| Lease options became popular in the 1970's and | | | | the lease option is secured, the monthly lease |
| 1980's and were created to circumvent "Alienation | | | | payments can be treated as income for the |
| Clauses" found in mortgages. The definition of an | | | | purpose of financing another home. |
| Alienation Clause is Language in a mortgage or | | | | One benefit for the buyer is first right of refusal |
| trust deed that allows the lender to call the loan | | | | which means that they are the first in line to |
| immediately due and payable in the event the | | | | purchase that property. Another benefit for a |
| owner sells the property or transfers title to the | | | | potential buyer includes time. A buyer who does |
| property. Almost every loan today contains an | | | | not qualify for loan today has the length of the |
| alienation clause, which means title cannot transfer | | | | option to get their finances and credit in order and |
| and a buyer cannot purchase subject to an | | | | apply for a mortgage. In some cases the seller will |
| existing loan without triggering a due on sale | | | | credit a small amount of the monthly lease |
| clause. | | | | payments to the purchase price. As an example, |
| The basic premise of a lease option is the buyer | | | | a $160,000 property on a 2 year lease option |
| pays the seller option money for the right to later | | | | with 10% option money and monthly payments |
| purchase the property. The buyer and seller may | | | | of $1,000 with 20% going toward the purchase |
| agree to a purchase price now or the buyer may | | | | price would mean that at the end of the option, |
| agree to pay market value at the time the option | | | | the purchase price would be $ 139,200. That is $ |
| is exercised. The buyer typically leases the | | | | 16,000 for the option money and $ 4,800 from |
| property and lives in the property paying monthly | | | | lease payments applied toward purchase price. In |
| payments like any other lease to the seller. At | | | | this example the option money is 10%, but any |
| the time the option is mature and the buyer can | | | | amount the parties involved agree upon can be |
| exercise their option to purchase they will seek | | | | written into the agreement. |
| third party financing for the agreed upon sale | | | | The lease option can be a viable strategy and can |
| price. It is at the time of the option that the sale | | | | be a win-win for everyone involved. It can get a |
| transaction takes place. | | | | seller a viable buyer and allow time for the buyer |
| In most lease options the option money locks the | | | | to obtain financing. The terms and option money |
| buyer into the right to purchase the property at a | | | | is flexible. I have seen six month options with 1% |
| later date for a predetermined price. If the buyer | | | | option money executed because the buyer had |
| fails to exercise their right, in most cases they | | | | to sell another property in another state but had |
| lose the option money. The option money is | | | | to also report for a new job. I have seen three |
| security for both the buyer and seller. It typically | | | | year options with 5% option money where the |
| takes the property off the market for sale for a | | | | buyer did not exercise their option and the seller |
| predetermined amount of time and gives the | | | | kept the 5% option money, and did another lease |
| buyer first right of refusal. | | | | option for 8% with another buyer who did |
| The advantages for the seller include up front | | | | exercise the option in 18 months. |
| option money, income from the lease of that | | | | As with any Real Estate transaction it is highly |
| property and a potential future sale once the | | | | recommended that you seek the advice of a Real |
| option is exercised. A lease option may be a good | | | | Estate Attorney or licensed Real Estate Sales |
| selling strategy for someone who has to relocate | | | | Associate or Realtor. State laws and Real Estate |
| from the property or is able to obtain financing to | | | | Law is different throughout the United States. |
| upgrade to another property. In some cases once | | | | |