Lease option agreements are one way to circumvent a financing problem when the buyer has poor credit. A lease option is a lease between a landlord (seller) and a tenant (buyer) but with the option to buy. The tenant has the benefit of consumer protection laws and the right to walk away from the lease without purchasing. The option usually locks in the price for the tenant should they decide to buy. The option gives security to the tenant knowing they can “try before buying” and a guaranteed purchase price regardless of any increase in fair market value.
Lease options are similar to installment land contracts but have very different implications. (Learn more about installment contracts here).
Lease options also have risks and drawbacks. The tenant will have to pay something to the landlord in exchange for the right to buy (the option). This compensation is usually in the form of increased rent during the term or a lump sum payment at the start of the lease. If the tenant decides not to exercise the option, the payment is forfeited.
Lease option agreements are also ripe for serious unanticipated disputes. Below are three common disputes that result in litigation:
1. What happens to the tenant if the seller cannot transfer title? If the seller defaulted on a mortgage or incurred a judgment, the tenant’s claim will be subordinate to the mortgage or judgment holder. An unscrupulous seller may even intentionally accept the tenant’s option payment knowing that title will never be delivered.
2. Matters are often made worse when the tenant unwisely invests improvements to the property anticipating a sale. Those improvements may end up become a gift to the seller or the foreclosing lender.
3. Lease options may contain an “as-is” sale clause. A tenant who did not exercise due diligence before paying the option payment may be stuck with a seriously defective property.
As a real estate attorney, I help property owners resolve disputes. If you someone involved in a lease option dispute, please forward our contact information:
Phone: (484) 690-4613
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