Options As Sales Tools

Options can give you the "best of both worlds" between a land contract and a rental. With an option, you are renting the house with the right for the tenant to buy it later at a set price and terms. The tenant/purchaser pays an additional sum over and above the rent each month which is later applied to the down payment when the sale closes. The sale can be in the form of a land contract or mortgage.

An Example

You are planning to sell a house that would rent for $475.00 per month. The house is worth about $30,000.00 cash. You write an ad as follows:

RENT WITH OPTION TO BUY

3 bedroom house, quiet area,

CALL: (313) 555-4546

You will be amazed at the amount of responses any ad starting with "Rent with option to buy" will bring. Let's assume that you would like to sell the house for $38,000.00 with $4,000.00 down on a land contract.

You pick one of the applicants who would like to buy the house, but they only have $1,600.00 to put down. This is where the option comes in.

You take their $1,600.00 as initial option consideration and tell them that they must pay $475.00 per month plus an additional $100.00 monthly for one year towards their down payment. You will match their contribution of $100.00 per month. You now have $1,600.00 in hand which is yours to keep plus you are receiving $575.00 per month on a house that would rent for $475.00. Isn't this better than a regular rental?

Assuming the tenants pay right along for the year, you close and they are now purchasing on a land contract. You've had a year to establish their payment track record and will probably have ended up with a good purchaser on the land contract.

Think about it. Isn't the tenant/purchaser more likely to be willing to pay a little more than market price for the home? Of course. Where else can they get into another house with only $1600? Also, since they will be buying the house, you will make them responsible for all of the repairs while they are renting with the option. They will stop thinking of the home as yours and start thinking of it as theirs. They will start to show "pride of ownership".

The end purchase can also be in the form of a mortgage. However, you should consult with a loan officer before completing the agreement as certain mortgage guidelines might prevent you from using option consideration for a down payment.

Option No. 1

The following is the option agreement I use when I give a tenant an option to purchase. You will note that it does not have a space for a notary. Without notarization, the option agreement cannot be recorded by the tenant and cloud the title to your property. Removing a cloud on your title might require a lawsuit to “quiet title.” Recording requirements differ from state to state, and sometimes county by county. Check with a competent real estate lawyer to determine your best strategy for using options.

You will also notice clauses that will void the option if the tenant pays their rent late which allows you to keep the option consideration for their failure to perform under the agreement.

To properly complete the option, you should fill out a purchase agreement with the terms of the sale which should be initialed by you and the tenant. Your rental agreement should be filled out the same as any other. Under no circumstances should the rental agreement refer to the option agreement. If it does and you later have to evict the tenant, the court may construe the option as part of the lease and complicate your eviction process.

OPTION TO PURCHASE                                 

THIS AGREEMENT made this             day of                           , 20       between,                                                                                                              Optionor, and                                                                                                              Optionee.

IN CONSIDERATION of the sum of $____________, consisting of $               cash and $                   in the form of a Promissory Note (copy attached) paid by Optionee (the receipt of which is hereby acknowledged buy Optionor) the Optionor gives to Optionee the exclusive option, right and privilege of purchasing certain Real Property located in the __City______ of ___      ________, County of ___         _____________, and State of Michigan, described as:                                                                                      

Lot                                                                                                       County records.

Commonly known as:                            

Tax ID                                                

This option is subject to the following terms and conditions:

1. This option is not assignable by Optionee unless Optionor agrees separately and in writing.

<!--[if !supportLists]-->2.       <!--[endif]-->Optionor grants Optionee the right to exercise this option for a period commencing on__   ______________and terminating at midnight on _______________ if not exercised this option shall expire midnight__                         ______________________, and Optionor shall be released from all obligations hereunder, legal or equitable.  The obligations shall cease and the consideration here above receipted for by Optionor, shall be retained by Optionor.

1. If Optionee elects to exercise this option the sale shall take place according to the terms of the attached purchase agreement, which have has been initialed by Optionee and Optionor.

<!--[if !supportLists]-->4.       <!--[endif]-->Notice of election to purchase shall be given by Optionee in writing, and by registered mail, addressed to Optionor at _____                                      .  All provisions of the Rental Agreement between Optionor and Optionee pertaining to the aforementioned property shall be performed by Optionee or this option may be withdrawn by Optionor and Option consideration will be forfeited by Optionee.

<!--[if !supportLists]-->5.       <!--[endif]-->OPTIONEE agrees to accept subject property in current “AS IS” condition. Should OPTIONOR be required to make repairs of any kind whatsoever to the property, the cost of such repairs shall be added directly to the purchase price stated in the purchase agreement.

1. The option consideration is for the sole purpose of granting the OPTIONEE the exclusive right to purchase the subject property at the stated price and terms.

1. This option to purchase will be terminated and all option consideration forfeited, if payment required on option agreement or any payment required on rental agreement is late for more that ten days past the due date.

1. This option to purchase shall apply to and bind the heirs, executioners and administrators of the respective parties.

1. Time is of the essence in this agreement.

IN THE EVENT THAT OPTIONEE DOES NOT MEET THE TERMS AND CONDITIONS CONTAINED IN THIS AGREEMENT AND ADDENDUM ALL OPTION CONSIDERATION PAID WILL BE KEPT BY OPTIONOR.

            IN WITNESS WHEREOF, the parties have executed this agreement on the date first above written.

WITNESSETH:                                                            SIGNED AND SEALED:

SF.10.7.05

If you want all the information and forms that put you in control of a successful Lease Option, go to: Creating an Exit Strategy: Lease with Option to Buy

• Find the buyer who will pay top dollar for your property
• How to find tenants and put them at risk on rent purchase program
• Determine credit worthiness
• Help tenants gain credit worthiness
• If you are a landlord get above market rents
• Learn how to Sell properties with little to no equity

Included Documents

Exhibit A: Landlord Favorable Rental Agreement
Exhibit B: Seller Favorable Option to Purchase 
Exhibit C: Promissory Note 
Exhibit D: Seller Favorable Buy/Sell Agreement

go to  http://www.MrLeaseOption.com