7 Elements of a Lease Option
Lease options (or Lease Purchase or Rent to Own) are called ingenious and innovative, even though they have been around forever. They’ve also been called one of the only non-confrontational ways of acquiring real estate.
I’ve liked Lease options from the day I 1st heard about them. And there are a lot of things to like about them, they’re low risk, you need little or no money and no credit to do them, you can be in and out in a matter of days or stick around for a steady monthly income.
The 7 Key Elements
The Lease Term specifies from when till when the client is allowed to occupy the property, and as a result for how long the client is indebted to make Lease Payments.
The Lease Term will be adjusted down for less risk to the client or up for more security to the seller.
The Lease Payment specifies how much money per period (week, month etc.) the buyer is needed to pay the seller in order to maintain their occupancy rights.
The buyer wants the Lease Payment to be low and the seller wants it to be high. The Rent Credit will be increased or decreased to compensate for a high or low Lease Payment.
The Rent Credit specifies how much of the Lease Payment will be credited towards the purchase Price; if and once the buyer exercises their option to purchase.
The buyer needs the Rent Credit to be high and the seller wants it to be low. As mentioned, it will be adjusted along with the Lease Payment to come to an acceptable compromise.
The Option consideration specifies how much the client is required to pay for the option to get the property.
Similar to the Lease Payment. the client needs the option consideration to be as low as possible, and also the seller wants just the opposite. Often, once a seller is motivated enough, they’re willing to accept a negligible amount of cash for the choice consideration, or even just a promise to keep the other terms of the agreement.
The Purchase price is an easy one to work out. How much should the buyer pay if they decide to exercise their choice to purchase? This could be set at a particular dollar amount, or as a formula, as an example once the buyer is allowed to purchase the property for the balance of the existing mortgage(s).
Again, the buyer needs the lowest purchase price, and also the seller needs the highest. It’s no surprise that the next price is the main reason a seller would be willing to sell on a Lease/Option in the first place. generally speaking, this can be the main point of reference for all the other negotiation points.
The Option Term specifies how long the buyer’s option to purchase will be in effect.
The buyer will want this to be as long as possible and also the seller as short as possible. Because of appreciation a purchaser can safely agree to a higher price in exchange for a longer option Term.
Renewal or Extension Terms
As a final point of negotiation, Renewal or Extension Terms will be agreed on one by one or collectively for the Lease Term and the option Term.
It’s quite common to find an option Term of a few years, with a Lease Term of twelve months that may be renewed year after year. The buyer will want to be able to renew for free, while the seller will either not need the buyer to be able to renew at all, or to pay for it.