How Can I Get The Most Out of My Commercial Lease Option?

A lease what? Huh?

The Basics
Commercial lease options are a contractually negotiated legal right in which a buyer pays the seller a set fee to purchase a property at a late date. The purchase price can either be decided during the option negotiation or the buyer may agree to pay fair market value at the time of option exercise (transfer or title). Additionally, the buyer leases the property form the seller for a stipulated amount of rent, some of which is applied to the purchase price.

Generally, lease options last from one to three years with the option expiring at the end of the predetermined term if the buyer does not exercise. This means that the buyer is not required to buy the property, but if the buyer does not choose to buy, the buyer loses all legal right to the property.

Because lease options are recognized legal rights and vary from lease purchase agreements and options to purchase, please consult with an attorney to determine the best investment for you.

How Do I Protect My Lease Option?
A commercial lease option is a legal right to real property. As with any real estate transaction, you should take the necessary legal steps to protect your rights.

Record the applicable documents with the appropriate state agency. This means that you need to have a copy of the option recorded, as well as a copy of any mortgage to secure performance. Both of these actions will create issues for the seller if the seller attempts to default on the contract.

Use an escrow service for the deed. Escrow agents have fiduciary duties to the titles and deeds to make sure that those instruments are protected. Using this service will save you valuable piece of mind.

Should I Exercise My Option?
Many sellers do not expect option holders to exercise. Consider carefully that you have paid a substantial sum (usually over $5,000) for the option and have been paying a few hundred dollars more a month than market rent toward the purchase. Do you really want to throw that money away? If you used a lease option because you had a difficult time obtaining the necessary financing, has your situation changed or has the market changed?

As with any transaction, be sure to consult the appropriate professional in your area.

I Am A Property Owner. Should I Grant A Lease Option?
On the flip side of the previous paragraph, many option holders do not exercise their options. This is a great way to generate extra income by taking the funds from the option as well as the extra rent. There is always the gamble that the buyer will exercise their option, but many have found it to be a successful way to generate passive income. Please be sure to consult a real estate attorney to structure a lease option agreement.