Lease Option to Purchase Contract clauses that work to         protect you.

What should be in a Good Lease Purchase Agreement anyway?

                

                      BY:  CLAUDE W. DIAMOND J.D.

Lease Purchasing is one of the most profitable and practical ways to be in real estate. You don’t need a bank or an extensive line of credit to get started. There is an absence of Tenant & Toilet problems (if setup correctly)!   It’s creative and even fun!  Lease Purchasing can also be a nightmare if you do not have the foresight to have well designed, strategically written contracts.

      Recently, I was asked by a reader where he could find good generic Lease Purchase contracts. To me, that is like asking a neurological surgeon if he can recommend a do-it-yourself brain surgery kit and combination salad maker!

    I advised the reader that there are generic contracts from several sources.  One such source is your local real estate agent or office.  They have the multi-purpose  fill-in the many blanks type forms. The question remains, however, are they any good or even

    

             WORTH THE PAPER THEY ARE WRITTEN ON?  

        My handy Law Dictionary defines Generic as follows:

        Something not specific or not referring to a specific thing.

      Generic contracts are just that, generic.  They are designed with the one size fits all concept. In reality, they are not designed to protect you or your interest in the particular Lease Purchase transaction in which you are currently involved. I have collected many of these so called generic Lease Purchase contracts for years.  I have received contracts from Realtors, stationery stores and  others came from the get rich quick, while staying in bed all day, books and seminars. They all have one thing in common. They are garbage!  They are poorly written and lack the necessary clarity and/or specific verbiage in order for the contract to be enforceable.

    I have designed and utilize 8 specific contracts for my own Lease Purchase deals. Which one I use is determined by the hat I am wearing at the time. Am I the Landlord/Seller, the Tenant/Buyer or the Assignor/Assignee? Will I be Subletting, Assigning, Sandwiching, Pure Optioning or just quick flipping, bird dogging, networking or consulting?  

    TIP: I always carry a couple copies of my Lease Purchase Contracts in my car’s trunk right next to my earthquake/wildfire emergency kit.  An investor is always prepared especially if you live in Southern California!

    Here are a few suggestions for items that should be contained in any Lease Purchase Agreement.  Some of these may seem like obvious inclusions.  Having been involved in Lease Purchasing for many years now, I can tell you that the obvious is not always so!

        1. Identify the principle parties: Who is the Tenant/Buyer and who is the Landlord/Seller? It might even be a good idea to do business as a corporation.

      2. Location of the property: Use the parcel identification number (PIN) and the street address. There should be no mistake about which property you are dealing with.

         3. Date and Signature: Make sure all the owners sign the contract.  This includes spouses, partners or anyone who has ownership or an equitable interest in the property. Big problems  can occur with a Lease Purchase if you don’t have all the owners sign. Better yet, check the title, loans, etc.

           4. Terms:  Be specific on the length of the contract.

      Strategy Tip: If you are negotiating with the owner make the contract for as long as possible. If you are the owner or are subletting the property, make the contract no longer than one year.  If you are the investor, try to get your agreement from 3 to 5 years.

       5. Be Specific: All the terms, including Price, Rent Credit, Closing Costs, Option Consideration, Financing and Escrow should be included. No term should be ambiguous.  Be specific! 

  6. Assignment Clause: This is the most powerful section that you can place in your agreement. It allows you to transfer-convey-sublet  and recreate new hybrid deals.  With this one clause, you can have control of a property without transferring title, lawyers, down payments and so much more.

  7. Indemnification: This protects you from liability when one of the parties you are dealing with make errors whether  intentional or otherwise.

  8. Contract extensions: Sometimes you just need more time to get the deal closed and go to the bank; make sure you have that extra 30 days before the option expires in a specially worded paragraph.

   9. Rent Payment: Make sure the rent payment is tied into the rent credit and maintenance; you don't want to be a repair man or a bill collector. Create incentives throughout your agreement.

10. Financial disclaimer: All great Lease Option Agreements have financial disclaimers specifically towards the financing when the option is exercised. This one paragraph alone can save you thousands of dollars in potential legal fees.

  11. Legal Fees: Speaking of legal fees, make sure you have a clause that states who pays what and the jurisdiction of your choice. In the event there is a frivolous lawsuit involving your Lease Purchase you can then recover all fees.

  12. Disclose: The best way to avoid problems is disclose all known negatives in writing. Make sure you have an addendum attached to your agreement that contains every silly thing you can think of: power lines, earthquake faults, traffic intersections, future construction, etc. Foresight is better than hindsight.

    Generic Contracts, YUCH!!!  I would recommend that you never use a generic contract!  If, however, you choose to do so, have it reviewed by a competent (oh boy;-) attorney who is either a real estate investor or who specializes in real estate law.  (Sorry, it’s the Perry Mason in me!)  Better yet, have him design an agreement that meets with your needs, expectations and of course, PROTECTS YOU.