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Why Lease Options Rule!!

by Ryan Moeller on June 23, 2010 · 8 comments

  

Lease options, or the concept of rent to own, simply refers to a rental agreement with an option to purchase at a future date.  With bank financing tight, not all potential homeowners can secure a loan and fulfill their dream of owning a home.  Many people absolutely love lease options as it is a perfect solution.  Here are just some of the benefits to sellers and investors.

  1. Higher sales price – Buyers who cannot qualify for loans like FHA loans do not have as many options.  Thus they have less leverage and are willing to pay a higher price for a home.
  2. Higher then market rents – On top of market rents, there is also a non-refundable monthly option price.  If the purchase contract is executed this amount goes towards the purchase price; if not executed, the seller keeps this amount.
  3. Down Payment – You also get a down payment that is non-refundable if the buyer doesn’t execute the purchase contract.  If the buyer does execute the purchase contract the amount goes towards the purchase.
  4. No agent commissions – You do not have to pay agent commissions which are usually 6% of your sales price.
  5. No vacancy issues – Lease option buyers are motivated to stay as they will lose their down payment and monthly option money if they move.  Therefore they almost always stay.
  6. No maintenance responsibility – Sellers make the tenant responsible for maintenance since they will be purchasing and owning the home.
  7. Creative strategies – Lease option service, sandwich lease option, lease option assignment and even lease option a property then rehab and flip are all creative strategies to profit from lease options.  You can even earn referral fees for credit repair, agents, lenders, etc.

 If you are still looking to focus on a strategy, learn about lease options.  They are win-win for all involved and have tremendous advantages for investors.

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{ 8 comments… read them below or add one }

Michael Kraft June 23, 2010 at 7:34 am

A lease with option to purchase can be a great alternative for sellers who are having trouble moving their property. One enormous caution – the parties should negotiate all material terms of both the lease and the purchase and sale agreement before accepting any money and in advance of allowing the tenant to take occupancy.

A lease with an option is really two separate transactions and both need to be negotiated up front or you risk misunderstandings when the time comes to exercise the option. Issues to address include the purchase price, how the option is exercised, when the option expires, whether any money paid in for rent is applied to the purchase, etc. I would even include a dispute resolution provision.

The worst-case scenario for the owner would be a dispute that leads to litigation that may result in a cloud on title and prevent any future sales.

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Jessica Brylan June 23, 2010 at 11:28 am

My mother introduced the concept of renting with the option to buy back in the 70s. I’m sure she got the idea from somewhere, but the town she was working had never heard of it. She flipped her first house and sealed another deal with another seller. In this economy, the seller is the one hurting. Lease Option is a great idea for anyone who is looking to buy a house.

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Ryan Moeller June 23, 2010 at 5:16 pm

Great points Michael! I totally agree, always finalize both the lease and purchase contract before handing over the keys. Each state has different rules, if you are not certain that the lease and purchase contract protect both parties and is reasonable then get an attorney, title, an agent or expert.

I always advise people to be reasonable. A buyer may be so excited about fulfilling their dream to own a home that they will pay over the value of the home. Then the property will not appraise and they cannot get a loan. I recommend at that point the buyer either takes appraisal value or renegotiates the lease option. Do you agree?

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Michael Kraft June 24, 2010 at 4:56 am

Being reasonable is always good advice, but often very difficult to follow when the parties are wrapped up in a residential real estate purchase. Emotions are high, so best to negotiate all reasonable contingencies up front when everyone is calm and able to think rationally (and where the worst case scenario is that a deal doesn’t happen). The parties should expect that if the buyer is already living in the house and something goes wrong with the deal, it can be very difficult to resolve differences. Renegotiation sounds reasonable, but if the parties are too wound up, it can be impossible.

If the value drops and the lender will not give the buyer what is needed to close, there are several alternatives, but again, this should be considered at the outset. For instance, there may be a clause that a drop of 5% or less requires the seller to drop the price, but more than that and 5% becomes a floor, leaving it to the buyer to close the gap. If the deal simply cannot close because of a change in circumstances beyond the parties’ control, then perhaps there will be some amount of rent refunded. Anything is possible when parties are working together to make a deal happen that is mutually beneficial. Both sides need to stay very open minded during the initial negotiations to find creative solutions to the potential future problems.

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Ryan Moeller June 23, 2010 at 5:21 pm

That is really cool that you Mom did lease options in the 70s Jessica. They are incredible for sellers, but not all buyers can get approved so this is a chance for them to fulfill that dream. It is a win-win all around which is why Lease Options are so great.

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Ryan Moeller June 24, 2010 at 9:30 am

Great points Michael. When a buyer and seller works together to achieve the same goal it can work out fantastic for all involved. The market is out of our control though and drops in market value that cause the property to not appraise should definitely be handled. Great advice!

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Paul Francis June 27, 2010 at 1:58 pm

I did my first lease with the option to purchase 10 years ago and it worked out very well…

As long as the terms / options are legal in the state the property is in, everything is negotiable between the owner and the prospective buyer. #2, #3 and #4 above are flexible options not set in stone.

#2 is the key reason to do a lease with the option to purchase for me… I don’t require #3, the down payment up front.

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Ryan Moeller June 27, 2010 at 5:21 pm

Thanks for sharing Paul, I’m glad to hear you have had success with lease options. The terms are definitely negotiable.

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