GUEST POST: A Brief Overview of Wisconsin Options To Purchase

Posted by Tristan R. Pettit, Esq. in Investing In Rental Property, Options To Purchase / Comments

By Attorney David J. Espin of Petrie + Pettit S.C.

Many landlords in Wisconsin are looking for ways to persuade their tenants to put some “skin in the game," and eventually to purchase the property they are renting. Tenants with a financial stake in the property will often take better care of the premises, and are less likely to walk away from their lease obligations. In order to accomplish this, landlords often turn to land contracts so that tenants will build equity in the property, or rent credit programs structured to incentive tenants to save towards a down payment.

Unfortunately, these alternatives come with formidable downsides. In the event of a breach of the land contract, the property owner must go through a costly and time-consuming foreclosure process before it can proceed with an eviction. Rent credit programs risk garnering the attention of regulators who may interpret them as mortgage financing instruments in disguise, which, without the proper licenses, could result in significant fines and penalties. However, there is another alternative: the Option to Purchase.

Landlords can structure an Option to Purchase as part of the lease, or as a separate stand-alone agreement. Although there are many variations, an ordinary Option to Purchase usually contains the following key provisions:

• Tenant agrees to pay an upfront fee, usually called an “option fee," for the exclusive right to purchase the property pursuant to the terms of the agreement.
• Landlord and tenant agree upon the purchase price for the property. This can either be a fixed dollar amount, or some other methodology, such as an appraisal, used to determine the property's value if and when the option is exercised.
• For some finite period of time, the tenant has the exclusive right to purchase the property at the agreed upon purchase price.
• If the tenant lease breaches the lease, the Option to Purchase is voided.
• Regardless of whether the tenant exercises the Option to Purchase, the landlord retains the option fee. The consideration for the option fee is the tenant's exclusive right to purchase the property, and the landlord's agreement to keep the property off the market for the duration of the option.

If drafted and structured properly, the Option to Purchase can be a great way for landlords to take in some extra cash at the front end of the lease, give their tenants an incentive to maintain the property and abide by the terms of the lease, and potentially sell the property once the lease expires