What is a lease option?

Question: Dear Kari,A co worker of mine told me to check out something referred to as a "lease option". What does this mean? Answer:First let's look at a quick definition of a lease option; a type of contract used in both residential and commercial real estate. Working with a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property. There are several reasons a property seller might want to use the lease option contract such as tax purposes, or if the seller could not obtain the price in the current market and did not need the cash from a sale. There are various types of contracts and titles of specific methods, such as lease option, rent to own, lease purchase and so on, but we're going to just focus on the basics. A basic lease option is that a buyer pays the seller a sum of money called "option money" for the right to lease purchase the property. The option money may be substantial or a little as $1. Of course, this is negotiable. Buyer and seller may want to lock in the future purchase price upon execution of the option to purchase. The term of the option agreements are usually from one to three years. The option money is usually nonrefundable. During the option period, no one else can buy the property. The buyer is not obligated to buy the property at the end of the option term, but the seller is obligated to sell at the agreed-upon terms if the buyer opts to follow through with the purchase. During the time of the lease option, the buyer will be paying a monthly agreed upon rent and some of the rent money may or may not apply to the lease option's initial amount. Or some of the rent money may go into a different account to be applied to the purchase price of the property. If the option is not exercised, then those monies usually are returned to the buyer (also negotiable). Please note that usually the agreed-upon purchase price is generally a bit higher than the current market value, which is an advantage to the seller. Typically the buyer cannot offer the lease option to anyone else without the sellers' approval. The buyers are often given the responsibility for maintaining the property. It would be wise for all parties to obtain an independent appraisal on the property which would benefit both buyer and seller. In addition you should hire a real estate lawyer or real estate agent to draw up the documents and help explain everyone's rights, consequences, as well as the necessary disclosures required by law. Some benefits of a lease option for buyer and seller:Faster equity accumulationHigh sales priceHigher-than-normal rentPortion of rent monies for purchaseMinimum tenant's cash out of pocketTime to repair tenant's credit, if applicable Higher quality tenantsResidual income Tax shelter might be held Usually no down payment owed Happy house hunting! Kari McCoy has been a Realtor for over 30 years and owns the Kari McCoy Group, Residential Real Estate, at Lyon Real Estate. She can be reached at (916) 933-5274 or at sold@karimccoygroup.com.