Methods of Creative Real Estate Purchasing
The following articles will be of interest to real estate investors and realtors. Over the years as a real estate attorney, I have had many real estate investors and realtors ask me similar questions regarding Leases with Options to Purchase, Lease Purchases, Contracts for Deed, Real Estate Installment Contracts and Seller Financing. These articles are not intended to cover all of the law in this area, but may serve as a guide to real estate investors and realtors on these topics, and hopefully answer some common questions. While it sounds like this article will cover five different topics, in fact, it will only cover three as people tend use different terms for the same purchase vehicle.
Options to Purchase
An option to purchase contract obligates the owner of real estate (referred to as “optionor”) to hold an offer to sell the real estate open for a set period of time for another party (referred to as “optionee”). The optionee pays the property owner a negotiated amount of money, often referred to as a option fee, for the exclusive privilege of buying the property within this designated time frame at a specified price upon the terms of the option contract. While this option fee is typically applied towards the purchase price should the optionee purchase the property, it is usually not refundable if the property is not purchased because this fee acts as consideration for being granted the option to purchase.
Once an option contract is entered into, the property owner is precluded from selling the property to anyone else during the option period. The optionee is not obligated to purchase the property by entering into an option contract, and may choose not to accept the offer. If the optionee decides to exercise the right to purchase the property on the agreed upon terms of the option contract, the optionee must affirmatively notify the optionor of the intent to do so and commit to purchasing the property prior to the expiration of the the option period.
An option does not give the optionee any title or equitable interest in the property. The optionee only has the opportunity to choose to accept a temporarily irrevocable offer by the optionor to sell the property. The optionor, by granting an option to purchase, gives up both the right to sell the property to anyone other than the optionee during the specified time period, and the right to withdraw the offer to sell the property to the optionee prior to the expiration of the option period.
An Option to Purchase must be in writing to be enforceable. It should also be recorded if the optionee wants to be protected from third party claims of persons who may deal with the owner-optionor and who are unaware of the outstanding option. Furthermore, unless there is an express provision in the option contract to the contrary, options may be assigned by the optionee to a third party. Once assigned, the third party assignee has the right to exercise the option and purchase the property. Therefore, if the optionor desires to prevent the optionee from assigning the option contract, or restrict the optionee from assigning the option contract without the written consent of the optionor, that restriction must be specifically stated in the contract.
Lease with Option to Purchase
North Carolina General Statute Chapter 47G governs Option to Purchase Contracts with Lease Agreements. This is a means of purchasing residential real estate while you already occupy the property under a lease agreement. If a real estate purchaser enters into an option to purchase agreement with a seller of real estate, but the purchaser will not be occupying the property under a lease agreement, then that agreement is not covered by this statute and the below formalities.
While parties to the transaction may include any terms they wish in their option contract, the contract must be in writing and is required to contain the following minimum terms:
- Full name and addresses of the parties.
- Date contract is signed.
- Legal description of the property to be conveyed.
- Sales price of the property.
- Option fee or any other fees or payments between the parties.
- Obligation that if breached will result in forfeiture of the option.
- Time period during which the purchaser must exercise the option.
- A statement that the purchaser has a right to cure a default once in any 12 month period.
- A conspicuous statement, in not less that that 14 point boldface type, immediately above the purchaser’s signature, that the purchaser has a right to cancel the contract until midnight of the third business day following the later of the execution or delivery of the option contract.
Within five business days after the option contract has been signed and acknowledged by both the option seller and the option purchaser, the option seller shall record either the option contract or a memorandum of the contract at the register of deeds of the county in which the property is located. Unless the parties agree otherwise, the option seller shall pay the recording fee. If a memorandum is recorded instead of the actual option contract, it must at least be executed by the parties, include the names of the parties, a description of the property, and applicable time periods of terms 7 and 8 above.
There are no particular requirements of the contents of the lease that will be executed concurrently with the option contract. Standard landlord tenant laws of North Carolina General Statute Chapter 42 apply. This includes the right of the seller to initiate a Summary Ejectment action in small claims court to recover damages and possession of the leased premises should the option purchaser default under the terms of the lease agreement. It is worth noting that this is not an available remedy under the other vehicles we will be discussing.
