Leasing With Option To Purchase

Houses! Magazine

January 2011

 

Several months ago in an article titled “Seller Financing: A comeback story?” seller financing utilizing a seller mortgage and installment sales contracts were discussed. There is another option for buyers and sellers seeking ways to assist a buyer obtain a seller’s property. That option is a lease with an option to purchase.

In a lease with an option to purchase a potential buyer will put down a deposit, typically non-refundable, and will enter into a lease with the seller. The buyer will then lease the property from the seller as they would in a traditional lease. However, the lease has an option clause allowing the buyer to end the lease and purchase the property. The purchase price for the property is negotiated in advance, as is what portion of the rent will be applied as a credit towards the purchase price. If the option is exercised, a closing is scheduled and the seller conveys the property to the buyer as they would in a traditional sale. In the event the option is not exercised and the lease expires, the seller retains the rent paid and the lease is treated as a traditional lease.

While a lease with an option is a good way to get a potential buyer in a property who is otherwise having difficulties due to the credit market or other factors, such an arraignment should be carefully considered as there are pitfalls for both the buyer and seller that would not exist in a traditional sale. For example, if the seller has a mortgage on the property, the buyer needs to ensure the mortgage payments are made to avoid foreclosure issues. Also, a seller needs to ensure entering into a lease with an option to purchase does not violate any provisions of the mortgage. As with any transaction involving real estate, a potential buyer or seller should seek the advice of a real estate professional.

Ron Pennington is Chair of the Real Estate & Financial Services Practice Group at BoltNagi PC, a full service business law firm located on St. Thomas, Virgin Islands. Attorney Pennington concentrates his practice in commercial and residential real estate, acquisition, development and financing. To contact Attorney Pennington, please email: [email protected] or visit www.vilaw.com

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