Lease Option Contract

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Lease Option Contract

A Brief Introduction of Lease Option Contract

If you have a dream to own a house but don’t have enough money to pay at once, then the lease option contract can be a good choice for you. It allows the lessee to buy the rented property by the end of a specified period. The relationship between a lessor and a lessee is a very complicated one if not structured and drafted properly.

A lease option is just another service that a lessor or a house owner gives to the lessee or a buyer. Every month, the lessee has to pay a certain amount as a down payment in addition to the monthly rent. He or she also has to pay an option fee at the beginning of the lease. By the end of the lease, the lessee may opt-out of the lease option. He is under no obligation to buy the house. However, his option fee and down payment will not be returned.

Who Takes the Lease Option Contract?

A Lease Option Agreement is signed between the house owner and the tenant. When both these parties enter a lease agreement, they also have the option to decide the terms of the Lease Option Agreement. Both parties can mention the name of a third party who can mediate in case of any conflict or confusion. The agreement must also mention the governing laws of your state.

Purpose of the Lease Option Contract

When the owner decides that he wants to give the lessee the right to buy the property by the end of a specified period, both parties also decide the purchase price in most cases. For a lessee or a buyer, it is extremely convenient to buy a house in the future at a decided price point. It gives him the liberty to buy a home at a lesser rate than its future rate. For any house loan, one needs to maintain a good credit score. However, with the help of this option, you cannot just rent, but also buy a house.

Contents of the Lease Option Contract

A Lease Option Agreement must contain the basic details of both parties. These basic details include the name, address, phone numbers, etc. The agreement should also include the address of the property and its basic details. Further, the agreement must mention all the important details related to the price point. It should also include the terms of purchase in a very clear and simple language.

In addition, the termination policy is one of the most crucial inclusions to the agreement. Both parties must be clear about what will happen to the down payment in the event that the lessee decides not to buy the property.

How to Draft the Lease Option Contract?

How to write a lease option agreement? Before drafting the Lease Option Agreement, it is essential for both parties to sit in person and decide on the terms and conditions. A lot of terms are also negotiable in this agreement. For instance, parties can decide the price point to be the current value or the future value of the house. This depends from case to case. Further, for each state, there are different laws for the lease option.

Parties need to negotiate on the option fee and monthly down payment. What happens when either of the party decides to terminate the agreement should also be discussed before signing the agreement. Further, parties must read all clauses properly before signing the agreement.

Negotiation Strategy

Like any other agreement, a Lease Option Agreement or contract also requires a lot of negotiations between the involved parties. The lessee is advised to negotiate for the option fee and down payment. Both parties should also negotiate the termination policy as it impacts both parties in several ways.

Benefits & Drawbacks of the Lease Option Contract

For both the seller and buyer, there are different kinds of advantages and disadvantages of a Lease Option Agreement.

Here are some of the benefits of this agreement –

  • It makes it easy for the owner to sell the house
  • The buyer gets to purchase the house without worrying about their credit score
  • The buyer can pay the down payment with the monthly rent
  • The agreement stops the owner from giving the house to someone else during the specified period
  • It ensures the existence of a proper means of conflict resolution
  • The buyer can turn his rented house into his own once it’s purchased.

There are no major disadvantages to signing the agreement. However, for an owner, it can be a little problematic while selling the house in the future at its present value. For buyers, it can be risky if he ends up terminating the agreement as he may not get back his option fee and down payment.

What Happens in Case of Violation?

In case of any violation, both parties can resort to a judicial solution. State laws protect both parties(1), and thus, both are well within their rights to approach the courts. However, it is recommended that both parties refer to the agreement and its clauses to deal with any confusion or disagreement.

A Lease Option Agreement can be a Master Lease Option Contract or a Wholesale Lease Option Contract. Depending on your requirements, you can choose the type of agreement that suits you best. A well-drafted agreement is bound to help both parties reach a comprehensive solution. It is recommended that you carefully draft the agreement and take the help of an attorney in case of any confusion.