Agreements, or covenants, govern all real estate transactions, and the primary types are the sale and lease agreements. The former gives details of the rights and obligations of the seller and purchaser, and signifies that the property is about to change hands. The latter outlines the rights and obligations of the future tenant, and the landlord or owner. These rights include the provision to extend or renew the future tenant’s tenancy for another period – usually one year, or as stipulated in the agreement. Another provision may be to purchase the property at a specified price. Peter Harris Real Estate blogger discusses this at length on his blog.
Lease purchases or options relate to a provision in the agreement for the lessee to purchase the property at a stated price during the period of tenancy. It provides several advantages for the lessee. Details of these advantages follow below:
The ability to own the property at a price lower than the existing market price is a well sought after benefit of entering into this type of arrangement. That happens when market prices have risen substantially since signing the covenant. To be beneficial, it should be significantly higher than the additional monthly payments for the option.
Having some of the monthly lease payment deducted from the selling price is an added benefit. However, the receipt of such benefits depends on whether such a clause is in the agreement. The non-existence of this is not binding.
Advantages not only accrue to the tenant but also the landlord. The lessor may be able to obtain a higher price for the property. Additionally, the monthly lease payments are usually higher with the inclusion of such an option. The facilitation of full or partial set-off of rental income against mortgage payments occurs when the lessor has a mortgage on the property. If the lessee does not qualify for a mortgage loan, the owner gets to keep the property.
There are also risks associated with such transactions. The tenant loses money paid towards lease options in the initial stages for failure to qualify for a mortgage to buy a property. The lessee may not qualify for a number of reasons – chief among them being the lessees inability to find the down payment. Additionally, the lessee may not have sufficient income to comfortably cover the monthly mortgage payment and meet other monthly expenditures such as utility bills and food. The ability to make payments in a timely manner is critical to lending institutions. All in all, consulting a real estate coach or a Commercial Real Estate Investing Coaching book would be in your benefit to answer any questions you may have about real estate lease options.
PS: This article contains contributions from Phil Pustejovsky. You can learn more about him on his Phil Pustejovsky Reviews website.