Pitfalls (and joys) of the Lease Option To Buy Houses

Lease option to buy houses are mighty effective for getting a great deals, however they need to be drawn up correctly or you could find yourself in hot water. 

Experienced Investors and Buyers Alike Use This Simple System

If you have just one takeaway from this article is that drawing up two separate documents is critical.

  • One - The lease document (just what you'd normally use for any house you'd lease).
  • Two - The option to buy document.
If you aren't careful with your Lease Option To Buy House, you could end up in court -- losing. ouch.

It's absolutely critical to have two separate documents, and here's how I know.

Several years ago I had leased one of my rental houses to a young couple, Mr. and Mrs. Miller and their two adorable daughters.

And it wasn't even six months into the lease when they stopped paying. I was managing the house myself at the time, and thought we had a good working relationship. So I dropped by to see what's up.

Mrs. Miller answered the door, and shared with me that she had lost her job, but was just hired at a better company. For more money. In fact, she wanted to know if I'd be willing to sell them the home since they loved living there. We talked for awhile about it, and she promised to make up the lost rent as soon as she got her paycheck.

A couple months go by, and I filed a notice of eviction since they weren't answering my calls anymore. We just had to move on, it was becoming clear that they weren't exactly the best tenants.

When we next met up in the Magistrate's court, Mrs. Miller shared with the Magistrate (for those who don't know, a Magistrate is similar to a judge in some states), that she thought they had a lease option to buy house. This sent huge red flags to the Magistrate, and she nearly cancelled the eviction on that assumption. "Hold on, Hold On!", exclaimed the Magistrate.

Just Checking, a lease option to buy house doc would have send us running

Seems that if we DID have a lease option to buy house agreement  in place, the eviction proceedings would have terminated at that point. The Magistrate went on to explain that an offer to buy/sell is a foreclosure issue. Not one for the tenant - landlord court. 

I will never forget that legal lesson

Since that time, I always use a simple lease to rent the property out, and a completely separate document, the Option to Buy document. Every time. 

The Option to Buy  is kinda like a coupon that the tenant buys, for an Option fee, which commonly is considered their down payment. That Option to Buy document spells out the agreed upon purchase price, document the critical terms such as when the tenant will find their financing to buy the property and an expected close date. 

If they don't perform on all of the terms of the Option to Buy document, their "option" goes away, along with any option fees they have paid.

See the link below for the lease to purchase option agreement that I use -- actually, it's the option agreement as a standalone.

Learn more about lease options and how to make money using them with these articles:

An overview of the lease option method of making money with real estate

Customary lease to own option fees

How to correctly use lease options to buy houses

Free example to print off - Lease to Purchase Option Agreement

How lease option real estate investing can work into your investing goals

Let's get creative with Sandwich Lease Options

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