Leases, Land Contracts, Lease-Purchases, Leases with Option to Buy and other terms connected with renting property

The information that you read here is not legal advice.  You should always consult an attorney for any legal question.  We can only give you a simple explanation of our understanding of how leases, land contracts, lease-purchases, and leases with option to buy differ from each other.

 

LEASE – A lease is a contract that gives you the use of real estate for a definite period of time.  A lease will state the full amount of the obligation—$7200.  Usually, the monthly installment—$600—will be indicated on the lease and it will be stated that this amount is payable over a certain period of time such as 12 months.  A lease contains all of the terms and conditions that apply to the resident as well as the property owner in connection with this contract.  In the simplest terms:  the resident has a place to live—guaranteed—as long as the monthly installments are paid on or before the due date and the other terms of the lease are not violated.

 

MONTH-TO-MONTH TENANCY – This is a situation where the property owner and the resident have agreed that a definite amount of rent is due each month on a certain date.  If rent is paid in full and on-time the resident has the right to reside in the property for that month.  Obviously, there is no long-term obligation for either the owner or the resident.  Often, a resident may start out with a lease and when the lease term concludes, a month-to-month tenancy goes into effect if neither the resident nor the property owner take any action to terminate the tenancy.  If either the resident or the property owner wants to terminate the resident’s tenancy, whoever wants the termination must give the other notice in writing 30 days or more prior to the next rent due date.  For example if Tommy Tenant wants to move on or before August 31, and his rent if he stayed beyond this date would be due the next day, September 1, he must notify Larry Landlord in writing that he is terminating his tenancy and he must provide this notice on or before July 31.

 

LEASES WITH OPTION TO BUY – This agreement is actually two contracts:  a lease and an option agreement.  In some cases, purchase terms are not included in the option agreement and there is a third contract, a purchase agreement.  Often times this type of agreement is referred to as Rent-to-Own .  Basically, the resident and property owner agree to a lease (see above) and an option agreement.  The option agreement spells out the conditions under which the resident may buy the property.  Often, but not always the purchase price or the property is stated.  Requirements for both the property owner/seller and tenant/buyer is spelled out in exact detail.  Very typically this includes the price of the property, any portion of the rent that the resident will  pay that will be applied to the purchase price of the property, and how long this agreement will be in effect.  Option consideration—sometimes thought of as down payment—usually is required, is stated on the option agreement, and usually will be applied to the purchase price of the property.  In simplest terms, this type of agreement gives the resident the right to buy the property for a period of time to the exclusion of anybody else.  It does not require the tenant to buy, he/she simply has the option to do so.  Any prospective tenant considering a lease with option to buy should realize that they will lose whatever money they have put down as option consideration as well as any rent credit or other forms of option consideration that may have accrued if they do not exercise their option to buy the property before the expiration of the option agreement.  It would be in the best interests of the prospective resident to be sure that they will have the funds necessary to complete the sale of the property by the end of the option agreement.  Not having money, not being able to qualify for financing etc. does not change the fact that the tenant/buyer loses everything if they do not buy the property.  It is always recommended that the prospective tenant/buyer and the property owner come to an agreement based on the cash available from the prospective resident and that resident’s ability to meet a monthly payment at an agreed level.  It is also best to discuss one’s qualifications for getting a mortgage by the end of the option term.  This method for someone who wants to be a homeowner can be quite effective if all terms are carefully considered and there is a realistic understanding of where the funds are coming from to complete the purchase of the property at the end of the option term.  Usually, the prospective tenant/buyer simply needs time to repair credit issues, accumulate cash for a down payment, or determine with some certainty that the property is suitable for his/her needs and is a serious candidate for purchase.  In a way, this is a “try before you buy” situation.  There is flexibility in that either the prospective buyer or the property owner can decide that the agreement will not be renewed when it ends.  The biggest caution is that a tenant/buyer can lose significant money if he/she decides to not buy.

 

LEASE-PURCHASE – This agreement is a blending of a purchase/sale contract and a lease.  Commitment is a key word here.  The tenant/buyer firmly agrees to purchase the property on the terms of a purchase/sale contract.  The property owner agrees to sell on those terms.  Further, both agree to a lease for the property for a period of time while some condition is being met—a residency requirement for a period of time, resolution of credit issues, financing is being arranged, money is being accumulated to meet a lender’s requirements, or a major repair is being completed.  It should be understood that this is a firm commitment that both the property owner/seller and the tenant/buyer have made.  There is no option involved.  The most serious bottom line issue is that the tenant/buyer loses all funds paid to the property owner/seller and the property owner/seller still owns a property that they thought there was an agreement to sell.  Buyer and seller must be much more sure of their situations with this type of agreement as opposed to having a lease with option to buy.

 

LAND CONTRACT – This is a sale.  Purchase price, monthly payment, obligation to pay property taxes and to keep the property insured all are part of the terms of this type of agreement.  The buyer owns the property.  He/she has the right to utilize that property as their own as long as they are not diminishing its value.  Essentially, this is private financing, often from the seller, as opposed to bank financing or a mortgage loan.  There are many terms in a land contract and it is drawn up by an attorney.  It also must be filed at the court house/county recorder’s office.  The buyer assumes all responsibility for repairs and maintenance on the property as well as payment of property taxes and insurance.  However, the buyer does not get the deed to the property.  He/she must completely pay off the total purchase price of the property in order to get the deed and have full ownership rights.  There are a few common misperceptions about land contracts:  The buyer can walk away from the house whenever he/she decides to.  Sellers can maintain control of the property by simply not filing the land contract with the county recorder.  Land contracts don’t require a down payment.  All or any one of these situations could very well occur but they are not something that either buyer or seller should either do or expect to happen.  Because land contracts are filed, they become what is commonly referred to as a cloud on the title to the property.  This is serious business and would in most cases block the possibility of the property being sold.  Land contracts can be “undone” or nullified if both the buyer and seller agree and execute the proper documents to clear the title to the property.  Where there is not agreement or cooperation between the parties, land contracts can be nullified through court action.  Needless to say this is not quick or cheap.  This is typically why large down payments are required for a land contract.  In simple terms, this type of agreement is for the buyer who has significant cash but not enough to purchase the property.  The buyer also will typically not be able to qualify for a bank loan or mortgage to buy the property outright.

 

 

There is much more that could be said about any one of the above real estate agreements.  Many legal issues are involved with each.  The intent of the information presented here is to provide a basic understanding of the differences in each of the topics discussed.  As always, it is best to discuss your personal situation with a qualified attorney.

Comments are closed.