Firstly, a purchase lease option (PLO) is a sophisticated deal and in one sentence it’s simply a way to take control of a property now and pay for it later. Sounds good hey? In slightly more detail it’s actually a contractual agreement between a property owner (the landlord) and a buyer that combines aspects of both a lease agreement and an option agreement, and actually a great strategy, let me explain more…
Here’s how it typically works
1. The Lease Agreement
The landlord and the buyer enter into a lease agreement, which outlines the terms of the rental arrangement. This lease typically includes details such as the monthly rent, duration of the lease, responsibilities for maintenance and repairs, and other relevant terms.
2. Option Agreement
Alongside the lease agreement, the buyer also enters into an option agreement with the landlord. This agreement grants them the exclusive right, but not the obligation, to purchase the property at a predetermined price within a specified timeframe, typically at the end of the lease period. Note there is no obligation here, it’s a right, unlike an exchange delayed completion where one will lead to the other. Also always make the option assignable!
3. Option Consideration
In exchange for the option to purchase the property, the buyer usually pays the landlord an upfront fee called the option consideration. This fee is negotiable and can vary depending on factors such as the property’s value and market conditions. It is typically non-refundable and may or may not be credited toward the purchase price if the tenant-buyer exercises the option to buy.
4.Exercise of the Option
During the lease period, the buyer has the opportunity to decide whether to exercise the option to purchase the property. If they choose to do so, they must notify the landlord in writing within the specified timeframe outlined in the option agreement.
5. Purchase Price
The option agreement typically includes a predetermined purchase price for the property. This price may be fixed at the time the option agreement is signed or may be based on the property’s current market value at the time the option is exercised, with a predetermined method for determining this value. I’d recommend if possible that you fix the price at the time of contract.
6. Completion of the Purchase
If the buyer decides to exercise the option, they proceed with the purchase of the property according to the terms specified in the option agreement. This usually involves arranging financing, completing any necessary legal paperwork, and transferring ownership of the property.
Finally, always seek legal advice from a qualified professional and remember that if you control and fix the price now, in 10 – 15 years time the asset will have doubled in value, so negotiated well it really is a great strategy! If you’d like to know more about this and other strategies reach out for a free consultation.