Lease options are a popular tool to purchase and sell real property in certain situations. Prior to entering into a lease option, however, there are several things to consider.
What Is a Lease Option?
A lease option is a type of contract in both residential and commercial real estate where a property owner (or lessor) and lessee agree that, at the end of a specified rental period, the lessee has the option to purchase the property for a specified sum. It also precludes the lessor the option to sell the real property to a third party until the expiration of the option period. In most states, consideration is required to be paid by the lessee to the lessor for the option, even though the amount of consideration can be minimal. Also, usually a portion of the rent paid is credited towards the purchase price in the event the lessee exercises the option.
It Varies from State to State
One major consideration is that states are divided on whether the lessee has an equitable interest in the real estate by virtue of having an option to purchase. This is important because in states that consider the lessee to have an equitable interest in the real estate (“judicial states”), the lessor will be forced to foreclose on the lessee in the event the lessee defaults on making rental payments rather than simply filing an eviction. An eviction can take as little time as a couple months in certain states, whereas a foreclosure can take several months to years.
Another thing to consider is market fluctuations, which could increase the value of the property beyond the option price. Some states have also implemented rules which offer more protections for a lessee with an option to purchase as opposed to a regular lessee. This is why it is important to work with an attorney who understands the local and state laws.
On the other hand, lease options give lessees incentives to keep and maintain the real property better condition than a normal lessee. Also, closing fees are often lower because a realtor is not involved in the sale in the event the option is exercised.
Right of First Refusal
If a lease option is too risky for one reason or another, another option to consider is a right of first refusal (ROFR). A ROFR gives the lessee the right to purchase the real property before the lessor sells the property to a third party, usually on the same terms and for the same price as the third party offer.
If you or someone you know is considering leasing, contact a real estate lawyer, like a real estate lawyer in Belgrade, MT, today.
Thanks to Silverman Law Office, PLLC for their insight into lease option considerations.