Lease Purchase Agreements have been explored in previous Broker Corners.
The emphasis in this Broker Corner is the distinction between the earnest money
that accompanies the purchase agreement and the security deposit that
accompanies the lease. The 2 amounts are disbursed differently.
Earnest money is disbursed according to the terms of the purchase agreement.
If the sale closes, the earnest money is applied to the purchase price. However,
if the buyer defaults and the sale does not close, earnest money is forfeited to
the seller. A security deposit, on the other hand, is returned to the tenant if the
lease ends without damage or outstanding rent or other costs.
Don’t Allow a Buyer to Occupy Property Until These 3 Items Have Been
The point of a lease purchase is that the buyer be allowed to move into the
property prior to a closing. That said, the buyer should not be allowed to occupy
until 3 things have happened:
1. The earnest money is paid and has cleared (confirm if the co-op is the
Holder). Should the buyer default, the earnest money is the seller’s sole
2. A move in agreement has been executed by both parties. Without a move in
agreement, the landlord/seller’s right to the security deposit is compromised.
3. The lease security deposit has been paid. Should the buyer not pay the rent,
not close the sale and damage the property, the security deposit is the
landlord/seller’s remedy on the lease.
What If the Buyer is in Default of the Purchase and Sale Agreement?
The tenant is obligated to purchase at the end of the lease term, which coincides with
the closing date of the Purchase and Sale Agreement. If the tenant/buyer does not
close the purchase by the closing date, the tenant is in default, the seller can terminate
the purchase agreement and the buyer forfeits the deposited earnest money. The
lease also terminates upon the termination of the purchase agreement and the
buyer/tenant must vacate the property upon the owner’s demand.
What Happens to the Security Deposit?
The disbursal of security deposit operates just like a standard lease. It is returned to
the tenant if the lease ends without damage or outstanding rent or other costs.
Seller Versus Buyer Representation
It is generally better for the seller to have a larger earnest money deposit than security
deposit. If the buyer defaults, the seller keeps the earnest money, but not necessarily
the security deposit. If you are representing the buyer, you might offer the opposite.
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