Common State and Federal Restrictions on Lease Options

For those who are not quite ready to purchase a home, there may be a lease option available. A lease option allows you and the seller to structure a contract under which you will rent a property with the option to purchase it in the future with agreed-upon terms. You can make an option fee payment to secure your intent to purchase the property. The option fee is non-refundable. This type of arrangement allows you time to get your financing secured to purchase the property and enjoy the property prior to its becoming yours. Before you agree to a lease option, there are some state and federal restrictions you want to be aware of. These restrictions can help make sure that your lease option contract is legitimate.

State Restrictions

The lease option was designed to help homeowners sell difficult properties. It opened the door to people who were not financially ready to purchase a home. Since the lease option appeared to be the solution to potentially owning a home, many renters opted for them. However, many would find themselves evicted or losing the option fee due to a violation of the contract. Because the market has been flooded with renters interested in the lease option and there have been many investors abusing the program and the renter's lack of contractual knowledge, many states have started to enact legislation to protect renters. These regulations vary from state to state. The basis for the majority of the regulation is the structure of the contract. In most cases, tenants will not be able to exercise the option to purchase, and most property owners are aware of this. This type of business is predatory and leaves the potential renter/buyer back at square one. One state that has enacted restrictions for lease options is Texas. Texas now requires landlords/sellers to meet a list of requirements concerning the title, leasing provisions and financing. These types of regulations are being developed to protect renters/buyers from being taken advantage of without fully understanding the implications of the contract. Consult your state to determine what laws govern lease options.

Federal Restrictions

There are not any specific federal restrictions that govern lease option agreements. However, as with all real estate transactions, there are federal, banking and real estate laws that must be adhered to in order for the agreement to be legal. In addition, housing laws such as the Fair Housing Act must be applied to transactions. Another restriction is how rent credits are applied towards closing and how they are outlined in the lease. Rent credits are credits that a buyer receives for paying monies towards the down payment. Federal banking laws require that the amount of rent credit the buyer can receive be outlined in the lease agreement. The lease option must also adhere to real estate laws about having certain disclosures, the payment process and the terms outlined. If you are unsure as to what is being offered in the contract, consult a real estate attorney. Protect yourself from becoming a victim.

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