By: Edward Hale, Fort Myers Board Certified Real Estate Attorney
Many sellers are turning to lease/options to sell their property. Usually there is ample demand among tenants/buyers for lease options, so lease options open sellers up to a new market of potential buyers.
1. Usually the documents executed between the landlord/seller and tenant/buyer are:
A. The lease (there is a good FR form in online)
B. The addendum for option to purchase
C. The purchase contract (FR/BAR)
All of these documents are usually executed up front, before the lease term begins.
2. The tenant/buyer’s ultimate lender may not allow the buyer to take a credit back on the closing statement towards the purchase price. So the parties may want to include a provision in the addendum for the option to purchase which requires them to adjust the purchase price to reflect any credits. This is totally legal and ethical. Parties can always renegotiate sales prices as long as the lender is fully informed.
4.Lease options are quite a bit more complicated than just a standard lease or a standard sale. As such, the agent (and his or her broker) could potentially be exposed to greater liability. I strongly recommend transferring some of that liability to an attorney, who can help draft some of the documents.
5.Make it clear how much, how and when the agent is going to get paid his or her commission. Agents usually want to get paid up front.
SOME OTHER IMPORTANT THINGS TO CONSIDER:
- Term of the lease
- Rental amount under the lease
- Purchase price
- Purchase terms
- Whether a portion of the rent payments will be applicable towards the purchase price
- Amount of the option money
- Whether a portion of the option money will be applicable towards the purchase price.
- Expiration date of the option
Whether the purchase option addendum or a memorandum thereof may be recorded in the public records. (Recording bad for seller, good for buyer)
Whether to add a clause allowing the landlord/seller to evict (as oppose to foreclose) in the event the tenant/buyer defaults. (Ability to evict good for seller, bad for buyer)
Lease Option to Purchase
A contract in which a landlord/seller leases his or her property to a tenant/buyer for a specific monthly rent, and which gives the tenant the right (but not the obligation) to buy the property at or before the end of the lease period for a price established in advance. The “contract” usually takes the form of a standard lease, with a “purchase option addendum” spelling out the terms of the purchase option.
At the time the lease is entered into, the tenant/buyer usually pays to the landlord/seller a nonrefundable option deposit that may or may not be applied to the purchase price of the property. The tenant/buyer then pays to the landlord/seller the monthly rent to compensate the landlord/seller for the tenant/buyer’s use of the property. A portion of the monthly rent payment may or may not be applied to the purchase price of the property.
Before the option expires, the tenant/buyer has exclusive right to buy the property under the terms to which both parties have previously agreed. The option usually expires when the lease expires.
(Note: Usually, the landlord/seller will be considered to hold both legal and equitable (aka beneficial) title during the term of the lease, but that would depend on the facts and the drafting of the lease and purchase option documents. It all depends on whether a court would decide that the contract should be considered to be a mortgage under F.S. 697.01. That is an important consideration, because it can make the difference between the landlord/seller having the remedy of eviction versus foreclosure in the event of a tenant/buyer default).
Agreement for Deed(also known as Contract for Deed, Installment Land Contract, Contract Sale, Installment Sale Contract or any number of other names)
This type of document allows the seller to retain the title to the property during the period of the contract, and agrees to transfer the title to the buyer once all the payments under the contract are made and all other obligations are met. In essence, the seller finances the purchase and holds the legal title to the property as security while the buyer is making payments. During the period of the contract, the seller continues to be liable for payment of any underlying mortgage.
When the Buyer completes the required payments, the seller must deliver valid legal title by way of a deed. During the period of the contract, the buyer makes installment payments towards the purchase price and is entitled to possession and equitable (aka beneficial) title to the property. An Agreement for Deed is treated like a mortgage under F.S. 697.01, and the seller’s only remedy is foreclosure if the buyer defaults. The case law in Florida is very clear: The seller cannot merely evict the buyer.