Option fee to the seller's pocket, or held by a third party until exercise?

Question

I'm looking at my first rent-to-own on the buyer side and the two drafts I've been shown handle the option fee completely differently. In one, the $6,500 goes to the owner at signing and it's gone, credited against price only if I exercise. In the other, the same money sits with a title company until the option is exercised or expires, and then it gets released.

The case for paying the owner directly is that it's clean and it's what most owners will accept. The fee is what I'm paying for the right to buy, so the owner earning it up front is the honest description of the deal. It also makes owners take you seriously, which matters when you're competing with regular tenants.

The case for third-party holding is that three years is a long time. If the owner refinances, stops paying the mortgage, or just spends my fee and can't credit it at closing, I've handed over real money against a promise. Holding it outside the deal means the credit is actually there when I need it.

The counter I keep getting is that an owner who won't touch the fee isn't motivated enough to sell, and I'll never get one signed.

Which way do people here actually structure it, and did the owner push back?

paulgrant17 · Answer

Every listing I've called about wanted the fee in hand the same week. Nobody offered escrow and two of them laughed at me for asking, so I'd say the market answers this for you unless you're the one with the leverage in the negotiation.

kevin_lombard · Answer

What happens to the fee if the owner dies or sells the property mid-term? That's the part I can't picture. Does the option follow the house to a new owner, or does it just evaporate and I'm chasing an estate for $6,500? I've read the word memorandum a few times but I don't understand what it does yet. If the answer is that the option only binds the person who signed it, then where the fee sits matters a lot less than whether anybody else is bound by the deal at all.

tashaford30 · Answer

I've been drafting my version of this for months and landed on a split, half to the owner at signing and half held. It gave the owner cash and gave me something to point at if the credit got argued about later. It's slower to negotiate and I lost one deal over it, though the one that signed felt much safer to me.

Rena Expert · Answer

The question turns on one assumption, which is whether you expect the counterparty to be solvent and still on title on the day you exercise. If yes, holding the fee outside the deal buys you very little and costs you negotiating room. If you can't get comfortable on that, the escrow structure is doing real work for you.

Mechanically, the option fee is consideration for the option itself. In most states an option needs consideration to be enforceable, and whether money sitting in escrow counts as delivered consideration is a question of that state's contract law. Confirm it in writing with an attorney licensed where the property sits before you build a deal on it.

Separately from where the fee sits, the exposure @juniper raised is the bigger one. An unrecorded option is generally enforceable between the two people who signed it, and its effect on a later buyer or lender depends on notice rules that differ by state. Recording a short memorandum is the common way practitioners address that, and recording practice and what a county will accept also vary by state. That is a title question rather than an escrow question, and the two get conflated constantly.

One more piece of arithmetic. On a $6,500 fee and a three year term, escrow fees and the friction of the extra negotiation are small relative to the amount at risk, so the cost of caution is mostly deal flow. If you're seeing enough owners to lose a few, ask for it. If you've found one owner in nine months, you're pricing that differently.

brandonlee36 · Answer

On the owner side of two of these, I took the fee directly both times and I'd do it again, but I also wrote the credit into a separate ledger and sent the tenant-buyer a statement every January. Half the fear in this thread is really about record keeping. If the buyer can see the running number, the argument about who's holding cash gets much quieter.

laurenkim53 · Answer

Out where I buy, an owner asked to be paid in two checks so his ex-wife wouldn't see the second one. I walked.

Option fee to the seller's pocket, or held by a third party until exercise?

6 replies