Security Deposit Vs. NROC For L/O
Hi,
I have heard both on this forum and on other forums that it is a REALLY good idea to have a Lease Agreement, and then a separate Option Agreement. Well, I have found many sample Lease agreements on the web, but most of them refer to a security deposit, which is typical when one is renting.
My question is, if I were to use one of these "Lease" contracts, would I consider the "security deposit" the same as the Non-Refundable Option Consideration (NROC)? Should I just take this statement out of the Lease agreement?
All the lease agreements consider the security deposit refundable, when an NROC is non-refundable...that's why I'm asking. I am guessing the security deposit is TOTALLY different than the NROC, but with L/O's do you include a security deposit also?
I also wanted to mention that ALL of the Lease Option contracts that I have found are just one contract. There is no separation between the option consideration and the lease agreement. Could this get me into some trouble down the road if I went with a contract that was "combined" (although the lease agreement parts only refer to the option consideration when necessary). Thanks for your help!!
As with any form or contract, it's much better for you to have it reviewed by your attorney to insure that it is a) state legal and specific and b) that it covers your needs like it is supposed to do.
The security deposit is NOT the same as the option payment. Whatever amount you put in the security deposit blank is refundable IF the tenants live up to the terms of the lease (no damage, cleaned, etc.). You can always put 0 down if you want.
Even in a L/O, rent-to-own contract, some investors still charge a security deposit on top of the option payment. Check with your attorney and read up on the landlord/tenant laws of your state, though. Security deposits usually have a specific way that they must be handled by the landlord.
Again, whether to use an 'all-in-one' contract or two separate contracts for your L/O's is completely your choice.
Personally, a lease and an option to purchase are two separate deals and should be treated as such, in two separate contracts. In a combined agreement, it is much easier for a tenant to claim 'equity' in a deal (especially when rent credits are applied) than it is when the two are separated.
Roger
RajWarrior,
Thanks for the help. That explains it perfectly for me. I was planning on going to see an attorney about the contract, but I thought I'd get the opinions of this board. Again, thanks for that help.
D
For what it is worth, I have always seen L/O as one document. I couldn't come up with a good reason for making more paper.
The point of having two separate agreements is so that if the tenant/buyer takes you to court and says that they have an equitable interest in the property, all you have to show is the lease agreement. The option agreement cannot be included in the court proceedings if the tenant/buyer was evicted for a lease violation. If the judge rules that the "lease/option" is really a disguised "sale" and the tenant/buyer has "equitable interest" in the property, you will be required to return the entire "non-refundable" option payment, and ALL rent paid by the tenant (OUCH!).
Regarding the security deposit: Allocate half of a rent payment from the option payment and put it on the contract as the security deposit, this is the standard practice from what I understand. The idea is to not have anything that the judge could rule as consistant with a seller/buyer transaction, and not a landlord/tenant relationship.
Also, NEVER refer to the tenant as "tenant/buyer" in the lease agreement, only as "tenant". Remember that the local (free) Realtor option agreements are specifically designed to protect the poor innocent tenant/buyer and have no protection for the big bad blood-sucking investor.
You get what you pay for.
iglooman
[addsig]
iglooman,
Thanks for the hints....I get what you're saying. One question though....do you have any problems with T/B's signing your contracts? It would seem that because they favor the investor more than the T/B, the T/B would catch on to this and not sign the contract.
In my situation, I will be selling my own personal house on L/O, (due to lack of equity and slow selling market). How do you weed off the other investors that want to get your property? (Obviously, other investors would NOT sign a contract that is leaning towards the seller.) Thanks again for the help.
D
Most tenant/buyers' wouldn't care about signing 2 contracts or that it favored the landlord. They are usually just happy that someone is willing to work with them.
However, I always recommend to my buyers (or tenants) to have the contracts reviewed by a lawyer IF they have any questions about it. I also have a place where the sign that the DO understand it and HAVE willfully waived their right to have it reviewed by an attorney (protects from that 'I didn't know what I was signing' stuff).
As far as other investors wanting to L/O from you, what would it matter as long as you get what you want for the property? Personally, it wouldn't be a problem for me because any L/O I've ever done has a clause that the property cannot be sublet without my express written consent.
Roger
Rajwarrior,
You make a great point. Thanks again for the reply!
D
I cannot stress strongly enough the need for 2 documents. Everyone is happy when y'all sign the documents. It's not a happy reunion when they don't pay as agreed, and you file papers to evict in which event they will be losing their $1000.00, $3,000.00 or whatever. When you L/O a prop. you are in fact doing 2 distinctly separate things. You are leasing them the property, AND you are allowing them to purchase an option to buy the property at a later date. If there is only 1 document, they will bring it to court and you will have to explain it to the judge. You may win, or you may lose, but isn't it worth another piece of paper and some ink, so that when you evict and the deadbeat, I mean tenant, and he/she brings up the option, that you can tell the judge that that is a completely different contract, and that if they have any contention with it, they need to pay for and file a separate complaint. The cause of action in an eviction should only be judged based on the broken lease, usually by Non Payment of Rent. Nothing more, nothing less.
[addsig]
I agree that 2 documents gives you more protection.
I really need to get a hold of a good seller favored option agreement. If anyone could send me one (for informational purposes only) I would really appreciate it. dgtop @ yahooDOTCOM
thanks[ Edited by dgtop on Date 09/22/2003 ]
I agree I am looking for a good L/O contract package I here so many people mention so many great ideas but I wonder if We could buy or have access to some good owner favored docs
Bri
**Please See My Profile**
I have a L/O that is in one document, against the advice of the board, but could be doctored into two that I would be willing to share for INFORMATION ONLY. If you would like to take a look, PM or e-mail me.
I had a question/comment regarding this subject since I'm in the same position right now. The point of a security deposit is to use it to do repairs after the tenant moves out IF the tenant defaults on the lease agreement and/or cannot exercise the option to purchase at the end of the term and decides to move on. Assuming 2 separate contracts, if you allocate some of the NROC as a security deposit in the lease agreement, and at the end of the lease option term, the tenant DOES exercise their option, can you keep the security deposit since it was originally a part of the NROC? If there is to be very limited connection between the lease and option agreements, where (which agreement?) would you put the clause and what would it say to ensure you include the security deposit amount as part of the NROC when the T/B exercises. Hope that didn't sound too confusing. TIA for your replies.