Lease to Own, Option, With Option, Purchase Option

(My Original Blog Post: http://ping.fm/MqyKQ)
Lease to Own- Lease to own I would use to mean the same thing as rent to own, I really don't see the difference, I don't hear the term lease to own very often, but I thought I'd mention it here, so I will use lease option or rent to own going forward in this article.

Lease Option-I think lease option is probably the most common phrase over rent to own and lease to own.  I think because you are talking about the technical paperwork, so it's probably the more proper term. I personally use this term when I am talking about educational materials, or with landlords and seller's as I find it makes more sense to them. Whereas I may use this term with a renter, investor, but more often with a seller, you can use whatever term you like.  A lease option is simply a contract where you use a lease and an option all in one.  It will spell out the terms of the residential lease as well as the terms of the option.  A lease option is typically 1-3 years, that's just the traditional length of time, I believe it's because it gives the tenant buyer time to improve credit and their financial situation so they can later purchase.  A lease option as I've stated is only one document, it could be as short as 1-3 pages in some cases.  Because it's tied together, it arguably gives the tenant/buyer equitable interest in the property and could complicate things at the time of default, cancellation, eviction, etc.  Upon on a disagreement on payments, cancellation or moving out, with a lease option you may end up in court where the judge may have to rule as equitable interest and in some scenarios a full foreclosure procedure may be required to be filed by the owner of the property.  This would be the tenant buyers opportunity to follow through and purchase the property before the end of the foreclosure rights throughout this process.  I wouldn't recommend this method for a seller / landlord.  Likely because it's the same document, the lease may reference the option and the option may reference the lease, tying them both together, making them nearly impossible to severe in a court of law. It would almost appear as a sale.  Also many would argue with state laws that this could be considered the seller conveying interest clearly in the property to another, where the alienation clause, and accelearation clause in a mortgage may come into effect, where a lender could have the choice to do something. It's something work looking into with an attorney and the seller's lender.

Lease with the Option- This is going to be similar to a lease option, except the (with the) seperates the two documents. It gives us an option and a lease, two totally separate documents.  It's important to state here that each document should stand alone and totally be separate from the other. In other words the lease shouldn't talk at all about an option, and the option shouldn't talk about a lease, or if the option does, it should cleary state that a default of the lease negates and cancels the option.  That clause should be in there, and both the tenant buyer and seller should discuss this ahead of time as full disclosure.   As most renters know what a lease is.  The lease could be 1-10 pages long often and spell out the rules often for the landlord side, in favor of the landlord usually, but I still think most leases are pretty standard and have pretty much the same print and guidelines from lease to lease.   Leases will state the do's and don't's allowed with the occupying of the house and the terms of the lease and renting.  Examples of this may be whether pets are allowed, how late payments are handled.  Consequences if anything illegal takes place by the tenant and what will happen.  It may discuss the case of default, or any other occupants living in the house.  The lease may discuss whether the house or property can be subleted. The lease will discuss security deposits, it will discuss who pays for all utilities.  In most all cases the landlord will pay for the taxes on the property, and in certain cities the landlord has to pay water and trash.  The option is usually a pretty simple form, most I have seen are 1/2 page long.  It states what the future locked in price will be, and the duration of time before it expires.  It will often refer to how much the option money is and in most cases the option money is going to be non refundable.  The option will refer to what is needed to exercise the option with the seller.  What's important to know about this simple idea of exercising an option is that it's referred to as a unilateral contract what this means is uni-one sided, meaning that the buyer has the first right of refusal, in other words the tenant buyer can purchase the property and excerside the option if he/she wants to, but does NOT HAVE to.  The seller on the other hand does have to sell the property to the tenant buyer if they choose to excersise.  The way out of it for the seller is if the option buyer defaults on the contract or the option contract expires after it's duration of time.  The option may or may not have signature lines and notary signature spots.  The signature spots should be signed by the option buyer and the landlord/owner/manager who has the legal right to sign for the proprety.  The notary signature spot would require a notary stamp and witness if you want to later record the option.  From my understanding you can record the notarized documents with the county with just the option buyers signature needed.  From my understanding with Torrens property, at the county you will need the buyer and seller to both sign.  If you don't know the difference from torrens or abstract don't worry about it, you can ask a clerk down at the county or a title person to help you with that.  It may be a good idea to have both sign anyways.  There is another form I won't go into here called a memorandum of option or referred to as a affidavit memorandum of agreement. this essentially is a very simple form that should have a contact spot for the buyer likely in this scenario, or the optionee.  This form is also notarized and can be recorded.  Many choose to record the memorandum and not the actual option.  The reason for this is that the memorandum does it's job of being recorded and put on public record while clouding the title, and everything remains very private.  The memorandum is simply going to state if you want to contact me about my interest in the property at any point in the future, or necessary when clearing title before a purchase closing or refinance closing with a title company you can contact the person on the memorandum form that's recorded at the county.  Many don't want to record the option contract itself because the option contract states the price paid, and the buyer or seller may want to keep this more private and not on public record, especially so if the buyer were ever to get paid to do an assignment of option, where they will assign over their option to a new buyer who would then be paying for the equivalent rights of the original option buyer. According to the option, there may need to be an agreement to do this from the current seller.  This section sounded more complicated than it really is. Most people have seen a residential lease before, and an option is simply about 1/2 page and spells out the price, option consideration, and duration of time before it expires.  Because the option is seperate in this scenario, when a tenant defaults on the lease, the court system will treat the tenant under tenant laws and a standard state eviction should be able to be processed.

Lease Purchase Option-A lease purchase option is going to be pretty similar to a lease option except for the word "purchase" which is likely to include a purchase agreement, and possibly a closing date, and set amount of time.  This would be much more of a commitment from the buyer, and may require more substantial money from the seller/landlord of the property.  As with purchase agreements in this state, it will give the buyer equitable interest in the property.  It would likely have to require a cancellation of the purchase agreement someday if needed, just like with a standard purchase agreement.  Much like most purchase agreements, they are usually bilateral agreements, meaning both the buyer and seller are asked to perform on the property.   Simply put the seller will have to provide clear title usually, and the buyer would get new financing to cash out the sellers existing financing.  I would explain this as a lease with a purchase agreement.  I feel it's much more of a serious commitment from a tenant buyer, and a substantial down payment may also be used in this scenario.  Check with an attorney and a tax accountant on this, but this scenario may even allow for the buyer to pay property taxes and interest in this scenario, and receive the tax write-offs.  With a purchase you may end up using a real estate agent and a standard MAR (minnesota association of realtors) purchase agreement forms, and you may need to use all disclosure, etc to protect all parties.  Contact me and we can have an agent work with you today.