Real Estate Articles » For Sale By Owner (FSBO)

Selling Your Investment Property Using A Lease Option Agreement

By: Gregory Davis
Submitted: 08:32PM on Saturday 15 November 2008

Real estate investors love to throw around esoteric terminology, like “irrevocable land trust,” and "lease-option agreement," but that doesn’t mean they have a clue how to actually use them. Like all methods of sale, lease-options are a viable option for some situations, but should merely be one more wrench in your real estate sales toolbox.

The definition itself is basic enough: a lease-option agreement is a rental agreement that provides the tenant an option to purchase the property, within a specific term of time. Simple stuff, right?

However, consider this: lease-option agreements don’t obligate the tenant to buy the property (the way a contract of sale does), but does obligate the landlord to sell. Why would this be a good idea for the landlord/seller?

Well, in a seller’s market that’s rapidly appreciating, it’s not beneficial at all to the seller.

But in a slow market, where buyers rule, it can be an easy and inexpensive way to sell a rental property without paying carrying costs for months on end while the property sits vacant on the market. It also eliminates the real estate agent as the middle-man, so you the landlord/seller don’t have to pay a commission.

Be careful not to confuse a lease option agreement with an installment contract, which is similar but differs in a few critical ways. Installment contracts legally transfer the title of the property after the term is up, and are literally a form of sales contract. That being said, the tenant/buyer generally has to refinance to pay the balance owed to the landlord/seller and any lienholders, at which time the change in title is recorded. Lease-option agreements, on the other hand, do not count as a contract of sale, so a separate one must be signed and a purchase settlement, not a refinance settlement, is what takes place.

As far as where to find a lease-option agreement, some city/town governments offer them to the public for free on their websites, and of course there are many private companies who also offer them online. For an example, the EZ Landlord Forms website below offers a custom lease option agreement for each state.

Before you sign or offer a lease-option agreement, it would be prudent to make sure your tenant/buyer will qualify for a mortgage loan. You should review their credit, income, and employment history (all of which you should be doing anyway in the tenant-screening process). Most of all though, don’t ever assume that a tenant will actually succeed in buying the property from you, regardless of what they tell you. Lease-options are one more way of selling real estate, but only for sellers who have the time, capital and patience to assume the responsibilities of a landlord.