Nonrefundable deposit on lease to purchase option

[Ismael Ayala Jr.]

Regarding nonrefundable deposit on lease option to purchase for a home selling for $375K.

What does the nonrefundable deposit entail?

1) For illustration purposes is it (10K) upfront that the seller gives back to the buyer? To assist with the bank required down 3.5%, 5% down payment?

2) Is there a portion of that nonrefundable deposit that is considered the cost for the lease option?

3) Do I charge seperate for a lease option in addition for nonrefundable deposit?

4) If lease is ending, and the buyer decides not to purchase home for whatever reason: Unable to obtain financing through lender, doesn't want home, change in job location, etc. does the buyer or seller keep that nonrefundable deposit?

5) If the seller wants to rent another year or so after current lease is up, do I apply another nonrefundable deposit. Or does it carry over?

6) Any knowledgeable real estate lawyers you can refer me to that can draw up this contract for me.

[Benjamin Aaker]

It's great that you are asking these questions now rather than later. #6 is your best question and you really will need an attorney experienced in real estate in your area to help you. Some general answers I have are:

1. The seller is selling the option. It has a price. The option has value, it is setting a future price that the seller is agreeing to sell for. If the house value goes way up, the seller has taken a loss, as without the option, he could have sold for more. If the house value goes down, the buyer could opt to not purchase for the agreed-on price and the seller would have to sell for lower than he would have gotten by simply selling rather than optioning. The option has two components: a price and a date. The option is a valuable thing for the buyer and whatever that value is, is the price of the option.

2,3. But, you asked about a nonrefundable deposit - subject to the local laws, the agreement you make can be anything that the buyer and seller agree to. This is just the price of the option and I prefer the term because deposit often carries other definitions and expectations. Just charge for the lease option.

The seller (also the landlord in your scenario) will also want to get a security deposit, which is refundable, and typical.

In these types of deals, the buyer often doesn't have the cash for the down payment. The buyer will agree to pay some monthly amount higher than the market rent, to offset the cost of the property when the purchase happens. The seller would be wise to keep this in a separate account for use at the purchase or in case it needs to be paid back. This could be refundable or not based on the terms of the agreement. Upon closing, that money becomes the seller's and in the case of seller financing is used like a down payment, or in the case of bank financing, used to decrease the sale price (and it is the buyer's responsibility to have saved whatever down payment the bank wants at this price).

4. After the date of the option, the language in the contract will usually state that the option has expired and buyer's rights terminate. The lease agreement will usually have gone month-to-month at this time. The option money will stay with the seller and the extra monthly amount paid will go to whomever specified in the contract (usually the seller).

5. I'm not clear on the question here, but if the buyer wants to continue to rent and the seller agrees, he would stay month-to-month and the rent would go back to market rent or whatever was in the lease at the time of the initial contract. A better idea would be to sign a new lease agreement at this time, plus or minus an option to purchase.