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Lease-to-Own Contractual Provisions

October 29, 2015

The following are the major provisions of a lease-to-own contract. 

 

Appraisal: An appraisal of house value by a licensed and neutral professional should be part of every lease-to-own (henceforth LTO) contract. The appraisal facilitates negotiations over the contract sale price. Further, if the LTO includes provision for a rent-credit (see below), an appraisal of the rental value of the house is needed because the credit must be an amount above the appraised rental value.

The cost of the appraisal may be borne by the seller, the buyer, or shared between them.

          Appraisal cost paid by seller:____%

          Appraisal cost paid by buyer:_____ %

Both parties should have confidence in the integrity of the appraisal. The mortgage professor is available to order appraisals anywhere in the country through reputable appraisal management companies. Email the professor at jguttentag@mtgprofessor.com,     

 

Option: The prospective buyer receives the right to purchase the subject property at the specified sale price, within the option period, in exchange for an option fee.

          Sale price: $_____

          Option period: _____months

  •       Option fee: $_____

Refund of Option Fee: This fee is generally not refundable if the buyer does not exercise the option. However, the fee might be refundable if the seller violates the contract in a material way.

           Refund of option fee:  Contractual violations by seller triggering refund.  

 

Loss of Option: The buyer could lose the option to purchase by violating the contract.

          Loss of option: Contractual violations by buyer triggering option loss.

 

Lease Period: This is ordinarily the same as the option period.

           Lease period:____months

 

Market Rent: This is the amount the buyer agrees to pay for the right to occupy the property. If the contract includes a rent credit, the market rent should be based on the appraised rental value.

           Market rent:$_____per month

 

Rent Credit: This is the amount above the market rent paid by the buyer, which can be treated in two different ways. One way is to treat it as a credit to the price. At closing, the sale price is reduced by the total rent credit paid by the buyer. This reduces the required down payment only slightly. For example, if the sale price is $100,000 and the rent credit totals $5,000, the sale price becomes $95,000 and the down payment required at 5% falls from $5,000 to $4750. If the option is not exercised, the buyer loses the rent credit.

 

The rent credit is more useful to the buyer if it can be used for the down payment in its entirety. For this to work, the seller must return the rent credit to the buyer at closing, and the lender must accept it as savings by the buyer which constitute a legitimate down payment. To be sure that the rent credit is an amount paid above the market rent, the lender will require that the market rent be documented by an appraisal. The lender will also want to see the cancelled checks that document the rent credit payments from the buyer.

   Rent credit is used to reduce sale price_____

                   Amount per month $____.        

   Rent credit is returned to buyer at closing____

                   Amount per month $____

                   If option is not exercised, rent credit is retained by seller____

                   If option is not exercised, rent credit is returned to buyer____ 

Total Rent: The sum of market rent and rent credit.

 

Rent Payment Obligations and Penalties: This provision specifies when the rent payment is due and the penalties if the obligation is not met. 

            Total Rent due date:____day of the month.

            Grace period after due date:_____days

            Late charge for payment after grace period:$_____.

            Other penalties for failure to pay rent on time:_________.

 

Payment For Utilities: Either the buyer or seller is responsible for payment of utilities.

            Buyer is responsible:____.

            Seller is responsible_____.

 

Property Use by Buyer: Ordinarily the property will be used as a residence, with any other use specified in the contract, or subject to permission of the seller.

 

Property Inspections: The buyer may wish a home inspection and/or a termite inspection as part of the transaction. The costs may be borne by either party or split.

  •        Buyer pays for home inspection____.

  •         Seller pays for home inspection_____.

  •         Cost is split, buyer pays ___%, seller pays ___%.

  •         Buyer pays for termite inspection____.

  •          Seller pays for termite inspection____.

              Cost is split, buyer pays ___%, seller pays ___%.

 

Maintenance: Ordinarily buyers are responsible for maintaining the property in as good condition as they found it aside from normal wear and tear, and are responsible for damages caused by them or their guests. The seller may require a security deposit that, if not used, is returned or credited to the price.

           Buyer posts security deposit of $_____.

 

Improvements: If the house needs improvements to make it habitable, such as a new roof or furnace, either the seller or the buyer can be responsible for getting them done, with the financial terms of the deal adjusted accordingly.   

 

Alterations by Buyer: Ordinarily buyers are barred from altering the property without the written consent of the seller. 

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