Question: I read your article on lease-options a couple months ago and was wondering if you could answer a question. We are in a lease-option now. We have recently discovered problems with the house that we will want repaired before we buy it but we have already put money down (earnest money) and signed the agreement. We will not want to buy the house if the seller does not rectify the problems. I do not know if the seller was aware of the problems or not. The main problems are defective siding and contaminated insulation. The house was on the market for over a year prior to us leasing, I am almost certain that there were potential buyers and inspections done in that timeframe, so I think the seller probably knew about the problems. He did not disclose these defects to us but I guess it works that way in lease-options. If I opt out because of the needed repairs will I still lose my $5,000 earnest money?
Answer: First, let me explain how a lease-option contract works.
It is basically a home sale in slow motion. The tenant-buyer signs a contract giving them the option to purchase the home at a set price during the lease term — typically one year. The tenant-buyer usually makes a non-refundable option payment that is applied as part of the down payment if the tenant decides to exercise their option to purchase the house. A portion of the monthly rent is usually (but not always) credited toward the down payment as well.
As I have said before in this column, a lease-option is a good way to sell a property if the seller is not in a hurry to close because they can usually get a top dollar price due to the easy financing terms. The seller can also get above-market rent because a portion of the rent is typically applied to the tenant’s down payment. If the tenant decides not to exercise their purchase option, the seller keeps the non-refundable option payment plus all the excess rent.
Normally, the lease-option is also a good deal for the tenant-buyers because they get a chance to move into the house while they are saving up the money to buy it. But as your letter points out, you have to be very careful not to let the easy entry into a lease-option deal distract you from the potential risks.
You should approach a lease-option deal as seriously as if you were paying cash for the house today. Typically, that means hiring a professional home inspector to check it out before you sign the final papers. I understand that most tenant-buyers use a lease-option because they don’t have a lot of extra cash to spend, but in your case you had $5,000 for the option payment. A few hundred dollars for a professional inspection would have been a good insurance policy to protect your investment.
As I said, option consideration is normally non-refundable, so you have very little recourse against the seller unless you can prove that they knew about the home defects and deliberately failed to tell you about them. I suggest that you contact the owner and ask to renegotiate the purchase price based on the information you have discovered about the house. You should point out to the seller that since they are now aware of this defect, they are legally obligated to disclose the information to any other potential buyers. And since they will have to negotiate with the new buyers they might as well negotiate with you.
If that doesn’t work, you could contact an attorney to explore your legal options. But since there is “only” $5,000 at stake, the legal fees may not be worth it.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at email@example.com.