Leasing with the Option to Buy
Leasing with an option to buy is exactly what it sounds like – a renting tenant signs an agreement with a landlord stating that the tenant can buy the property at the end of a prearranged time period. The owner is obligated to sell at the option price, but the tenant is not obligated to buy. But when a lease-purchase is exercised, the buyer is obligated to purchase at the end of the rental period.
A common misconception is that once a landlord signs this type of agreement, he has to sell the property to the tenant, or that the tenant has an absolute right to the property. Not so – the tenant can buy the property only if the landlord exercises the option to sell.
There are pros and cons on both sides – property owners are in a more secure position with a lease with option to buy contract than if they held a mortgage, because they still own the property.
The option should be recorded with the county clerk to put others on notice of the tenant's rights, thus preventing the seller from selling to another buyer. The lease agreement should have a clause that terminates the option to buy if the tenant in any way violates the lease or gets evicted before closing the agreement to purchase.
Usually, purchase price is set out in the original lease-option agreement – in other words, the purchase price is set according to today’s market, not in the future when the option may be exercised. The tenant may also have the right to purchase the property at the price offered to the landlord by another prospective buyer.
An option to buy doesn’t give the tenant legal title to the real estate. The tenant becomes a purchaser only upon exercise of the option, at which time the landlord-tenant relationship ceases and the option becomes an absolute and binding contract of sale.
A unique feature of the lease-option is the rent credit. The tenant usually pays above-market rent for the property, but a portion is credited toward the purchase price if the buyer decides to exercise the purchase option. If the tenant decides not to buy, they don’t get the rent credit money back.
The terms of the seller’s mortgage and the lease agreement determine whether the due-on-sale clause will be triggered by the lease with an option to buy. However, the lease with an option to buy may be a way of avoiding the due-on-sale clause, at least until the tenant exercises the option to purchase.