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.
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.
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.
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.
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.
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 ___%.