The Difference between a Straight Real Estate Option and a Lease Option

First things first: There is a world of difference between the straight or naked real estate options that I am writing about in this book and the rather ubiquitous lease-options that everyone and their brother has written about over the past 10 years. For starters, the real estate option agreement that I am writing about is a stand-alone document, which is not part of a lease agreement. Second, under the terms of a lease-option agreement, the lessee-optionee takes possession of the property under lease and is legally obligated to pay a monthly lease payment. The only payment required on a real estate option is a one-time option consideration fee. And unlike real estate options, lease-options violate the loan due-on-sale clause contained in residential mortgage or deed of trust loans. In other words, in the event that a lender discovers that a property owner has entered into a lease-option agreement, the lender could call the mortgage or deed of trust loan due and foreclose if the loan was not paid off in full.

Often, people confuse a real estate option with a right of first refusal. The main difference between a straight or naked real estate option and a right of first refusal is that a right of first refusal is the right to match a bona fide purchase offer from a third party, whereas a real estate option is an irrevocable right to purchase property, usually at a pre-determined price, within a specified time period. For example, most commercial leases include a right of first refusal that gives the lessee the right to match any written offers that the owner may receive to purchase the property under lease.

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