Duane Duggan is an award-winner Realtor and author of the book, “Realtor for Life.”
What is a lease option? Otherwise known as a “lease option to buy,” it is an agreement between a buyer and a property owner in which a buyer pays the owner money to purchase the property at a later date. This real estate tool can be a win/win for all parties involved, especially if both the buyer and seller would like to wait to make a transaction.
However, there are many details that need to be worked out to come to a satisfactory agreement. In Colorado, there is no Real Estate Commission-approved lease option form. Therefore, licensees would be practicing law to create such an agreement for clients. With that in mind, it is always a good idea to involve a real estate attorney to prepare the documents for the transaction.
The lease options I see are usually comprised of a lease that makes reference to the sales contract, and a sales contract that makes reference to the lease.
Items to negotiate within a lease option agreement:
*The rental amount per month.
*Any amount of the rent that would be applied to purchase. This could be $0, or it could be the full amount of the rent. Often it is a portion, such as 20%.
*Length of option. A year is fairly common.
*The cost of the option. The lower the amount, the less likely there will be a closing. Generally, a buyer wants to move forward with a lease option due to lack of money. Often the buyer can’t come up with an amount that will work for the seller.
*Is any part of the option refundable? Usually not. Otherwise why bother?
*Who holds the option money? The seller, title company, or real estate company.
*Is the property purchase price determined today? If today, will price be based on a current appraisal?
*Is the property purchase price determined in the future? Sometimes based on the average of 2 appraisals at a future date.
*Does the price go up as the time in the option moves forward?
*Who pays for utilities during the lease?
*Who pays for repairs that come up during the lease? For example, a broken water heater.
*Buyer loan qualifications. Many buyers want a lease option because they currently do not qualify for a loan. What is the likelihood they will be able to qualify by the time the option expires?
In a slow real estate market, sellers might have a stronger interest in lease options because they do not have another offer. In a hot market, sellers might have an interest in a lease option because they want to delay a closing until a later date. The bottom line is that there are circumstances where using a lease option can beneficial to both a seller and a buyer.
About Duane Duggan: Duane Duggan has been a Realtor® for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, REALTOR® for Life. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.
For questions, email Duane at DuaneDuggan@BoulderCo.com or call 303-441-5611