What are the typical provisions of a lease/option agreement? i.e. Down Payment, Rent, etc.?

Question

I am currently renting and a home across the street has recently become available for sale by owner. I have recently applied for a mortgage but my approval requires me to complete several items that may take a few months.I approached the owner with the possibility of a lease/option agreement so I may move into the home and leave the rental property. The owner mentioned today an option "fee" of $7,500 and monthly rent of $1,500 with a final purchase price of $173,900. Does the option fee typically get applied to the purchase price when I complete the sale? Should I request a percentage of my rent to be applied to the final purchase price as well? I haven't received any of the paperwork yet but just wanted some ideas. I am new to this.

Answer 1

Here is how I work it. The tenant pays me $5,000 cash upon moving in. Whatever rent is, $100 each month is potentially added to the $5,000. After 3 years the tenant would have a credit of $5,000 plus $3,600 for a total of $8,600 to use as a down payment for a mortgage at the initially agreed-upon price. If the tenant gets a mortgage, great, they own the house. If the tenant can't get a mortgage within 3 years, they lose their initial $5,000 and the $3,600 credit from the rent. They lose it all.

So to answer your questions. Yes, the option fee gets applied toward the purchase price. It will be your down payment. Yes, you should request that a percentage of the rent be added to the purchase price.

You would be crazy not to insist that the option fee and rent percentage be applied to the purchase price. If the seller doesn't want to do that, WALK AWAY!

Answer 2

If you REALLY want the house - then consider a land contract. Typically a land contract you put about 10% down and make your payments... usually take the asking price - minus the down payment for the house and add interest of anywhere from 8-11% (
you can do a mortgage calculator find one on line) the interest should be deductible on your personal tax return - as well depending on your income bracket your rent could be too....
You may be responsible for the taxes and insurance, typically depending on your agreement you finance the house in a couple of years yourself and it is legally yours...
When you do this, normally the principle made to the owner each month is deducted from the sale price and you only finance the balance....
Depending on the market it may be a good or bad idea to lock yourself into the price - just be careful with all the housing problems most states are experiencing, you do not want to pay too much....
Best advice I could give you is definately have an attorney read over anything but a lease before you sign... make sure he knows what you want and then you will be happy with your decision..
Good Luck, buying a home is always exciting and nerve wracking.....

Answer 3

There's not much in the way of "typical numbers" for a lease/option.

Usually though, the rent is fairly close to the owner's current payment, rounded up. The "deposit" is broken down into two parts, BOTH of which are usually applied to closing, but one is considered a rent deposit until then, and the other part is a nonrefundable option fee if the deal never closes.

Sometimes part of the "rent" is applied to the purchase price, sometimes it isn't.

Be sure you know whether it is a true option, or merely a "first right of refusal". The difference is what happens if someone else wants to buy the house during the option period. If you accept a first right of refusal, the option fee should be refundable if you decline.

To answer your specific questions, the option fee should apply to the purchase price when you close. Be sure you understand what part is nonrefundable if you do not. You should ask that part of that 7500 be rental deposit, and hence refundable.

You should definitely ask for part of the rent to go toward closing, but expect resistance. The amount of each payment that currently goes to principal is "fair", but don't expect to get it. Put yourself in their shoes, and you'll understand that they are taking the risk that the market will skyrocket, leaving them locked into today's price, and also the risk that the bottom will fall out, in which case you won't buy.

Answer 4

The option fee should be applied to the final sale. You and the seller should come to an agreement on what amount of your monthly rent will be applied to the final purchase price. Some of it should. However, take into consideration that he has expenses on the property as well. You will also need to agree on maintenance issues and what happens if you back out of the agreement. Be realistic, but also realize that everything is negotiable. I would try for 50% of the rent to be applied to the final sales price, but settle for something less, probably. Get EVERYTHING in writing and have a legal person look at all contracts.

Answer 5

Traditionally, the OPTION money is applied to the purchase of the home. It depends on the wording of the contract you sign with the owner.

Be sure you want the house before you sign the contract, because if you decide not to buy, the owner KEEPS your $7,500 and you walk away with nothing.

Make sure that the contract stipulates that the option money will be applied to the purchase price in the even that you opt to purchase the house.

It is NOT usual to apply a percent of the rent to the purchase price. The rent usually has nothing to do with the purchase.

Answer 6

I COMPLETELY agree with Clifford G