Leasing 101: What Home Sellers Should Know About Lease Option Agreements

People ask me about the difference between a lease purchase agreement and a lease option agreement when trying to sell a home. Those terms sound deceptively similar, but if you are the buyer you need to be aware that they are not the same at all. When I am making decisions about how to sell my home and I meet some interested buyers who need a little more time to qualify for a mortgage, the subject of rent to own often comes up. Rent to own is not a legal term, so I won't be discussing it here. This article is about a lease-purchase agreement, which is what your attorney would call it.

A lease purchase agreement is often confused with a lease option agreement because both arrangements involve people moving into a home prior to a traditional sale, before there is a closing when ownership transfers from the seller to the buyer. But the people who move into a house with a lease purchase agreement are buyers. They have signed a legal contract agreeing to buy the home and their payments on it are structured in a way that works for them. Usually it means they are paying the seller each month during the first couple years, after which they are obligated to get financing from a mortgage lender or other source. The seller is not obligated to provide the financing until the home is paid off, only for two or three years, and then the buyers pay the seller the balance due on the home.

A lease purchase agreement is nothing more than a written contract to purchase real estate over an extended period of time, typically not exceeding 36 months. It is usually coupled with an agreement to allow the purchaser to occupy the house and pay rent on it while he is completing the purchase.

In contrast, a lease-option agreement is primarily an agreement to rent real estate while trying to sell a house. That agreement contains a provision granting the renter the option of purchasing the real estate at some point in the future if he so chooses.

Some people call a lease purchase agreement a "rent-to-own" arrangement. That is not completely correct, but it gets the point across and sometimes I use that phrase myself when I'm explaining how to sell my home to possible tenants or buyers. It helps them understand the concept. But then I always follow up with the correct legal terms so that they can take the agreement to their lawyer for review, which is something I always encourage people to do.

When I'm selling my home myself, which is most of the time since I'm a real estate investor, I have various methods to sell my home quickly. One of my methods is not an actual sale, but it often works for me and for the buyers as well. If I'm negotiating with prospective homeowners who are interested in my home but don't have all the necessary down payment or credit rating needed to get a mortgage loan sometimes I pull a trick out of my bag that solves their problems and allows me to get some potential homeowners in my home. It's actually a well-known legal form used in commercial real estate, but not so well-known or commonly used in residential real estate. It's called a Lease Option Agreement and it is a lease with an option to buy the home.

As the landlord/seller, I agree to allow the prospective buyers to move into the home and make a monthly rental payment. And in addition, they pay me a flat fee at the time they sign the lease, and they pay me an additional amount each month for the right to purchase the home at an agreed-upon price on or before the last day of their lease. They are paying for two advantages really; the first advantage is a negotiated purchase price that will not change over the course of the one or two year lease agreement, and the second is that nobody else can come along and buy the house during that time. They are protected. All the money the tenants pay for the option fee up front and on a monthly basis is credited toward the purchase price when they close on the sale. If they never close on the sale they forfeit the option fee money. That money represents my compensation for keeping my home off the market and making it unavailable to other buyers during the term of the lease.

Most importantly, I have an obligation to sell the home to these tenants if they decide to buy it within the specified time frame. But they are not obligated to buy the home at all, they have a choice. So a lease option agreement is often a good solution when I need to sell my home quickly and provide my buyers with a flexible, practical deal on a home they want to buy. I encourage my buyers to show the agreement to a lawyer as a matter of good business practice.

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