Team Reba Real Estate

The following is not legal or tax advice. You should seek appropriate counsel to answer your questions.

On the front page of the Sunday, February 3^rd, Seattle Times Real Estate section, there is an article about significant rent increases. Much to the chagrin of many renters, the slim vacancy market, shortage of units, high housing costs, and tentative housing market has made King and Snohomish counties ripe for high rents. The area is a true landlords market.

Olya Lapina, a real estate investor, is offering a “lease-to-buy option” to prospective tenants. She believes this will be a more popular way for potential but apprehensive homebuyers to work their way into buying a home. Lapina applies a portion of each months rent towards the potential down payment. It’s less of a commitment then an outright purchase, and it helps potential buyers who might not qualify for a loan.

What Lapina is doing is called a Lease Purchase or lease to buy. This can easily be confused with a Lease Option. Confusing the two is quite common with novices, but there is a big difference between a Lease Purchase and a Lease Option. That difference can spell big trouble if you think you’re getting one but accidentally get the other. I am going to guess she did not talk with an attorney.

In a Lease Purchase, the lessor/owner agrees to sell the property to the lessee at a specific price on a specific future date. The lessor/owner typically charges higher than the fair market rent with the difference credited toward lessee/buyers down payment on purchasing the property. At the end of the lease term, the tenant/buyer purchases the property at the predetermined price and terms. Here is the big trouble. In the event of a dispute, it is unclear who keeps the earnest money or rent premium intended to be the deposit or down payment. If the tenant decides to stop paying the rent can the lessor/owner evict the tenant? The lessees rent credited toward the purchase may have created an interest in the property making eviction very difficult for the lessor/owner.

A Lease Option is the purchase of time. In a Lease Option the lessee purchases the exclusive right to purchase property for a predetermined price during specified period of time. A Lease Option provides the lessee no interest in the property. None of the rent is credited toward the purchase of the property. The tenant signs a lease agreement for one year paying market rent. The tenant signs a one year option and pays the option price. For one year, the tenant has the exclusive right to purchase the property for a predetermined price. After one year, the lease expires. After one year the option expires and the lessor/owner can sell the property to anyone for any price.

So, while a “lease-to-buy option” might sounds like a great plan, do your homework and speak to your attorney so that you know you’re getting a Lease Purchase or a Lease Option.

http://seattletimes.nwsource.com/html/realestate/2004159180_rentals03.html