Recently, the real estate business is on its toes because of the sudden demand for lease option. Due to the market decline of real estate ownership in recent years, leasing has become a trending option and seems to be working potentially in areas where this form of option never worked before. It is imperative that any potential investor interested into lease option must first understand some vital considerations in leasing which could help a lot in making a better decision to rent or not.
One must understand that lease option carries the right to rent and an option contract to buy the rented property by the rentee at an agreed price and at a specified expiration date. Market approaches in this form of investing is to have your property leased out to an end-buyer with the option to buy it or lease option your property to the original seller and re-lease option it to the buyer.
These are the following gains that an investor can obtain in a lease option investment: the rent differential which is paid to the original seller and end-buyer, non-refundable fee which is not necessarily a deposit, and the profit taken when the buyer purchases the property.
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Even if the end-buyer does not decide to buy the property, the investor can still profit from the transaction since the non-refundable fee consideration is forfeited in favor of the investor.
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A key point in leasing is to have separate agreements or contract for leasing and option to buy. Two separate contracts can insure the investor of legally evicting the buyer in situations where there’s a conflict of interest and that a single document may be sufficient to present it in a court action. Requiring for a single lease option document may result into the court favoring the tenant and allowing the option consideration to be given back and with it granting him to break the lease contract. Separate forms of agreements must be performed by the investor, which is a single lease-option document to the original seller and a dual document to the end-buyer.
Other key considerations in this lease option agreements are the following: an increase every 12 months of 3% to 5% of the strike price, terms of the contract should be annually and amended every 2 or 3 years, repair charges are to be shouldered for costs below $2,000 by the end-buyer and above $2,000 by the original-seller, property insurance for casualty losses should have co-beneficiaries coming from the investor and original-seller, rent amount to original-seller must be computed at 6% of the strike price while rental to the end-buyer must be based on the mortgage expense, and a clear policy as to when the rent starts.