ACBG Rent-to-Own TERMS AND CONDITIONS
A lease with purchase option combines elements of renting and buying and can be structured in a number of ways. While we at ACBG strive to provide you with the best possible information, we always recommend that you consult an attorney with experience in lease with purchase options before you enter into any real estate agreement with anyone. If you have any questions please contact us​​​​​​​ any time.
CONTRACTS
There are 3 agreements, otherwise known as contracts involved in a lease with purchase options: the lease, the option and the purchase & sale agreements.
1. Lease Agreement (Contract) - The lease covers rent (including any monthly purchase option premium), term, security deposit (if any) plus utility payment policies, pet policies, etc.
2. Purchase Option Agreement (Contract)- The purchase option agreement (also known as a 'lease purchase' agreement) stipulates the terms under which the tenant/buyer's purchase option term, purchase option premium(s), purchase option premium payment terms, any seller conessions (such as "rent credits", "improvement credits" and "early close credits"), or extension options. During the lease/option term, prior to exercising of option, only the lease and option contracts are active. At exercising of option, all purchase option premiums would apply towards the purchase and sale agreement. If option not exercised, only security deposit (if not put up towards purchase option premium) may be refundable. All purchase option premium funds are non-refundable as they are an extra charge reserving the rights to purchase the property at a later date. If these purchase rights are not used before the option 'expiration' date and there is no extension, the purchase option premium was simply extra rent paid. Only in cases of Owner default in the lease, option and/or purchase and sale agreements may purchase option premium be refundable.
3. Purchase and Sale Agreement (Contract)- The underlying sales contract. It covers the purchase price, deposits, seller concessions, closing date, and closing payment arrangements. As far as contingencies, inspections must be completed prior to start of lease/option term and there are no mortgage contingencies. The lease/option term basically buys an extended period of time to do whatever is necessary to obtain financing. This contract could be drawn up at time of lease and option contracts or drawn up at option exercise date.
RENT
Your base rent will be at or near the Fair Market Rent for your area and will only be exceeded when we are applying special special provisions detailed in your Lease Purchase Agreement (Contract) and/or the Rental Comps in your desired neighborhood so dictate.
Fair Market Rent (FMR) - Fair Market Rent comes from a documentation system compiled annually by HUD for every city or town in the United States. These figures should not be taken as an exact amount but instead as "ballpark" figures of rent for a particular area. For more information and to check the HUD Fair Market Rents for your area, click HERE​​​​​​​.
Rental Comps - These are the actual rental amounts that various properties are on the market for and are often significantly higher than the FMR for a given geographical area. It is important to note that properties with rents in the lowest end of the rent range tend to be harder to find because of the high desirability of such homes. We are dedicated to helping both our landlord/sellers and our tenant/buyers to the most fair agreement for all parties concerned. We are professionals, and we will never support any agreement that proves to be a disadvantage to any concerned parties. However, we recommend, and in some cases insist, that all parties seek independent legal counsel from an attorney who is experiences with Lease Purchase Agreements (Contracts).
Repairs - When you sign up for the ACBG Rent-to-Own Program you are not expected to be responsible for major repairs. The homes that we offer are move in ready. We require all of our tenant/buyers to purchase a renter's insurance policy to cover the cost of any repairs or damage. We also require the landlord/seller to agree to cover any costs that exceed a certain dollar amount within a monthly period that are not coverd under that policy. Any home improvements done by the tenant/buyer are to be at their discretion, and must be approved by the landlord/seller. No price concessions will be made by the landlord/seller at the time of the exercise of purchase agreement unless clearly agreed to by the landlord/seller. Any such improvements will become the property of the landlord/seller in the event that the tenant/buyer neglects to exercise their pruchase option in a timely manner, and will not be considered as established equity in favor of the tenant/buyer. (NOTE-There are sometimes exceptions to this particular term and condition and some agreement may vary accordingly. Consult your legal representative before doing any repairs to any property).
Landlord/seller Mortgage Payments - We require all rent that our tenant/buyers pay to go first to pay the monthly mortgage payment due on the home. We help to facilitate a rent escrow company which, for a small fee, will pay such mortgage and possibly other costs which the rent payment would normally cover thus preventing any foreclosure/eviction scenario from ocurring. Contact us info@allcashbuyergroup.com​​​​​​​ for any question that you have regarding rent escrow.
Purchase Option Premium - A purchase option premium is any funds paid towards the option rights on the property. A purchase option premium can be an up-front, monthly, annual and/or other arrangement. When it is included in monthly rent, the original lease price is raised. For example, 1 year lease, $8,000 purchase option premium, $1,600 rent. Tenant-Buyer only has $5,600 up-front for the rent premium but has enough income to afford $1,800/month rent. $200/month would then add to the $5,600 and in 1 year, the entire $8,000 would be paid.
Purchase Price- The purchase price is the total amout required to purchase the property before the purchase option premium is deducted. The purchase option premium is generally applied to the purchase price, but if the option to purchase is not exercised by the end of the lease/option term (the option 'expiration date'), then any beforehand purchase and sale agreement is considered to be in default and all said funds are forfeited and become in essence, additional rental income for the seller. Thus, these funds are generally non-refundable beginning on the first day of the lease/option term. (Note that there is a possible way for purchase option premium to be refundable - see the section on Purchase Option Premium below.
Purchas Option Premium - The purchase option premium (also known as "option fee" or "option consideration") are funds paid toward the option rights on the property. The purchase option premium serves several purposes. First, it may be listed as the earnest money deposit used to secure the Purchase and Sale Agreement (Contract) for the right to purchase the property. Second, being non-refundable (see possible exception(s) below), it gives the landlord/seller recourse if the option to purchase is not exercised and is also a "measure of seriousness" of the tenant-buyer for exercising the option to purchase. And it also givesthe landlord/seller some assurance that the tenant/buyer will not leave the property in a state of disrepair. The average purchase option premium for our program is 5 % of the purchase price although that can be higher or lower in some circomstances.
In almost all instances the purchase option is completely non-refundable. However, there are cases where a purchase option premium refund are required by law. If at closing the landlord/seller is not able to deliver a marketable title, or is not able to cure any defects to the title, the tenant/buyer may refuse that unmarketable title and shall be entitled to a refund of the purchase option premium. Examples of such title defects include, but are not limited to the seller further leveraging the property by refinancing, taking out additional property loans and/or encumbering the property with third party liens and/or judgments, etc. that cannot be paid off in full with the agreed upon purchase price. In this case, any purchase option premium funds credited as earnest money on the purchase and sale contract could be refundable. In the case of a cooperative assignment lease purchase agreement, we make sure that the title is clear of all encumbrances and/or liens, judgements, etc. other than a mortgage (if any) upon assignment of option contract to an assignee and we are under no circumstances to be held liable for a refund of assignment fee after execution of the assignment contract. Additionally, if the landlord/seller causes a mortgage loan to go delinquent over 30 days by not paying the mortgage on time and/or missing one or more payments despite having received rent from the tenant-buyer(s) as per the lease agreement, the tenany buyer my request a refund of the purchase option premium. In this case, the landlord/seller would be liable for refunding the purchase option premium if the tenant/buyer should choose not to exercise their purchase option due to such encumberances.
Security Deposits - The security deposit in a lease with purchase option may be handled in a different way than in an outright rental. In some cases, none may be required while in others, 1-2 months (unless over 62 years of age - 1 month security maximum) may be required (as in an outright rental). However, in lease with purchase options, the security deposit could be either in addition to the purchase option premium or included as part of the purchase option premium. This is important because with the purchase option premium, the up front costs can be high but with the security deposit included with the purchase option premium and not in addition to it, the savings could be substantial.
For example, a $200,000 lease with purchase option with $1,500 rent, 1 month security ($1,500) and a 5 % purchase option premium ($10,000), the total up front costs would be $13,000. But, by having the security deposit waived in favor of the purchase option premium, the up front costs would be reduced to only $11,500. With that kind of initial expenditure, the extra $1,500 could very well mean the difference between a "deal maker" and a "deal breaker". On top of that, the security deposit could be counted towards the purchase option premium anyway. In this example, there could be the 1 month security ($1,500) plus a purchase option premium of $8,500. $1,500 + $8,500 = $10,000. The whole purchase option premium. As a matter of fact, if the security deposit is on top of the full 5 %, then it would really by 5.75 % ($11,500 is 5.75 % of $200,000).
Lease Option Term -The lease with purchase option term consists of the lease term and the option term. Also, the lease term and the option [option to purchase] term are two different things but usually have the same start and end date, hence the designation, 'lease/option' term. However, the lease term and option term may sometimes have different start and/or end dates. Read below for more information about these terms and related terms and conditions.
Lease Term - Tthe Lease Term is the length of the rental period in a regular lease. As for the type of lease, being part of a lease with purchase option, cannot be a month-to-month tenancy and must be for a period of 1 year or more. For more information about the duration of the lease/option term, see below.
Option Term - The option term is the period for which the option to purchase begins and ends. The start of the option term is the first day for when the purchase option premium becomes non-refundable. The last day, also called the expiration date, is the deadline for purchasing the property, after which time the purchase and sale agreement becomes in default and all credits and/or price reductions are revoked. However, it is possible to get an extension. An extension would be an agreement to extend the lease/option term without defaulting or re-negotiating terms. Since typically the lease end date and option expiration date are the same, such an extension would involve extending both the lease and option terms. The length of the extension could be short term (for a period of 1 (or more) months) if a tenant-buyer just needs a little more time to exercise the option or it could be longer, typically 6 months to 1 year. The terms of the extension would be the normal rent plus a new purchase option premium of typically 50 % of the original one (for a 1 year extension) or a portion thereof (for a short term extension). Since the lease and option terms are concurrent, any extension may also require a lease renewal. In a lease renewal, the rent could be raised. Extension options could be part of the initial lease with purchase option agreement or negotiated after the fact near the end of the option term. It is recommended to have all terms and conditions specified in the lease with purchase option agreement initially. To purchase the property, the tenant/buyer would do what is known as 'exercising the option' (see below for more information).
Duration of Lease/Option Term - The time frame for a lease/option term in residential transactions is generally 1-5 years. A short term lease/option period (which is the most common) is between 12-24 months. Of these, the most common is 12 months. A mid term lease/option period is between 2-3 years and a long term lease/option period is between 3-5 years (these generally are for sandwich lease with purchase options - see below).
Seller Financing - Some sellers don't need all the cash from the sale of their property when the transaction closes. These sellers may be willing to offer you a second mortgage to help you buy their property. In fact, they often advertise that they're willing to assist with financing. Seller financing differs from a lease with purchase option in that in a lease with purchase option, the seller retains ownership of the property and becomes a landlord during the lease option term. Thus, the seller, retaining ownership, pays the taxes and insurance. In a seller financing arrangement, the buyer is not a tenant/buyer in that the property is not being leased but instead, the seller "becomes the bank" and the buyer takes possession of the property with the seller having a first lien position on their own property in much the same way as a bank would with a mortgage. In a seller financing arrangement the buyer is responsible for the taxes and insurance.
Exercising the Option to Purchase - In a lease with purchase option, the first step in the purchase of the property is for the tenant/buyer to exercise the option to purchase by sending written notice via certified mail to the seller of their intent to exercise their option at lease 30 days before the expiration date. A closing date of typically 30-90 days after option exercise date is also requested in the exercise notification. The exact time frame for the closing date (e.g. 30, 45 or 60 days, etc.) is specified in the lease with purchase option agreement. It is important to note that the closing date could conceivably be after the expiration date. However, the latest closing date (the "on or before" date) could be specified in the lease with purchase option agreement as well. Often, this date is the option expiration date. Therefore, it is important to exercise the option early enough to allow the closing date to be set on or before the expiration date. Any outstanding funds required as down payment to obtain financing would be paid at this time. During this time, the landlord/seller shall provide the tenant/buyer with an updated abstract showing the title to be good, marketable and insurable. In addition, any funds put up for security which are not "rolled" into the purchase option premium would be returned to the tenant/buyer at this time. If the option to purchase is not exercised by the expiration date and/or not closed by the closing date and there is no extension, the security deposit (if not "rolled" into the option premium) would be returned to the tenant/buyer at the end of the lease term in the usual way. If it is "rolled" into the purchase option premium then it could forfeited with the rest of the purchase option premium.
Inspection Contingency Period - Upon start of option term, the tenant/buyer is accepting the property in 'as is' condition. Therefore, it is important for the tenant-buyer to complete any and all desired inspections prior to the start of the option term.
Seller Consessions - There are 3 types of landlord/seller concessions that can be offered during the lease option term:
1. Rent Credits - Rent credits
2. Improvement Credits
3. Early Close Credits
All 3 are landlord/seller concession terms in a lease with purchase option arrangement and they are all strictly optional. A landlord/seller may choose to offer one, two or all of these terms or none at all. They are incentives for tenant/buyers to enter into a lease with purchase option agreement and if not offered can be requested by a prospective tenant/buyer.
As stated earlier, rent credits are a reduction in purchase price (cash back at closing for closing costs). These rent credits are an incentive for on-time rent payments because they would only be given if the rent is paid by the 1st of each month (and not the 2nd, 3rd, etc. even though those are within the 'grace' period before a late fee would be charged (there is also a possible exception to this rule - see the rent escrow tenant/buyer assurance section below for details. A typical "rent credit" is $50-100/month although some sellers (especially 'free and clear' ones) may offer more (especially if a larger purchase option premium is paid).
Note - With the [rent escrow] tenant-buyer assurance program, the rent would always be paid on the 1st of each month thus any rent credits would always be earned (the exception to this rule could be if the 1st of the month is a non-business day in which case, the rent would be paid on the 1st business day of the month or alternately, the rent could be paid before the 1st of the month - see the tenant-buyer assurance program page for further details).
Improvement Credits - Improvement credits are another of the optional terms in a lease with purchase option arrangement are an incentive for property improvements paid for by the tenant/buyer. While the exact conditions for these credits are again negotiable the general rules are as follows:
1. Work performed must increase the value of the property and does not include maintenance and repair expenses.
2. The seller must approve of said work prior to start and work must be completed by licensed professionals.
3. If the tenant/buyer does not purchase, these upgrades and improvements become the property of the seller.
(Examples of such improvements include gutting and remodeling/updating kitchens (including appliances) and bathrooms, adding back decks, installing upgraded blinds, upgrading fixtures, redoing flooring, adding security systems and so on. Generally, improvement credits are offered on properties that need work or are 'functionally obsolete' (for example if its a 4 bedroom house with only 1 bathroom).
4. The amount of this credit is dependant upon the condition of the home as expressed in a dollar amount or as a percentage of materials and/or labor but is typically a maximum of $2,500-5,000. Also, the form of the credit is typically a landlord/seller concession although some landlord/sellers may apply the credit to the rent.
Early Close Credits - Early close credits are incentives for the tenant/buyer to close sooner in the option term. These credits are generally given if property is closed on at 6 month intervals before the end of the lease option term. For example, in an 18 month lease option term, there could be an early close credit for a 6 month closing or a 12 month closing with a larger early close credit the earlier the property is closed on (e.g. at 6 months (or sooner) the early close credit would be more than that on a closing at between 6-12 months). Earlyand must be approved for in writing by the landlord/seller close credits are not guaranteed
