What is a contract?

A contract is a legally binding agreement that two or more parties sign, thereby obligating them to conditions that they have agreed upon. A contract between two parties is called a bilateral agreement; one between three parties is called a  trilateral  agreement; one between more than three parties is called a  multilateral  agreement.

What is a lease?

In real estate context, a lease is a contract between a landlord (lessor) and a tenant (lessee) stating that the tenant can use the landlord's property for a certain amount of time and for a certain amount of money (rent).

What does binding mean?

Binding implies that the parties who are involved in a contract create mutual obligations; these obligations are enforceable.

What is a deed?

A deed is a written instrument that conveys title to real property. A deed can be put in trust, which essentially means that it is given to a third party to keep until certain requirements are fulfilled.

What is title?

Title is the lawful ownership of property. There are different types of ownership of property

What is a Purchase and Sale Agreement?

A Purchase and Sale Agreement is the contract used between a seller and a buyer in the transaction of selling and buying a property. This is a bi-lateral contract where both parties are committed to one another.

What is equity?

Equity is the amount that someone actually owns. It is the difference between the value of the property and the loans still owing on it. It is also referred to as owner's interest.

What is subleasing?

A sublease is when someone who is already leasing a property from an owner leases it again to a third party for either a shorter term or the full term of the original lease, or leases only part of the property for a shorter or full term than the original lease.

What is an assignment?

Assignment refers to the transferring over of rights and/or ownership to a third party, much in the same way subleasing does.

What is an option?

An option means a choice or a selection. In real estate terms, an option is a written contract by one party to convey a right to buy, sell or use real property.

What is a lease option?

A lease option is a contract whereby the lessor/seller agrees that in return for a non-refundable deposit, the lessee/buyer has the option of buying the property at the end of the lease period.

How did lease options come about?

Lease options came about when prices of houses were very high, and when the cost of borrowing money was very high as well. Buyers, therefore, could not afford to purchase a property or even to borrow money to purchase a property, and if they did they ended up paying very high interest rates. Enter lease options.

What is the difference between rent-to-own and a lease option?

A rent-to-own is a bilateral agreement where the owner/landlord must sell the property and the buyer/tenant must purchase it at the end of the rental agreement. In a lease option, the owner/seller must sell only if the buyer/tenant decides to exercise the option and buy the property.

How can Canadian Homeownership help me become a homeowner?

If you're in a situation where you've tried to apply for a mortgage and have been refused or are given an option to take a mortgage with a very high interest rate, then lease options may be a great vehicle for you to repair your credit and save for a down payment, so when it comes time to re-apply for a mortgage, you're in a better situation. Our services at Canadian Homeownership bring together homeowners, investors and people like you who want properties. We provide the forum for people to meet and work together to create win-win situations. We can facilitate transactions as well, providing our assistance and the assistance of our affiliates to help in various situations.

Why would I use lease option instead of just buying a property straight?

A lease option permits persons with less than perfect credit or with little or no money available for a down payment to purchase a home. It's a great option for some people that want to get into homeownership sooner, but cannot get approved for a mortgage right away.

What are the advantages of lease option?

During the term of the lease, the lessee (also referred to as the optionee/buyer) builds equity at a specified rate so that at the end of the lease period or term, the lessee/buyer has the option of purchasing the property at a specified amount and they've saved up the equity to aid in the down payment. Because there is usually a 6 month or more term to a lease option, this also gives the optionee time to rebuild their credit. Some other advantages are:

  • Purchasing the property at a fixed price
  • Time to check out the home and neighbourhood before committing to buying it
  • Can get into homeownership sooner and into a house versus a condo
  • Lower down payment because of accumulated credits
  • Option to walk away without buying
  • Live in a good area in a mid to upper scale home
  • Should be easier to qualify for a mortgage because of the credits accumulated during the term

What happens if I fail to make the monthly payments?

Generally, the provisions of the lease purchase agreement state that should the lessee/buyer fail to make lease payments as agreed, the deposit is forfeited and the homeowner/seller may evict the lessee/buyer.

What are the fees involved?

There is an upfront option deposit (also referred to as option money), which typically is the only additional fee. There is a monthly payment (just as if you were renting or paying a mortgage). When you exercise your option to purchase, then there will be any fees associated with the purchase and sale agreement (legal fees, land transfer tax, etc.). The homeowner/seller may offer other services or options in the lease option agreement and with those options there may be additional fees, but all points are up for negotiation.

How does a lease option work?

When an optionor (homeowner/seller) and optionee want to move forward with a lease option, they set out an agreement stating how they will proceed, which can be referred to as an Option Deposit Agreement or Lease Option Agreement. In this agreement, all terms are set forth including the option deposit amount, the term of the lease, the time frame the optionee has to exercise the option to purchase, if there is an option to extend the lease, the purchase price of the property during or at the end of the term, the monthly payment, who will pay for damages, and the credit amounts towards the purchase of the property should the optionee decided to purchase the property. Once the agreements are signed for a property, the optionee moves in and the term begins. When the optionee decides to exercise the option to purchase, the optionor and optionee then sign a Purchase and Sale Agreement which will stipulate the closing date, purchase price and any other terms such as who will pay inspection fees. The optionee is responsible for obtaining any necessary financing for the property, just as in a normal purchase and sale situation. When the closing date of the Purchase and Sale Agreement arrives and each party has completed what they said they would as per the agreements, the optionee is then the new homeowner.

What if I do not want to purchase the house after the lease is up?

You don't have to! That's what is great about having the option to purchase.

Can I sublet the whole/part of the house to another person?

This will depend on the terms set out in the lease option agreement and on the other party's comfort level. Generally, subletting the whole property is not acceptable as the optionee is looking to be the homeowner and is assumed to be living in the premises.

How will I be qualified?

There are a few things optionors look for when qualifying an optionee. This can include employment status, credit score, income, monthly expenditures, job stability, range of house prices you're looking for, and who is going to be living in the house. The goal of the qualification process is to make sure you can afford the property and that you are honest in making your monthly payments.

What if I cannot qualify for a mortgage after the end of the lease?

The option is there to look at extending the lease agreement until you do qualify. Not all optionors will allow this, but be aware that should this have to occur, you and the optionor will be working closely together to make sure you're taking the steps to qualify and improve your credit.

How do I find lease option opportunities?

Check out the Property Listings {link to property listings} on our site as there are various properties located and whether or not the homeowner is willing to offer a lease option will be stated in the listing. If you want a lease option property but cannot find one on our site, you can sign up as an Optionee {link to optionee application form} and list your desired property and location as a Wish List {link to wish list}. Since we have many users of our sites, many being homeowners, they may have a property not yet listed and can contact you with something that meets your needs.

What do lease option agreements consist of?

Typically there are three contracts/agreements used, however there can be up to six types of contracts or agreements that can be used should an investor be involved. The main three agreements are:
1. The Option Deposit Agreement  which outlines how the two parties will proceed
2. The Lease agreement with an Option to Purchase between seller and buyer
3. The Purchase and Sales Agreement that accompanies the Lease with Option to Purchase (this is an optional agreement)
If an investor is involved, there may also be an Assignment Agreement involved.

How will this affect my taxes?

We recommend you contact your accountant as we are not accountants and everyone's tax situation is different.

What if the house decreases in value by the time I have to exercise my option?

Then you can walk away, but you will lose your credits and option deposit/option money. You can also see if the homeowner/optionor is willing to re-negotiate the purchase price, but note that they do not have to make any changes to the original agreement.

How do I know that value of the house will not go down?

You do not. You are taking a bit of a risk here, since you have to anticipate what the real estate market will do, but the house will probably not depreciate that much. Research can be done through Canada Mortgage and Housing Corporation (CMHC) and looking into development plans from the municipal government. You can also look at what the price appreciation of homes in the area has been over the last 5 to 10 years and anticipate this pattern to continue (or an average of it).

What if I want to extend my option period?

This will depend on the terms you set out with the optionor. If you signed an agreement that states the ending date of the term without any stipulation on extending the lease term then unless the owner of the house wants to renegotiate terms you will not be able to. You may also ask for an option to extend the original option when signing the first agreement.

Do I have to pay insurances and taxes during the lease term?

Not unless you had agreed to in the lease agreement. In most cases, the owner of the property is responsible for making the mortgage payments (if any), insurance payments and tax payments. That is, until you purchase the property for yourself.

Can I use borrowed funds for my option deposit?

It's up to you. But be prepared to answer why the option deposit is not coming from you. Remember, the goal is to rebuild YOUR credit, not to use the funds of others.

How quickly can I move into the property?

You should be able to move in as soon as all the necessary documentation/agreements have been signed, and the option deposit has been received by the optionor.

Is the purchase price negotiable?

Unfortunately, the purchase price is not negotiable once agreed upon. Usually the optionor has done his/her research into the appreciation rate and is set on the final purchase price. If you do not think the purchase price is fair for the end of the term, you may ask to negotiate this BEFORE you enter into the lease option agreement.

Who is in charge of the regular maintenance and/or upgrades of the home?

This is the responsibility of the optionee. Any maintenance and/or upgrades to the home will be of direct benefit to you, as it will increase the value of your investment.

Who pays for property taxes, condo fees, insurance, etc.?

All the payments that you are required to make will be outlined in your lease option agreement. Generally, all payments are inclusive when you enter into the lease option agreement but in any case, make sure everything is outlined for you and make sure you understand exactly what your monthly payment is covering and what (if any) is required in addition to your monthly payment. Otherwise it would be safe to assume that the optionor is taking care of any other payment, such as property taxes.

What happened if I am unable to make my monthly payment?

As with any lending institution, you are required to honour all your obligations under the lease option contract and agreement. It is legal and binding. If you fail to pay it on time, you will be considered to be in default and the optionor may reserve the right to commence with any legal proceedings or other actions.

What happens if I choose to walk away from the lease option agreement?

If you choose to walk away from your obligation during the term of the lease and not during the option exercise period, you will lose any and all equitable interest in the property as well as any credits. The optionor may also hold you responsible for any and all additional expenses that they might incur due to the breaking of the agreement. Note that this applies for the lease, not the option to purchase as you can decide not to purchase the property without any additional consequences to you other than losing any accumulated credits.

Can I arrange a home inspection before I sign the agreement?

The optionor should have no problem allowing you to do this, but may require you first pay an option deposit to show your commitment. The home inspection would be an additional cost to you, the optionee. Depending on the outcome of the inspection, you may be able to negotiate the purchase price of the home, except do not expect the optionor to budge if there are only minor deficiencies. That being said however, if there is major deficiencies or structural issues, you may have an option to get your deposit back or continue with the agreement and negotiate a different purchase price.

How much down payment will I have at the end of my term?

This will all depend on how much you, the optionee, can afford every month and how much is being put aside as credits towards the down payment of the home. This is negotiated by the homeowner (optionor) and you.

Do I have to pick a home that is listed in your database?

No. You can find a property on your own. But there are great benefits of becoming an optionee with us. If you cannot find a property that meets your needs, you can post your request on our wish list so that people can find you.

I have bad credit. I am not sure if I can qualify now or after the lease agreement is up. What do I do?

Lease options are about creating win-win situations. Your optionor should be willing to work with you to help you repair your credit. But if they are not (which they are not obliged to do), you can also take steps to improve your situation and help prepare you qualify for your mortgage. One of our affiliates has a great program to work with new home buyers. Feel free to contact Eminence Financial {link to www.eminencefinancial.ca) and inquire about their Canadian Apprentice program.

What are the benefits of selling my house with a lease option?

Depending on your situation, a lease option is a great way to sell your home. If you do not require all the money from the sale of your home right away, you could benefit from a lease option as it is a great means of obtaining cash flow and you can sell your house for more at a later date. In addition, you can benefit from the following aspects of the lease option:

  • The option deposit/option money received is tax-deferred. You will not have to pay taxes until the option is exercised or forfeited.
  • Monthly payments for lease options are usually above fair market price and are usually paid on time since if it is not, the optionee forfeits the option.
  • The optionee will likely take care of the house like it is his/her own since he/she will likely own it eventually.
  • You can have your house paid for if you do not have enough equity in it to sell it the conventional way.
  • There are also no real estate agent commission fees to pay.
  • The sale price in 2-4 years will usually be substantially higher than the current value if you were to sell your home today and, in some cases, the optionee is usually willing to pay more for the right to buy at a fixed price.
  • You can still receive some money upfront (the option deposit) which you set. It can be any amount you think is fair considering the property and the monthly payment. The norm is two months of the regular monthly payment, but this is up to you.
  • Maintenance and repairs should be done by the optionee therefore there are little landlord type headaches.
  • You set the monthly payments so that they cover your property expenses and that you have a cash flow.
  • It is typically safer to have the property occupied with someone that has the intent on buying the property rather than renting to tenants.
  • The option deposit/option money is non-refundable.
  • You\'re helping people realize the value of homeownership sooner and giving them the possibility when traditional finance companies have refused them.

What are the disadvantages of selling my home through a lease option?

There are some disadvantages of working with lease options. Obviously the goal is to find someone to lease your property for a certain period of time and then have that same person buy it, but this does not always happen. In addition, the decision of buying or not is in the hands of the optionee. As the optionor/homeowner, you have to wait to see if the optionee is going to exercise their option to buy and if they do, you have to sell it to them. In addition, if you need the money right away from the sale of the property, you cannot get it   you'll have to wait until the property sells (although there may be ways around this   speak to a qualified mortgage agent{link to www.eminencefinancial.ca} to see how you can overcome this situation). Some other disadvantages may be:

  • You still have to make monthly payments to the mortgage (if any on the property), insurance, property taxes, etc.
  • You have to work with the optionee (it's in your interest to do this) to ensure they're taking necessary steps to help them qualify for a mortgage to buy the property. If they don't qualify, your property isn't sold.
  • If the optionee decides to buy and has the house inspected, any problems that come up will have to be fixed which is something that you, the homeowner, and the optionee then have to negotiate. This might be an unexpected expense for you.

Why wouldn\'t I just list with a real estate agent?

You could, but this way you get income each month from your optionee, plus a deposit. Your monthly expenses should be covered by the monthly payments the optionee is paying. And, should the optionee exercise his/her option to buy, there will be no real estate commission fees to pay since you will be selling the home as a for sale by owner (unless the property is being sold using a realtor).

Why would the buyer/optionee want a long lease option term?

Note that the term of the lease option is negotiable. But consider the fact that some people will need time to qualify for a loan or save up for a down payment or rebuild damaged credit.

What are the benefits of working with a lease option investor?

There is no problem working on your own to find an optionee for your property; however you may not have the time or expertise in screening people, working with credit repair or negotiating terms. Working with an experienced lease option investor through Canadian Homeownership, you can have a lot of the typical headaches removed and benefit sooner from cash flow with your property.

Are lease options legal?

Yes lease options are legal. They are legal anywhere that has a free-market economy where lease and option agreements are legal. Some people will say that they are not legal; however this statement usually comes from a lack of knowledge.

Do cold market conditions make lease options a bad idea?

Absolutely not! The beautiful thing about lease options is that they work in both hot and cold markets, and anywhere in the middle.

I have a home that needs work. Can it work in a lease option situation?

You can, however you might have a more difficult time finding an optionee for your place. Most of the time, optionees are looking for a move-in condition property. You can still list your property and find a successful candidate for an optionee. Remember when posting your listing with us that you include in the homeowner comments that your property needs some work. We suggest that you also factor this in when entering in a monthly payment and purchase price.

How do you determine the price of the home at the end of the term?

This can be done in a few different ways, however the common practice is to use an appreciation value based on the market values of the area over a certain period of time (the last 5 years for example).

Where can I get lease option contracts and agreements?

If you decide to sign up as an Investor, you will have these provided to you as part of our services to you. If you decide that you'd rather just list your home, you can purchase the contracts from our site under Forms and Agreements (Link to resource section forms and agreements).

Why would I list with Canadian Homeownership when I can pay less and list elsewhere?

Canadian Homeownership does its own marketing and works with people who have a vested interest in lease options. We are a niche market where as other classified rental or for sale by owner sites are broader in range. In addition, Investors with us are constantly looking to match up optionees with homeowners, so you’ve got a sales force out there working to find someone that wants your home. If you like the idea of lease options and want to sell your home this way, then you’ve come to the right place!

What does an Investor do with Canadian Homeownership?

If you are looking to create an income with real estate investments, using lease options as your vehicle, then the Investor package is right for you. Investors have an opportunity to make money by introducing both homeowners and people that want to get into homeownership to their personalize lease option site. From the database that we maintain of properties and clients, investors can play matchmaker and work their leads in putting together optionees and optionors and create straight or sandwich lease option transactions.

What are the benefits of becoming an Investor with Canadian Homeownership?

The hardest part in developing a real estate business is generating your database. This takes time, money and great sales skills. Because we at Canadian Homeownership are creating a database of both properties and optionees, and giving you a personalized website to work with and market, all you really have to do is obtain business cards, and monitor the site’s listings and play matchmaker.

What do I need to get started as an Investor?

Realistically, you need to sign up, have a laptop or computer with internet access and a cell phone. Additionally you'll want to create business cards to hand out (adding to the professional image), but we even provide you with templates to use for this.

Do I need a license to do lease option contracts and working with optionees and optionors?

A license is not required as long as you sign proper legally binding contracts and agreements, such as a lease and a purchase and sales agreement.

Are lease options a viable way to make money?

Yes. Many real estate investors have worked with lease options for both residential and commercial properties. As with any real estate investment, you need to have a goal in mind. You'll be using lease options as a vehicle to achieve this goal. Then you need to create a plan of action. Once you have an idea of what it is you want to accomplish, make sure you have the knowledge of how lease options work (you can take a Lease Option Retreat {link to seminar section of site} for the first time or as a refresher to brush up on your knowledge and skills), you feel confident negotiating contracts and terms, and have a passion to help optionors achieve their goals (sell their home) and optionees become homeowners. If you know what you are doing and can educate sellers/homeowners and buyers/optionees about how lease options work and what the benefits are to them, then yes, it will be a viable way for you to make money.

How long should I lease option from the homeowner if I\'m working on a sandwich lease option transaction?

This depends on you. Consider that an optionee you have for the property will need some time to repair their credit or save for a down payment, or both, so a term under one year may not be of benefit to them,

What are my closing costs if I were to put together a sandwich lease option?

There should not be any. The seller/homeowner pays half and your buyer (the optionee) pays the other half, if you have written the agreement properly.

Can I only lease the property to qualified buyers with good credit?

It all depends on the deal. If your monthly cash flow is strong and you have a long lease option from the seller, you might choose a not so qualified tenant or buyer/optionee. If your largest profit comes from the difference between your sale price and your option price, you might choose to hold out for a qualified buyer.

What if the tenant or buyer/optionee damages the house in my sandwich lease option deal?

You will have to fix it. Keep in mind that you are dealing in higher price houses and quality people when working with optionees (not necessarily tenants). This will not be near the problem it is with cheaper houses.

How do I know how to qualify optionees?

Anyone looking to get started as an Investor {link to investor page of Canadian Homeownership} is strongly encouraged to attend a Lease Option Retreat {link to lease option seminar page} so that they get a good basis on how to qualify and work with optionees. When you sign up as an Investor, you will also be given access to different resources that can help you qualify optionees.

In addition, Eminence Financial {link to their website} offers a great course on how to get you prepared to work with real estate investments. This information you can take and apply to your optionees to help them qualify.

How can I sell or rent a house I do not own?

It is perfectly legal, as long as you have a written agreement or contract with the seller, you do not need ownership of the property in order to sell it, rent it or option it. Renting or selling someone else property without a written lease or option agreement is illegal.

What are the advantages of being an Investor in a Lease Option transaction?

There are various benefits. You have the decision to work your business as just introducing people to Canadian Homeownership's services and receiving referral income or you can actually work with people and put together sandwich lease option transactions. Should you decide to work with the latter, you can benefit from:

  • Buying properties at a fixed price
  • Not having to put much of your own money into a transaction
  • You don\'t have to own the property, you just control it during the deal
  • Monthly cash flow
  • Helping solve people\'s problems and creating win-win-win situations

What are some disadvantages of being an Investor in a lease option transaction?

When you're working with more than one party in a transaction, as you would be in a sandwich lease option, you can run into some hurdles, but all can be overcome. For example, the homeowner may want to change the deal or terms when it comes time to exercise the option. Because you also have an optionee to work with, one party wanting to make changes to the agreement you have with them may affect the other agreement you have with the other party. In addition, if your optionee wants to purchase the property, you must also exercise your option or have the seller agree to an assignment agreement. Should they not want to accept an assignment agreement, then you must qualify for the property in order to buy it and then re-sell it to your optionee. As an investor, you are doing the majority of the work, as a transaction engineer. But as such, the rewards are great for doing so. You need to weigh the pros and cons and see if this is the right business for you.

What size of deposit should I obtain from my buyer/optionee?

The market will indicate that. This is your biggest protection device against default and vandalism. The general rule is about 3% to 5% of the final selling price or two monthly payments. For example, if the monthly payment is $2,800 and the final purchase price you've agreed upon is $350,000, then you can ask for $5,600 up to $17,500. This amount will also depend on your optionee's situation since most optionees will be looking at lease options to help them save for a down payment, you may look at something closer to the 3% range.

How do I decide if I\'m going to do a Sandwich Lease Option or a Lease Option with a Rental?

This will depend on the deal and on what your end party wants. If you're working with a tenant that wants to rent and can afford what the property is demanding on a monthly basis, then you may just decide to rent out the property once you've arranged for a lease option with the homeowner. But you have to think of what the benefit will be for you. Are you trying to acquire property for yourself? Are you planning exercising the option at the end of the term if you have only a tenant renting it from you? You will also have to consider that a tenant may not maintain the property as much as an optionee who has the intent on buying would.

How much option money/option deposit should I give the seller/homeowner when I am lease optioning?

Typically, as little as possible. Yet, it is not a wise choice to destroy a decent deal, because you had to pay a few hundred dollars more. Remember, you will get it back shortly from the tenant at rent deposit/security deposit (lease option with a rental) or from your buyer/optionee as their option deposit/option money (sandwich lease option).

Can I lease option a property from a homeowner and then do a rent-to-own with a tenant?

This is an option however it can get messy should something happen to the homeowner. For example, since you are not the owner of the property and are in a lease option agreement with the owner, yet are committing to sell the property in the rent-to-own agreement with your tenant, should the homeowner lose the property, you can have a big liability issue on your hand with the tenant who is in a contract to buy it from you. We wouldn’t recommend you structure a deal this way.

How much of the monthly payment should I apply to the purchase when I am selling it to my optionee?

This depends on what you and your optionee agree upon. This can range from a few hundred dollars a month up to the entire monthly payment (since the credit is really coming out of appreciation of the property). You'll want to use the monthly credit as an incentive to have your optionee be willing to make higher monthly payments.

In a sandwich lease option, should I ask the homeowner/seller to give me a credit toward my purchase?

Possibly, if the seller has a lot of equity or you are paying a higher price that you would like. Do not get greedy though; your profit should be in the deal without the monthly credit.

How much spread must there be in the deal to make it worth my while on a lease option?

That depends on your personal situation and other factors. If you locate a house with very little equity, it might still be worthwhile to lease option. This will allow you to get the non-refundable deposit from your optionee and the monthly spread. If you cannot get much spread on the price or the monthly amount, and you do not see at least a $3,000 deposit in sight, you should walk.

What if the homeowner or optionee want to take the agreements and contract to their lawyer?

There is no harm in having the other party show any agreements to his/ her lawyer as long as you have drafted the contracts properly. We have provided you agreements to use as part of your Investor package, however we recommend that all transactions and their agreements are reviewed by your lawyer since every deal will be different. As such, there is no harm in having the other parties have the agreements reviewed either.

How do I proceed once I have located a homeowner/seller and a good optionee?

Canadian Homeownership wants to make sure that people using our services are who they say they are. As such, anyone listing a property should be the owner of that property. Since we cannot guarantee this, then the first thing you should do once you have located both parties is to verify that the owner on title to the property is the person you’ll be signing a contract with. Once this is verified, then you can proceed to sign a lease option agreement with the homeowner and then with the optionee. To commit the optionee and not to bind yourself in an agreement with the homeowner, you may obtain a commitment letter from the optionee or an option deposit agreement with them.

What if the seller will not sign over the title documents when I am ready to buy?

All the legal issues that we discussed in the legal aspects chapter should help you with this question. There are ways to protect yourself legally from all perspectives, whether you are the seller, buyer or tenant. For this situation you could, for instance, put the title documents in the hands of a third party.

Should I get the seller to put the title documents in the hands of a third party?

Yes, you should try, but if he/she refuses you can try and get around it in other ways, such as signing an affidavit for the whole contract.