Points to Consider for the Option Agreement

The option agreement: On the buying side, the option agreement turns control of the property over to the optionee without ownership. When I am doing a lease option, I sign an option with the buyer. I control the property as if I owned it, but I am giving them the right to buy upon exercising the terms of the option, usually in 12 to 18 months.

It’s important to get the optionee to be as responsible for the maintenance and well-being of the house and property as possible so that you are not tied down with constant maintenance. Here are some points in my option agreement:

1. Optionee agrees to accept the property in “as is” condition.

2. Optionee agrees to make all repairs major and minor to the property.

3. If the optionor has to make any repairs to the property, the cost of the repairs will be added to the purchase price. (If someone’s water heater or furnace goes out and the tenant can’t afford to fix it, you should go ahead and pay for the repairs. In Michigan, you just can’t go without heat in the dead of winter.)

4. If there is a septic system, the optionee agrees to have it pumped once per year.

5. If there is a pool, optionee agrees to open and close the pool each year and to maintain the pool.

6. Optionee should pay for all additional assessments, including water, sewage, sidewalks, and road paving.

7. The option can become void if the optionee pays their rental payment or any option payment more than 10 days late. (It is important to remind your tenants that their record of payments will have to be submitted to the mortgage company and may damage their ability to secure a mortgage. So, if they’re serious about owning the home, they need to be serious about paying on time.)

8. If the option is voided for any reason, then the contract becomes a month-to-month rental-only agreement (so that I can take steps to resell the property if I choose to.)

9. Optionee agrees not to record anything against the title of the property. (In other words, the tenant cannot file a Memorandum on the property. The memorandum is used only when you purchase, not sell.)

10. Optionee understands that optionor does not hold title (own) this property, but is transferring their interst in the property. If the optionor can’t transfer title due to something out of their control (i.e., owner refuses to close or can’t transfer clea title), optionor will reimburse optionee the entire option consideration plus an additional $500 for their inconvenience, as full and complete liquidated damages for optionor not being able to close on this property.

11. Equitable mortgage: This Option to Purchase is not, and shall not be construed as, or interpreted as any form of equitable mortgage. It is hereby declared that it is not the intent of the parties to create a loan of any nature or to create a mortgage of any kind. In the event that the optionee hereunder should ever raise such an issue in a court of law or otherwise this Option shall terminate immediately.

12. Optionor has advised the optionee to seek the advice of a mortgage lender and attorney prior to signing this document. (The mortgage broker might look at their credit and their history and tell them that even with an 18-month option they will not be able to clean up their history enough to qualify for a mortgage. They should also always have a lawyer look over any type of document that commits them to an agreement. In my experience, most people talk to neither, but they sign the document saying that they have.)





Excerpt taken from Investing in Real Estate with Lease Options and “Subject-To” Deals, Chapter 13, Pages 183-184.





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