Charging Lease-Option Tenants a Late Fee
Typically, when people consider lease-option contract negotiations they think of five key aspects: purchase price, lease term length, option fee, premium payments and rent payments.
At this point in the lease term, both parties are expecting the best outcome for the rent to own deal. They’re thinking about how rent to own should work, but they’re not considering the moments when things could go differently than planned.
A key aspect that many people don’t consider is what to do when the tenant pays rent late.
Accounting for Late Payments
It’s important to think about the possibility of late payments when you first work out your lease-option contract.
As a seller, you should incorporate a late payment fee into your contract. You can have one fee for a certain late period and then a separate daily rate. For example, if your tenant pays five days late or greater, they owe you a $25 base late fee plus an additional $2 for every day late thereafter. Of course, the fee structure should be modified based on the cost of the unit.
This fee has to be in your contract and agreed upon by both parties for you to charge it. While it is your hope that you never have to charge this fee, it’s important to have it within your contract in case you have that issue.
Why a Late Payment is Necessary
A late payment from a tenant can set off a chain reaction for the seller. For example, the seller may have to pay their mortgage late as a result of not having the money from the tenant on time. That could result in the seller having to make a late payment and incur fees.
Late Payments Benefit the Seller and the Buyer
The late fee is beneficial for the seller because it is a financial incentive for the buyer to pay rent on time each month. No one wants to pay more money when they don’t need to. Tenants are more likely to pay rent on time to avoid having to pay extra.
The late payment is beneficial for the buyer because of how much they have invested in the rent to own process. A late payment sets a consequence for making a late payment, but it’s not the worst possible alternative.
Technically, a seller has the right to terminate a lease-option as a result of a late payment. In that scenario, the buyer loses their option fee, premium payment and a heck of a lot of time. However, a late payment fee gives the buyer some wiggle room. The penalty for being X days late is a fee instead of losing the investment.
That helps the seller too because if the seller loses the buyer, then they will lose time looking for someone new to buy or rent to own the property – an unnecessarily added headache. However, a seller cannot allow a late payment to go without consequence because then it may become a common occurrence. The late fee serves as a penalty to the buyer, which will decrease the number of times that late payments occur.
More so, the fee can help the seller cover any late fees they incur as a result of not having the rent money on time.