Previously, I wrote about the opportunity to purchase a home through the use of a "lease option" or "lease with an option to purchase." Essentially a "lease option" is a contractual agreement between the lessee (the optionee/buyer) and the lessor (the optionor/seller) stating that the lessee has the exclusive right, but not the obligation to purchase a property at an agreed upon price within a specific period.
To repeat, under an option the optionee,has the right to purchase but not the duty to purchase. This is totally different from a Real Estate Contract and Receipt for Deposit that obligates the buyer to purchase predicated on the terms and conditions of the contract. One key element to remember about an option to purchase is that it is a contract. If consideration, i.e., something of value, an example would be money, is given, the right to purchase under an option is irrevocable. However, this contract does not transfer nor pledge to transfer title. The option to purchase is a power to make a contract to sell.
As a potential buyer, what benefits do you receive with an option to purchase contract? An advantage that you have as optionee is that no one can buy the property during the option period. The seller during the time of the option cannot sell the property even if there is a substantial increase in value, such as the increases experienced in 1988 and 1989. However, that protection against a run up in property values will only be available if an agreed upon price was set in the option contract. You, the optionee, will pay the price as stipulated in the contract. However, if you are the seller, you may have a reluctance to enter into an option to purchase agreement stipulating a predetermined price. You, therefore, may commit to an option and stipulate that a purchase price be determined at time the option is exercised.
On the other hand, tenants may not be too eager to sign a lease where the option to purchase is based upon a future value. If either party finds the above to be a stumbling block to a lease option, the parties may resort to the execution of a "Right of First Refusal" as a compromise. The "Right of First Refusal" will state that, if during the term of the lease or any extension of the lease, the lessor (seller) intends to enter into an agreement for the sale of the property, the lessor will give the lessee written notification detailing the name and address of the potential buyer, the purchase price, and all the terms and conditions of the proposed sale. If upon delivery of this notice the tenant does not elect to purchase the property, the "right of first refusal" will have expired and the lessor may proceed with the sale.
For a potential buyer, the option period can be used to investigate the property and make a determination to purchase. If, for example, you determine that there are specific business or personal needs to be satisfied by acquiring adjoining properties, an option to purchase will give you the opportunity to negotiate in secret with your adjoining neighbors. For many people, the overriding reason for using the option to purchase is to have a period of time during which financing is obtained. One could use the option time to save for the downpayment, facilitate the sale of another home or to clean up any current credit problems.
An interesting aspect regarding the "option to purchase" is that the option cannot be canceled upon death of the optionor. If the need arises, one can get assistance from the probate court to enforce the "option to purchase" contract. As an optionee you may assign the option to another, if the contract does not expressly prohibit the assignment.
For the seller, the option to purchase contract is a lot less restrictive than the contract for sale. The consideration paid for an option may be retained by the optionor if the optionee does not exercise the option. However, if there is no consideration paid for the option, the optionor can withdraw the "unilateral offer" to sell the property any time before the exercise of the option by the optionee. One must be careful about what one intends consideration to be in any lease option agreement. It can be a lump sum payment, rents or part of the rent payment to be applied to the purchase price. The use of an "option to purchase" can be win-win if each party to the contract understands the rights afforded by the contract and obligations imposed by the contract.
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