Looking to start investing in Real Estate? Read this guide that is full of information to help the beginning novice learn how to begin mastering the real estate market. From renting, to selling, to buying my goal is to help educate as much as possible.
Our last installment covered various techniques and methods of financing the purchase of property. This installment is going to cover a lot of information pertaining to this option such as the benefits, how to use with a sublease, as well as some of the items that need to be included in the contract for a lease purchase.
Remember a lease purchase is the purchase of property where you rent property through a lease, which includes a guaranteed option to buy at the end of a set period of time. Typically, a portion of your rent payments will be credited towards the down payment, so that if you decide to purchase the house, you have already paid the majority if not all of the down payment.
While it may seem as though only the buyer is benefited by this type of transaction that is false. For a buyer there are fewer benefits than for a seller. However, the benefits for the buyer are usually greater financially. Benefits to the buyer include low risk with high financial leverage, if the buyer changes their mind about the purchase they are free to walk away, the seller is required to sell the property to the buyer, the buy is given control and possession of the property when the agreement is entered, there is typically very few initial expenses and costs with securing property this way.
Benefits to the seller include, most buyers in this type of agreement are willing to pay more for the property, therefore increasing the profit they make from the sell. The money that is received is tax-deferred until the option is exercised or it expires. If the rent is not paid on time the purchase option expires immediately, as well as the seller received the equity buildup over the option period. The tenant is more likely to take care of the property since they have a feeling of ownership, as well as the seller has the ability to regain possession if the buyer defaults in the lease purchase agreement.
As you can see, the seller has a few more benefits that are helpful to them, especially in securing the debt. The lease purchase option is still very useful to the buyer as well, but remember the best scenario is a win-win situation for everyone. There are several ways to use a lease purchase option to secure property.
The first method is by using the property as a personal residence, this is the option that most people are familiar with. Another option is to lease the property and either use it as a rental, or if the property is in need of repair then fix it up to sell it and pay off your entire debt, therefore turning a profit on the property. The last and final option is taking the property and subleasing it to someone else, where you become the seller, and the person you are selling to a buyer. This is often referred to as a sandwich lease.
It is very important to remember when entering into contract of any form; there must be a written documentation and recording of the agreement to protect both the buyer and the seller. Some important details that need to be addressed include, whether you have the right to sublease the property. Even if you plan to live there, you never know if things may change in the future, which would make subleasing the property a viable option for you. The right to assign is another important part to include. This means that if you choose not to exercise your right to the purchase, you are allowed to assign someone else the right to buy the property, whether through a gift, or by selling the option. Finally, you want to include if possible a right to extend. This means that the terms and conditions under which the purchase option can be extended to a later point are clearly identified and spelled out in writing in the original contract.
The contract needs to include many different parts, depending upon the needs of the buyer and seller will determine if you need to include all of the following sections into the lease purchase option contract. I am going to give a list of the items that should be included so that you can decide for yourself which are important and must be included and which are irrelevant to your particular situation. Remember, if the item can possibly cause a conflict later it needs to be included and clearly spelled out to avoid court battles and misunderstanding at a later point in time.
Section 1. Date in which the contract is entered into. This is not optional, and must be included. Names are also included in the first sections. If the words “and/or assigned” are included then it typically grants the right to assign the contract to someone else. Names needs to include the name of the seller, preferably legal name, as well as the names for any and all parties who are legally responsible for the property.
Section 2. The term must be clearly spelled out, with the beginning date, as well as the ending date specified exactly. This section should also clearly spell out how long the term is in years and months so that no questions can be raised later.
Section 3. The amount paid monthly for the rent should be in this section. Also included in this section should be the address where payments should be mailed, as well as the late penalties that will be assessed if the payments are not received in time.
Section 4. While most people would not think of including things like the utilities, taxes and insurance in a contract for a lease purchase it is highly important to spell out exactly who is responsible for what. Remember the more that is clearly spelled out, the fewer chances for conflict that can create headaches later down the line.
Section 5. You need to make sure the contract spells out specifically the intended use for the property. If you are undecided make sure the contract allows you to both use it for personal use, as well as leave your options open to be able to rent or even sublease the property to someone else.
Section 6. This section refers to the rights that we discussed earlier. You need to try to include the right to assign as well as the right to sublease the property so that your options are as open as possible so you can make the best financial decision in regards to the property.
Section 7. Possession is something that must be clearly spelled out. What this will represent is the exact date in which you are legally entitled to begin using the property, as well as become responsible for making the agreed upon rent payments for the property. Until the possession date comes, you do not have the legal right to be present on the property without the owners’ specific permission.
Section 8. The next section needs to include the security consideration that is being given. This means the amount of money that is being offered to the seller to take the lease option, this money typically is applied towards the purchase price of the property when the option to buy is utilized. This is also called option consideration as well. Either way it needs to be included in the contract.
Section 9. There needs to be a section devoted to default, this includes what constitutes a default, as well as what can remedy the default, and the time frame in which the remedy must be exercised before the default progresses and the buyer loses the property, or the buying option.
Section 10. You need a whole section that is clearly devoted to the option itself. This needs to spell out exactly when the purchase option becomes available, as well as the price, and how much of the rent is applied towards the purchase if it is exercised.
Section 11. Another important aspect is the examination of title. This means that at a specified time after you elect to exercise the purchase option you have the right to examine the title to the property, as well as review the title insurance policy that should be currently effect to make sure the title can be purchased free and clear.
Section 12. You need a section included in the contract that gives the exact date in which the purchase option expires. This is the last date possible to exercise the purchase option before the owners no longer are legally bound to sell it to you at the previously agreed upon price.
Section 13. Signatures, everyone who is involved legally in the sale and lease of the property must sign the contract otherwise, the contract is not enforceable. This is not optional in any way, it is an absolute requirement.
Now that we have covered the major portions of the contract, please note this is not all-inclusive, and should never replace the advice from an attorney who is retained to look out for your best interests. Remember we discussed an attorney previously; they should be consulted before signing any contracts to make sure there is adequate protection afforded to you. Next installment we will cover making an offer for the piece of property you select to make an offer for.
Our last installment covered various techniques and methods of financing the purchase of property. This installment is going to cover a lot of information pertaining to this option such as the benefits, how to use with a sublease, as well as some of the items that need to be included in the contract for a lease purchase.
Remember a lease purchase is the purchase of property where you rent property through a lease, which includes a guaranteed option to buy at the end of a set period of time. Typically, a portion of your rent payments will be credited towards the down payment, so that if you decide to purchase the house, you have already paid the majority if not all of the down payment.
While it may seem as though only the buyer is benefited by this type of transaction that is false. For a buyer there are fewer benefits than for a seller. However, the benefits for the buyer are usually greater financially. Benefits to the buyer include low risk with high financial leverage, if the buyer changes their mind about the purchase they are free to walk away, the seller is required to sell the property to the buyer, the buy is given control and possession of the property when the agreement is entered, there is typically very few initial expenses and costs with securing property this way.
Benefits to the seller include, most buyers in this type of agreement are willing to pay more for the property, therefore increasing the profit they make from the sell. The money that is received is tax-deferred until the option is exercised or it expires. If the rent is not paid on time the purchase option expires immediately, as well as the seller received the equity buildup over the option period. The tenant is more likely to take care of the property since they have a feeling of ownership, as well as the seller has the ability to regain possession if the buyer defaults in the lease purchase agreement.
As you can see, the seller has a few more benefits that are helpful to them, especially in securing the debt. The lease purchase option is still very useful to the buyer as well, but remember the best scenario is a win-win situation for everyone. There are several ways to use a lease purchase option to secure property.
The first method is by using the property as a personal residence, this is the option that most people are familiar with. Another option is to lease the property and either use it as a rental, or if the property is in need of repair then fix it up to sell it and pay off your entire debt, therefore turning a profit on the property. The last and final option is taking the property and subleasing it to someone else, where you become the seller, and the person you are selling to a buyer. This is often referred to as a sandwich lease.
It is very important to remember when entering into contract of any form; there must be a written documentation and recording of the agreement to protect both the buyer and the seller. Some important details that need to be addressed include, whether you have the right to sublease the property. Even if you plan to live there, you never know if things may change in the future, which would make subleasing the property a viable option for you. The right to assign is another important part to include. This means that if you choose not to exercise your right to the purchase, you are allowed to assign someone else the right to buy the property, whether through a gift, or by selling the option. Finally, you want to include if possible a right to extend. This means that the terms and conditions under which the purchase option can be extended to a later point are clearly identified and spelled out in writing in the original contract.
The contract needs to include many different parts, depending upon the needs of the buyer and seller will determine if you need to include all of the following sections into the lease purchase option contract. I am going to give a list of the items that should be included so that you can decide for yourself which are important and must be included and which are irrelevant to your particular situation. Remember, if the item can possibly cause a conflict later it needs to be included and clearly spelled out to avoid court battles and misunderstanding at a later point in time.
Section 1. Date in which the contract is entered into. This is not optional, and must be included. Names are also included in the first sections. If the words “and/or assigned” are included then it typically grants the right to assign the contract to someone else. Names needs to include the name of the seller, preferably legal name, as well as the names for any and all parties who are legally responsible for the property.
Section 2. The term must be clearly spelled out, with the beginning date, as well as the ending date specified exactly. This section should also clearly spell out how long the term is in years and months so that no questions can be raised later.
Section 3. The amount paid monthly for the rent should be in this section. Also included in this section should be the address where payments should be mailed, as well as the late penalties that will be assessed if the payments are not received in time.
Section 4. While most people would not think of including things like the utilities, taxes and insurance in a contract for a lease purchase it is highly important to spell out exactly who is responsible for what. Remember the more that is clearly spelled out, the fewer chances for conflict that can create headaches later down the line.
Section 5. You need to make sure the contract spells out specifically the intended use for the property. If you are undecided make sure the contract allows you to both use it for personal use, as well as leave your options open to be able to rent or even sublease the property to someone else.
Section 6. This section refers to the rights that we discussed earlier. You need to try to include the right to assign as well as the right to sublease the property so that your options are as open as possible so you can make the best financial decision in regards to the property.
Section 7. Possession is something that must be clearly spelled out. What this will represent is the exact date in which you are legally entitled to begin using the property, as well as become responsible for making the agreed upon rent payments for the property. Until the possession date comes, you do not have the legal right to be present on the property without the owners’ specific permission.
Section 8. The next section needs to include the security consideration that is being given. This means the amount of money that is being offered to the seller to take the lease option, this money typically is applied towards the purchase price of the property when the option to buy is utilized. This is also called option consideration as well. Either way it needs to be included in the contract.
Section 9. There needs to be a section devoted to default, this includes what constitutes a default, as well as what can remedy the default, and the time frame in which the remedy must be exercised before the default progresses and the buyer loses the property, or the buying option.
Section 10. You need a whole section that is clearly devoted to the option itself. This needs to spell out exactly when the purchase option becomes available, as well as the price, and how much of the rent is applied towards the purchase if it is exercised.
Section 11. Another important aspect is the examination of title. This means that at a specified time after you elect to exercise the purchase option you have the right to examine the title to the property, as well as review the title insurance policy that should be currently effect to make sure the title can be purchased free and clear.
Section 12. You need a section included in the contract that gives the exact date in which the purchase option expires. This is the last date possible to exercise the purchase option before the owners no longer are legally bound to sell it to you at the previously agreed upon price.
Section 13. Signatures, everyone who is involved legally in the sale and lease of the property must sign the contract otherwise, the contract is not enforceable. This is not optional in any way, it is an absolute requirement.
Now that we have covered the major portions of the contract, please note this is not all-inclusive, and should never replace the advice from an attorney who is retained to look out for your best interests. Remember we discussed an attorney previously; they should be consulted before signing any contracts to make sure there is adequate protection afforded to you. Next installment we will cover making an offer for the piece of property you select to make an offer for.
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