Is an Option to Purchase Binding for Buyers/Tenants, Sellers?

Is an option to purchase binding? It is for the seller but not the buyer. The buyer gives consideration for the right to buy, but he/she doesn’t have to. Make sure that you get the contract in writing, though. An unwritten agreement will not hold up in court, but an executed legal contract will. What does that mean?

It is in writing
All parties sign

The buyer must give consideration to the seller

Consideration is usually money, the fee. Without any sort of reimbursement, it is not a legal contract. This is because the buyer won’t lose anything if the seller doesn’t honor the agreement.

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Is an Option to Purchase Binding? Assigning It

An option can be assigned it the buyer and seller agree. There are three types of options used in real estate. The seller may or may not let you assign it based on which type.

Straight – buyers often assign these because they are for investment purposes most of the time
Lease – sellers won’t usually let you assign these because they want to know who lives in the house
Rent-to-own – sellers won’t let you assign these, either, because they want to control who rents the property

Buyers and sellers can agree to a contract that is or isn’t assignable. Most of the time the seller won’t agree to let the contract be assignable if the person lives in the house. They want to know who is living there.

Break a Lease to Own Contract

There are ways to break your lease to own contract without breaching it. Remember, though, that it is a legal document. You are responsible for keeping your side of the agreement unless there is a good reason. If you do need to cancel the contract:

Review the contingencies – Most have the same clauses as a regular house sale

Look for a material breach – like the owner misrepresenting information about the property

If your situation changes and you either don’t want the house or can’t afford it, you may simply go and talk to your landlord. Explain the situation and see if you can work out other terms, or if they will let you out of the contract. While they have no legal obligation to help you, many do.¹

Who Pays What?

Who pays what depends on how you construct the contract. It’s important to remember, though, that the seller still owns the house until the sale closes. With that in mind, for most of these arrangements, the seller pays for the homeowner’s insurance and homeowner association fees. The renter/buyer pays for utilities like gas and electric bills.

It’s important to write the contract so that it is clear about who is responsible for which obligations. If it is written correctly it describes all the responsibilities clearly, and you won’t have any confusion.²

Property Taxes

The seller pays the property taxes until the house sale closes. Generally, the seller must pay any bills directly tied to ownership.

Repairs

Who pays repairs depends on the arrangement you have with the landlord/seller. Most of the time the landlord pays for major repairs, such as a roof, hot water heater, furnace, or air conditioner.

The renter/buyer does upkeep on the property. This may include cutting the grass, changing light bulbs, snaking a backed-up toilet, or shoveling the driveway and sidewalks when it snows.

These are general guidelines. The seller pays for major maintenance, and the buyer pays for the minor repairs. You may agree to something different, and your specific arrangement depends on what you negotiate.

Advantages and Pitfalls of Rent-to-Own

Buyers and sellers each have advantages and face pitfalls with rent-to-own agreements. Let’s look at each.³

Sellers

If you offer a purchase option, you may get more buyers. These are more complicated contracts, and the advantages revolve around what type of tenants you get. There are also significant risks. Advantages include:

You earn rental income as you go through the house sale process.
Some people are willing to pay a higher price for this arrangement.

The tenant has an incentive to take better care of the property because they want to buy it.

On the other hand, pitfalls include:

Your renter may not buy, and if they don’t you have to start the process all over again.

You don’t get a large lump sum upfront which you may need if you want to purchase another house.
If you lock in a price you might miss out on appreciating house values.
On the other hand, if prices fall, the tenant may not exercise the option and you may have to sell to someone else for a lower price.

The buyer may discover flaws while they live as a tenant and decide not to buy.

These agreements aren’t too common because they benefit the buyer more than the seller. Unless you are willing and able to use the house as an investment property you may not want to consider this. If you do want to use your house for an income property make sure you work with a local attorney with experience writing these types of contracts.

Buyers

This is often a good deal for buyers. It gives them the flexibility that they don’t enjoy with ordinary home sale contracts.

You may be able to buy with bad credit. It allows you to rent until you can repair your credit and get a mortgage.
You can lock in a purchase price. If prices go up you are better off, and if they go down you don’t have to exercise the option.
You can live in the house and see if you like it before you commit to buy it.

You can build equity because a portion of your rent goes to the down payment.

There are pitfalls for buyers, too. They include:

You lose the extra money you paid if you decide not to buy it. This includes fees and higher rent.

It may take longer to improve your credit, and that might mess up your contract.
You don’t control the property, so if the landlord loses the property due to foreclosure or something else, you may have to move.
If prices fall you can decide not to buy the house at the agreed price, but you lose your fees and equity you built in the property.

If you are late with payments some contracts stipulate you lose your right to purchase.
There are lots of scams that take money from people not in a financially secure position.

If you work with a realtor, they can help you navigate the home buying process, including rent-to-own situations. You should treat this process as any other home sale agreement. Make sure the contract has the appropriate clauses to protect you and do your due diligence on the property.

Final Thoughts on is an Option to Purchase Binding

Is an option to purchase binding? It guarantees the buyer the right to purchase, but they don’t have to. They pay a fee and usually higher rent and sale price to have this ability. If they decide not to buy, they lose the fees and equity they put into the deal, but they don’ have any legal obligation.

On the other hand, the seller is legally obligated to sell the house to the buyer. When they enter the contract, they agree to sell the house to that particular buyer for a specified price at a specified time in the future. If they decide not to sell to that buyer they are in breach of the contract, and there are legal consequences.