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Lease Option when is it the right time to use them?

Lease option is a type of real estate transaction which utilizes creative financing to help credit-challenged individuals purchase a home, vacant land or commercial property. Some real estate investors use lease options to obtain investment properties. They then resell the property outright or engage in a lease option with a new buyer.

Lease option is sometimes referred to as 'options to purchase' and 'lease purchase agreements'. However, these are three completely different financial agreements. To further add confusion, each individual state within the U.S. adopts their own set of lease option laws. Therefore, it is important to obtain legal advice from a real estate attorney prior to entering into any lease option agreement.

Using a lease option, the buyer pays the seller "option money". Option money secures the buyer's right to purchase the real estate at a later date. Depending on the circumstances, purchase price and the individuals involved in developing the lease option agreement, the amount of option money can range from as little as one dollar to 20-percent or more of the purchase price.

Lease options allow the buyer and seller to decide if they will agree to a purchase price at the time the lease option is executed or if the buyer will pay market value at the time the lease option expires. Both parties should conduct due diligence and determine the pros and cons of both scenarios.

The term of lease option agreements is negotiable and typically lasts between one and five years. During this term, the buyer pays rent and a portion is applied toward the purchase price. This can range from 5- to 100-percent; although it is rare to find a seller willing to apply 100-percent of the rent toward the purchase. Generally, the average applied rent falls between 10- and 25-percent of the rental rate.

Lease sale purchase agreement lock-down the property investment to both buyer and seller. The seller cannot sell the property to another buyer and the buyer cannot reassign the lease option without consent of the seller. The exception to this rule is if the buyer defaults on the lease option or is unable to obtain financing when the lease option expires.

Lease options do not require the buyer to purchase the home at the end of the contract. However, option money and any rent monies applied toward the purchase price are nonrefundable. Prior to entering into a lease option, both buyers and sellers will want to conduct due diligence to ensure they are not entering into a real estate deal that could potentially cost them time and money.

Lease options offer many benefits to buyers and sellers of real estate. They can also turn into a huge nightmare. To ensure a smooth lease option transaction retain the services of a real estate attorney, conduct due diligence on the property and parties involved in the transaction, and work with reputable investors. Doing so can help you buy or sell real estate and create win-win solutions for everyone involved