Lease with option to buy

[Brian Pfaehler]

I have a tenant that has asked me for a lease with option to buy and wants to take over some maintenance items (although these are few and far between on this property). I’m not sure how to approach this...I’ve done a good but if research on the topic and how it would/could be setup..anyone have good luck with this and want to share some pointers or advice? Thanks

[Lee Smith]

I handle several lease-options each year. Key thing is to document document document... You might even write up a document to tell the buyer in layman terms everything that is in the contract and have them sign it. Just be careful and document.

It's actually two documents..

1. an option to purchase. They generally put money down for the option to purchase at a set price within a certain time frame.
   
   1. In Indiana if your option period is 36 or more months then you need to record the contract for it to be enforceable. 
   2. Option fee is non-refundable. It should state this on your contract, but make sure they initial it to make sure they understand.
2. Lease. This is a standard lease. Probably the one you have been using all along.
   1. Legally you are still responsible for all repairs to the home during this period. So if they decide they want you to make a repair, then you are ultimately responsible.

Doing a lease option can be construed by judges as a note/mortgage or land contract. Especially if you take a large down payment and/or are giving rent credits. It may not work out that way, but your worst case scenario is you may need to foreclose instead of evict.  Note: You can create documents and have the tenant buyer sign them stating they know this will be an eviction instead of foreclosure, but ultimately it depends on the judge reviewing the documents.

We sell several rent-to-own properties each year. Our current SOP is to do a 30 month lease-option to allow tenants to prove they are ready for home ownership. At the end of 30 months, if they have not been late on rent for more than 3 times, then we will switch to a note/mortgage or land contract. 

I don't know your price point, but my experiences are that 90+% of people who start a lease-option and need to refinance within 3 years don't do it. They just don't have the discipline to get their credit in line. They do usually leave just like a tenant would though. 

Lastly, qualify them like you would a tenant.. Just because they are putting more money down, doesn't mean that negates their 30k in unpaid child support, $3000+ to previous landlords, and $1000 each to 5 different mobile carriers.. hehe