Options, CFD, and Lease Purchase

Question 1

What is an option?

Answer 1

An option is an enforceable contract where, for a nominal fee, a potential seller grants a potential buyer the right to purchase property before a stated time for a stated price and terms.

Question 2

How is “right of first refusal” different from an option?

Answer 2

A right of first refusal gives a potential buyer the first opportunity to buy a property when the owner decides to sell it. Unlike an option, the potential buyer has no right to buy the property until the seller decides he or she wants to sell.

Question 3

Why do developers often use land options?

Answer 3

Land options give developers time to evaluate the land and make sure it will work for their project without risk of losing the land. This is done either for a low fee or in exchange for a study that influenced the developer to not exercise the option.

Question 4

What is a rolling option?

Answer 4

A rolling option gives the optionee the right to add new parcels of land to an option as original parcels of the option are purchased.

Question 5

What is a contract for deed?

Answer 5

It’s a bilateral agreement between a seller (vendor) and buyer (vendee) where the seller defers receipt of some or the entire purchase price of a property over a specified period of time.

Question 6

When does the buyer receive full title?

Answer 6

The buyer receives title when he or she pays the final payment specified in the agreement. Of course, all other contractual obligations need to be met for title to pass.

Question 7

From the seller’s perspective, what are 3 benefits to participating in a contract for deed?

Answer 7

Tax Benefits
Large Pool of Buyers
Quick Sale

Question 8

How is default handled?

Answer 8

Default and recourse with contract for deed agreements vary from state to state. Typically, if the seller defaults, the buyer can sue for cancellation of the contract or specific performance. If the buyer defaults, the seller often cancels the contract, keeps the consideration already paid, and evicts the buyer. In some states, default will go through a foreclosure process, which is much lengthier.

Question 9

What is a lease purchase agreement?

Answer 9

It is a lease agreement that allows, and sometimes obligates, the renter to purchase the property within a specified period, usually between 1-3 years, at an agreed upon price.

Question 10

What is the relationship between the parties in a lease purchase agreement?

Answer 10

Landlord and tenant

Question 11

What is a rent credit?

Answer 11

It’s an agreed upon percentage or fixed amount of the monthly rental payment that will go towards closing costs and a down payment when the house is purchased. If the tenant does not purchase the house, the landlord usually keeps the rent credit.

Question 12

What are 3 tips for successful lease purchase agreements?

Answer 12

Consult a lawyer
Have a home inspection
Know as much as possible about the other party

Question 13

An option to buy is

Answer 13

an enforceable contract in which a potential seller, the optionor, grants a potential buyer, the optionee, the right to purchase a property before a stated time for a stated price and terms.

Question 14

An option to buy places

Answer 14

the optionee under no obligation to purchase the property

Question 15

A developer who options land does not incur any

Answer 15

holding costs, such as taxes, insurance, interest and maintenance, until he or she exercises the option. This allows the developer time to find out if the land will work for a particular project with only paying a minimal fee.

Question 16

Contract for deed

Answer 16

also called an installment sales contract, is a bilateral agreement between a seller, the vendor, and a buyer, the vendee, in which the vendor defers receipt of some or the entire purchase price of a property over a specified period of time.

Question 17

At the end of the period

Answer 17

the buyer pays the vendor the full purchase price and the vendor deeds legal title to the vendee.

Question 18

During the contract period

Answer 18

the seller is allowed to mortgage the property, sell or assign whatever interests he or she owns in the property to another party. However, the vendor must convey legal title to the vendee upon receipt of the total purchase price.

Question 19

The buyer may occupy, use, and enjoy the property

Answer 19

subject to the provisions of the written agreement. The vendee must make periodic payments of principal and interest and maintain the property.

Question 20

A lease purchase agreement, also called a rent-to-own purchase, lease-to-own purchase, or lease purchase option agreement

Answer 20

is a lease agreement that allows, and sometimes obligates, the renter to purchase the property within a specified period at an agreed upon price.

Question 21

Consideration fee

Answer 21

a non-refundable deposit for the right to purchase the property at a later date.

Question 22

Rent credit

Answer 22

a percentage or specific amount of the rent set aside for the down payment and closing costs if the buyer agrees to purchase the property. If the tenant does not purchase the property, the accumulated rent credit and consideration fee is forfeited to the landlord.

Question 23

Benefits of a lease purchase agreement:

Answer 23

Tenant-buyer lives in a house before buying it and can build credit.
Landlord-seller can still pay existing mortgage and receives consideration fee and rent premium for added security.

Question 24

Disadvantages of lease purchase agreements:

Answer 24

Late payment consequences are costly to tenant-buyer.
Tenant must trust that the seller pays the mortgage.
Under the contract, landlord can’t accept other offers on the property.
Landlord may be stuck with an unqualified tenant-buyer at the lease expiration.

Question 25

When lease purchase agreements are successful,

Answer 25

it’s a win-win situation for all parties: A normally unqualified buyer can purchase a home and a seller can continue making payments on his or her mortgage without a financial burden.

Question 26

it’s always important to contact a lawyer

Answer 26

before signing a complicated agreement