Types of Lease Programs
Lease with Option to Purchase: This where a potential buyer who does not qualify for financing to purchase the property wants to lease the property with an option to purchase the property based on qualifying to purchase and approval of lender financing in the future. Future can mean (12) twelve to (36) thirty-six months; terms are based on Seller and Buyer. The Buyer is not required to purchase the property in the stated amount of time; but instead has the option of doing so should they desire to exercise their option agreement. During this time period the seller/owner is responsible for all taxes and home owners insurance claims. However, the tenant/buyer is responsible for renters insurance; in addition, the renters insurance should cover damages that may not be covered by the home owner’s insurance policy. The tenant/buyer can also purchase a Home Warranty to help cover any repairs that the seller/owner is not responsible for in lease agreement. The legal forms that go with this transaction would typically be as follows: 1) Lease Agreement 2) Option Agreement Clause with agreed purchase price and realtor fees addendum 3) Deposit
Pros: Tenant/Buyer is able to live in the home without the obligation to purchase the property. In addition, if the Tenant/Buyer decides they would like to purchase the property they can do so within the allotted time period. Sellers/Owners have the advantage of having a potential tenant/buyer in their property which means the tenant/buyer will be taking better care of the property than a typical renter. Sellers/Owners also receive some type of deposit that ensures that the tenant/buyer will take of the property because the tenant/buyer will want their deposit back should they not purchase the home.
Cons: Tenant/Buyer may want to exercise the option to purchase the property but the seller/owner might be in financial trouble and file bankruptcy or initiate foreclosure which can nullify the tenant/buyers ability to purchase the property. Tenant/Buyer also needs to be aware of any liens or back taxes that can be placed on the home during this time period. A simple title search can clear any questions up just before purchasing. The seller/owner may lose out to selling their home to a qualified buyer and cannot unless the new buyer will honor the terms of the current seller/owner.
Lease Option Agreement: * (Also known as Rent to Own- there are many types of these looming on the market some of which may not be legal, ethical, or stand up in court should a legal dispute arise). This type of agreement always involves three transactions that are all linked together which includes the lease agreement, option agreement, and final some type of purchase contract. We will use the CBR approved purchase contract and an addendum if needed. The lease agreement is very detailed which typically includes that the tenant/buyer must have renters insurance at all times, along with a certain dollar amount that the tenant/buyer is responsible for on monthly repairs, and can come with a home warranty but not typical. The second documents is the Option Agreement which is spells out details terms such as deposit amount, credited amount applied towards closing costs, time frame to purchase, and what happens if tenant/buyer does not purchase property. The third document is some type of purchase terms/contract that includes purchase price, seller/owner contribution towards down payment, allowance, earnest money, financing terms, inspections, titles, and close cost all associated with purchasing the said property. In addition, the Option agreement can have rent or lease credits that are given to the tenant/buyer each month should they pay on or before the first of every month. The rent/lease credits are spelled out in detail and cannot exceed the total amount of FHA/VA/USDA Down Payment requirements that the tenant/buyer are required to put down by lender rules and regulations.
Pros: Tenant/Buyer can receive additional rental/lease credit per month that helps them save for down payment requirements. Lease Option Agreements can be submitted to underwriting/lenders but certain rules apply. Tenant/Buyer should save all receipts to proof that lease payments where paid on time thus helping them with proven ability of paying on time; lenders want to see a pattern of financial stability. During this time period the tenant/buyer must be working on their credit to purchase the property on or before the Option Agreement terms and conditions. Seller/Owner benefits are very good for this type of tenant/buyer will start customizing house, improving or upgrading items in home adding to equity value and ensures a tenant/buyer who care for the home as if it is their own.
Cons: Tenant/Buyer will lose their large option deposit should they not take reasonable steps to purchase the property. This means that the tenant/buyers must show proof that they are paying off debt, saving for down payment, and rebuilding credit. Any upgrades and improvements made to the home remain with the seller/owner and will not be credit to the tenant/buyer; the seller/owner would benefit from the equity gained from improvements. Tenant/Buyer can also be responsible for additional damages to the property and seller/owner can request additional money for repairs that are not considered normal wear and tear. The Seller/Owner can lose out to selling their property during this time. If the tenant/buyer is unable to purchase the property the seller/owner will have to start the process all over again or relist the property to sell outright thus causes more financial loses than anticipated.
Lease Purchase Agreement: This agreement is just like the lease option agreement; however, there is one major difference- the Tenant/Buyer MUST purchase the property per lease and purchase contract terms. The contract terms are spelled out in specific detail, as follows; purchase price, seller/owner contribution towards down payment, allowance, earnest money, financing terms, inspections, titles, and close cost all associated with purchasing the said property. In addition, inspections SHOULD be done prior to signing any lease agreement. The Purchase Contract terms come first then following the lease terms. Remedy to any items unsatisfactory to the tenant/buyer must be addressed with the Seller in writing.
Pros: Seller/Owner typically likes this type of contract because it removes the option to purchase; instead, it states the tenant/buyer must purchase the property. Likewise, the tenant/buyer is protected because the seller/owner is contractual obligated to sell this property to you per all contract terms and conditions.
Cons: Seller/Owner cannot sell this property to anyone other than you per contract terms; unless of course they default on the mortgage loan. Tenant/Buyer is contracted to purchase as well; if they do not the seller/owner has the right keep your earnest deposit and charge you additional fees for not purchase said property or repairs that need to be made during the time the tenant/buyer has lived in the property. Again, this does not prevent liens and/or foreclosure filings during this time period.
Land Installment Contracts: *(I want this to be very clear before I give a description on Land Contracts. There are many Brokerages/Brokers/Realtors that create and execute Land Contracts without an Attorney. We work with your attorney or will give a reference to one. Lautzenheiser & Associates will not create a Land Contract without an Attorney working on our clients behalf because of the laws and restrictions that come with Land Contracts.) A Land Installment Contract is also known as a Land Contract and there are many different ones that a currently on the market. This is why it is CRITICAL to ensure all current Real Estate Laws are being followed correctly in the State of Ohio. It is our professional opinion that an Attorney who specializes in Real Estate should be the end person who drafts the Land Contract. We will work with you on all the terms and conditions, your attorney will ensure that we (your Realtor and you) have written everything down and ensured that all laws, rules, and regulations are correct in the State of Ohio in Franklin or Delaware Counties.
So after all of this “What is a Land Contract?” Simply put the Seller/Owner retains Title to the property but gives the Tenant/Buyer the rights to the property legally. Typically with Land Contracts you will actually close at a Title or Attorney’s office so that your rights to the property are legally registered. Land Contracts are the best way to ensure your rights; however, Land Contracts are not for everyone. Tenant/Buyer will make a large installment known as the down payment and pays a monthly amount the goes towards the total payment of the property which includes principal and interest over a specified period of time. Typically this time is anywhere from 24 to 48 months after which a large payment is due to pay off the land contract which is known as a balloon payment at the end of the land contract known as term. In addition, land contracts must contain certain legally language required by the Ohio Revised Code called and known as Statutory Regulation terms and other Statutory Provision may apply thus the reason why our Team will always use an Attorney.
Pros: Seller/Owner and Tenant/Buyer have clear ownership and terms that have been recorded by law and typically drafted by an attorney ensuring a win-win situation for all parties. Land Contracts are the best way to ensure your rights but they also can cause issues if not followed for this is a legal binding contract.
Cons: Seller/Owner must actually follow the rules for home ownership known as foreclosure actions. This can take several months to due during this time period the seller/owner can lose months of payment. Tenant/Buyer can be sued or charges filed if they do not honor the contract agreement. In the State of Ohio if the Seller/Owner file a foreclosure on you and this will go on your credit report and it will affect your credit and possibly not being able to purchase a house.
Things to consider when looking at a Land Contract; as follows;
1) How long before I can purchase the property?
2) What is my current and future financial situation look like?
3) Do I LOVE this house and location?
4) And other questions apply such as overall job stability and personal situations must be closely looked at and analyzed.
Most Seller/Owners will not enter into a Land Contract unless the Tenant/Buyer has at least 10% of Total selling price of property.
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