Even the simplest real estate transaction involves a whole mess of paperwork. Because buying a home involves a lot of money and features several processes from inspection to the transfer of ownership, each part of the transaction must be documented to make sure it’s legit. Lease-option agreements are no different. Setting yourself for success involves a lot of paperwork, some of which can be technically specific and confusing at first. To help make the process a little easier, we are featuring this run-down of the things you will need to have a successful Rent-to-Own transaction without the headache.
Because a Rent-to-Own agreement is different than securing a mortgage in the traditional manner, certain documents are necessary to ensure all parties involved know the terms of the agreement and have it down on paper. Some documents are pretty standard for any home sale, whereas others will have to be drawn up by the parties involved in the sale to tailor their needs. Here is a comprehensive list of basic documents smart Rent-to-Own buyers and sellers will be looking for, assembled and recommended by real estate investor and author of How to Build a Real Estate Empire, Jason Hanson.
1. Residential lease. If you’ve rented an apartment before, you are familiar with a residential lease. This document sets the terms under which the tenant lives in an apartment or house, and firmly establishes the relationship the tenant and landlord have with regards to payment obligations, duration of stay, damages, etc. For a Rent-to-Own situation, the lease will be for the duration of time until the tenant/buyer has the option to exercise the purchase option.
2. Purchase option contract. Signed at the same time as the residential lease, this critical document establishes the terms of the sale at the end of the lease term. It should include purchase price, as well as what happens to deposits, etc. if the tenant/buyer walks.
3. Authorization to release. This very important document allows you to verify your landlord’s mortgage information. Before taking on a new property, you need to be sure that the seller’s monthly payment and the balance of the mortgage is what they say it is. Hanson writes “There have been times when a seller told me they owed $200,000 on a house and when I verified the balance it was closer to $250,000.”
4. Due on sale disclosure. A simple form that indicates that the seller acknowledges that doing a Lease-Option could trigger the due on sale clause in his mortgage.
5. Lead-based paint disclosure. When dealing with older houses, be sure to do research with regards to what you need to do about lead paint. Buyer and seller may want to get a mutual acknowledgment in writing about the risks of lead paint to prevent future litigation.
6. Notice of option agreement. Hanson suggests drawing up a form that states clearly the terms of the purchase option, including price and duration, to give to a local courthouse. This will have the agreement recorded in the land records so that you can “cloud” the title. In essence, this puts a claim on the title that can be seen by others.
7. Lease-Option consultation agreement. For investors, an agreement that states the relationship between the seller and intermediary with regards to profit is a way to establish the terms of the sale, so if additional equity goes into the home, the owner can’t claim additional money in the sale.
8. Power of attorney. Jason writes “I make landlords sign a limited power of attorney so that I can have their loan paid off (when my tenant/buyer exercises their option) and take care of the loan in general in case the landlord disappears from the face of the earth.”
9. Affidavit of liens. The seller should always sign a document stating they do not have any liens against the property. Ensure that this is notarized.
10. Property disclosure/disclaimer. This form lists any and all defects to the property. Check and see what the legal protocols are for your individual state and municipality, as this can vary widely.
With this assortment of documents and proper research, you can be on your way to a successful Rent-to-Own transaction. While not all of them may apply to your unique situation, or you may need to develop a special document, this is the basic run-through you should anticipate in your arrangement.