Legal Question in Real Estate Law in California

Re: lease with the option to buy

A judge in deciding this question would first review your written lease-option contract. (If you don't have the deal in writing, it would not be enforced as an option. Leases for a year or less don't need to be in writing, but options to buy must be in writing, signed by the seller).

Most lease-options are written so that (a) the seller is not obliged to sell at "fair market value" or "appraised value;" rather, the option exercise price is specified - in your case at $365K; and (b) the portion of rent that would apply to the purchase price is paid at the tenant's risk and is not refundable.

If the lease-option agreement is silent on either of these points, the judge would rule that the option price is $365K, not fair market value, and that the $350 a month is treated as a non-refundable fee for the grant of the option.

After all, in granting an option, the owner/landlord takes the risk that the property will increase in value during the time it is tied up, and that he/she could have gotten a lot more for it, but for the option. During much of recent history, this is exactly what has happened. If the house had gone up in value to $400k, the owner would not be able to demand fair market value, so why should you be able to buy at a reduced price when the market heads south?

There are two final points to be made. First the court's analysis would begin by scrutinizing the document to see whether there is any language that could cause it to be interpreted the way you hope, and it's entirely possible there is such language, although unlikely. Second, you can try negotiating. If the fair market value has gone down, the owner may be very willing to take less money. Among other things, this kind of sale may avoid the owner having to list the property, wait for a sale, pay a commission, and perhaps get a still lower price in a falling market. So, what you may lack in legal position here may be made up for by negotiating power.