How to Structure a Lease-to-Own Agreement

Hemera Technologies/Photos.com/Getty Images

A lease-to-own agreement consists of two contracts; a lease agreement and an option contract. An option contract is unilateral and binding only on the property owner. The tenant offers to buy a property at a future date, for a stated amount of money and the seller agrees not to accept other offers while the lease is in effect. The tenant is entitled to walk away from the deal. These contracts are complicated and it is advisable to retain the services of an attorney.

Determine the future sale price. This isn't an easy task in an uncertain real estate market. Current fair market value won't likely be accepted if property values are rising. If property values are declining, the tenant will be reluctant to make an offer that reflects current prices. Options to buy are frequently utilized by individuals who can't currently obtain a mortgage loan, but hope to do so in the future.

Determine payments. For an option to be legal, there must be a significant option consideration, either in the form of a tenant's upfront payment of 1-to-5 percent of the sale price, or a higher than market value rent, or both. Check state law to determine if a basic, legally-sufficient option consideration is defined. It may be possible to apply these funds toward the down payment and closing costs if the option is written that way and the lender agrees.

Determine term. An option is typically a short term contract of 1-to-3 years. The seller agrees not to sell the property during this time to anyone other than the person holding the option. The seller benefits by having a tenant who takes care of the property. The tenant benefits by trying out the house before buying while gaining time to build up savings and credit. Most options, however, are never exercised.

Determine if payments are refundable. If the option expires and you are unable to close the deal, the contract should spell out if money can be refunded. It is uncommon to have a financing contingency that refunds money if you can't obtain a mortgage loan. Hire an attorney to write the option. Most real estate agents aren't experts in dealing with option contracts and the pre-printed forms most use may not be the best fit for you.