What are Typical Real Estate Lease Option Terms? – Video
Video Transcript
Kathy Fettke: All right. Here are some of the things that you want to negotiate in a lease option to figure out who’s paying for what; who’s going to pay for the utilities, who’s going to pay for maintenance, and what kind of maintenance is it. Do you know if big ticket items get covered by the landlord? You really got to define that. Taxes and insurance, who’s going to pay that? Usually, it’s the landlord, but it can depend. Pet fees.
You need to know the number of occupants in the property and if those occupants are going to perform renovations. Because the last thing you want to do as a landlord is to have somebody go in and do a bunch of shoddy renovations on your property, they end up not buying the property and you’re stuck with problems, or from the tenant’s perspective, you don’t want to doing all these renovations and find out later that it wasn’t approved. You got to get that clarified.
Make sure it’s clear if this property is going to be used as a primary residence or it’s a flip where that investor is just tying up the property, fixing it, and flipping it under the option. Just again, spell it out. You cannot be too clear on these things. Clarity is everything.
Consumer protection. Again, this is something I just went through and I want you to understand it. I mentioned it earlier, I’m going to mention it again. There are very strict consumer protection laws for homeowners. Not so much for investors.
In order for you to not look like you’re a predator, that you are one of those investors who are trying to take advantage of people, you need to protect yourself. The way you do that is make sure you screen your tenants thoroughly like you would for any application to lease a property or even better yet, screen them to see what is going to take for them to eventually purchase this property. If they just need to clean up their credit, that’s fixable, but if they don’t even show anywhere near the income they’re going to need to be able to eventually purchase this property, again, you could look like a vulture. You don’t want to because there are laws that don’t protect you. They protect the homeowner, the consumer.
Same thing with terms. Offer at least one to three-year terms. If you did like six-months or less than a year, it would be really tough for that homeowner or that tenant to clean up their credit or get the money they need or the job history or whatever it is that they need to be able to qualify for a loan to purchase the property, they can’t do it usually in less than a year. Again, you would look like you were taking advantage of them if you didn’t do the one to three-year terms.
Keep the option price within 5% of market value. If you think you have a really good data, again, you can talk to an attorney. I’m no attorney, and every market is different, every city is different, but let’s say you’re buying a house for $100,000 in an area that’s been consistently about a 3% increase in value. I think that you’d be okay with the option price of 6% after 2 years because you just say, “This is what it’s been. There’s been a 3% appreciation in two years when you buy it. I wanted 6% over what it is today.” If you go 10%, 20%, you could get in trouble for that for, again, looking like you’re taking advantage of this person. You need to know the local laws. You need to know the federal laws too, but it’s the local laws that vary more and can really get you in trouble.
