WLCCI

Protecting Yourself With Lease Options

If you enter into a lease option agreement without taking care to protect yourself, you might find that the specific terms of the lease option are so binding that it will be almost impossible to exercise. The following precautions are important:
Record the Option
Every time you enter into an option agreement with a seller, you should record the option in the public records of the county in which the property is located. This protects you , the purchaser, more than it does a seller. It provides notice to the world that you have an option to buy the property. If the seller should sell the property to anyone during the option period, the new purchaser will buy the property with the knowledge that you have an option to buy the same property.

To record the option, it must be notarized and witnessed by two people. If the option agreement is signed before this notarization takes place, the seller might be reluctant to later sign a second time in front of a notary public. Make sure it is all done at the same time.

If you consider the terms of the option confidential, then record and Affidavit and Memorandum of Agreement Affecting Real Estate. This will put the world on notice that there is a pending sale of at least an agreement that could affect the real estate in question, without disclosing the terms of the agreement. As in the case of the option, it should be witnessed and notarized.

Right to Sublease
Whether you plan to live in the property or not, you should always make certain that your lease option will give you the right to sublease the property to another tenant. That right is not inherent in a lease unless specifically spelled out.

Right to Assign
In some states, the right to assign a contract is protected by law. In other states, it is not. Assignment is the right to transfer the contract to someone else. To avoid any misunderstanding or litigation, you should make sure that the right to assign the contract is spelled out in your lease option contract. If you do not exercise the option yourself, you should have the right to sell it. Your “equity” in that property is valuable. After all, you have been paying rent each month, and a portion has been allocated to the option price.

By providing you with the right to assign the contract, the seller also benefits. The seller does not have to find another buyer for the property.

Right to Extend
Some lease option contracts will have a section which spells out the terms under which the option may be extended, known as an extension clause. Other contracts specifically say that the extension of the lease option is prohibited. Some contracts may be silent on this point. Regardless of what your lease option says or does not say, make certain that you have the right to extend the option period for at least a period for one year.

This right may be expensive. For example, you may have to pay an additional 5,000 in earnest money, and the option price may be increased by several percentage points. However, in the end, it will be less costly than if you were not able to exercise the option when you want to, thereby losing all of the credits that you have built up