Lease option benefits

7 Replies

What are the benefits of lease options versus other exit strategies?

One benefit is that you control the property without buying it. It gives you time to fix up the property and find a buyer. If things don't work out, you don't have to buy.

Anthony, I wouldn't say that is a benefit of a optionee (buyer); neither a lease nor an option gives you the right or position to make repairs or rehab a residential property.

You also do not "control" the title to a property, I could buy a property with a L/O subject to that option and assume the existing lease as the new owner. It will allow a tenant buyer to obtain title later on, but that is not really controlling the property.

But, those are the guru marketing benefits used to advance their materials. (LOL)

You could do a construction contract and you could add a restriction to title in the option, but that isn't really the common option agreement generally used.

A lease in a commercial property may allow a tenant to do repairs and improvements.

The benefits to a seller are pretty simple, it opens the market population to move the property, you will generally be getting unqualified tenants/buyers accepting the L/O. It also opens the marketing to others who are not certain if they want to buy, they may rather lease and simply have the option to buy in the future.

But most of the L/O buyers will have some issue, time on the job, credit matters, lack of a down payment or other issues that keeps them from buying, the lease term allows them to cure the problem.

For a buyer, you may get into a property with less down. You can market your contract but not the property, you don't have title to sell the property.

A reminder, these contracts need to be made separately and if you finance any of the option price or have ant credits, with an owner occupied you will need to follow Dodd-Frank requirements. Rent at fair market value and don't give credits from the rent as that causes financing issues later on for the buyer. Ensure the deal can  not be construed as predatory, the buyer needs the ability to pay as agreed. Lastly, an option may not make any requirement on a optionee (buyer) otherwise, it is not an option and can be an installment sale contract or purchase agreement (which means you can't have an option price and you can be returning that money!).

An L/O has more disadvantages than benefits but once clearly understood as to rights conveyed, terms and what an option is, they can be useful and good to know. :)

@Bill G. all good points, but most not relevant to the context of my post.  A lease can contain any language that is agreed on by both parties. If I intent to exercise my option to sell the property, I will have permission in the lease to make repairs or else I don't do the deal.  By "control" I simply mean that the owner cannot sell the property to anyone else during my option period.  The question was not about installment sale or "rent to own." This is completely different than having the option to purchase.  My point was that if you cannot find a buyer during the lease term, you don't have to buy the property.  Option money can be $1 or any other reasonable consideration, so you can tie the property up for very little money and you also don't have to occupy the property.

If you are in the enviable position to consider purchasing a site, here are just a few of the pros and cons to consider regarding leasing versus purchasing commercial, retail, or office property:

  • Pro : It is better to pay a mortgage than a lease because eventually you will pay off the mortgage whereas lease payments are forever. More often than not, the monthly mortgage payment is also very close to the monthly rent payment.
  • Pro : Your equity in your property will increase over time. I have since visited this tenant at his location. With gratitude, he told me that he could now sell his business condo for about three times more than he paid for it originally. This does not include the value of the business, just the real estate Obviously, appreciated value will vary from location to location and city to city.
  • Pro : You don't have landlord hassles; you feel in control and can open and close your business when you want. Yes, ownership is empowering and it feels great (most of the time).
  • Con : You might have to sacrifice on location strength or desirability. Many of the ownership opportunities are in secondary locations and not on the busier streets. If you are relocating your business or franchise into a secondary location for purchase it's not so bad because you may have loyal customers who will follow you.
  • Con : You would have to move out or away from your current space giving up a well-established location that a "competing tenant" might lease and move into. Landlords almost always try to replace one industry tenant with another so the possible competition should be a potential concern to you.
  • Con : You may have to become a handyman or deal with various ownership issues like heating, ventilation, and air conditioning (HVAC) units, building maintenance, etc., that otherwise a landlord would have taken care of for you.
Originally posted by @Anthony Dooley :

@Bill G. all good points, but most not relevant to the context of my post.  A lease can contain any language that is agreed on by both parties. If I intent to exercise my option to sell the property, I will have permission in the lease to make repairs or else I don't do the deal.  By "control" I simply mean that the owner cannot sell the property to anyone else during my option period.  The question was not about installment sale or "rent to own." This is completely different than having the option to purchase.  My point was that if you cannot find a buyer during the lease term, you don't have to buy the property.  Option money can be $1 or any other reasonable consideration, so you can tie the property up for very little money and you also don't have to occupy the property.

Anthony, the reason I mentioned those good points is because you were pointing out misconceptions about the L/O, more reading on the topic on BP and in regulatory matters will be enlightening.

Basic business law, a contract must have a legal purpose, it can not violate law, if you will check in the IRS Code you will see deprecation requirements for improvements, if the owner doesn't account for improvements and isn't paying for them, he's in violation of the Tax Code.

Next, no, you can not contract for just anything the parties agree to, you can't agree to violate tax requirements for example, there are also predatory dealing laws, contracts are not totally foot lose and fancy free to do whatever.

Next, the concept of consideration is the basis for the equitable interest, a financial interest that can be shown in the event that interest is lost. Your $1 interest won't hold up if the seller refuses to sell a $100,000 property over a 5 year term, horsefeathers, you only have a financial interest of a buck in a 100K property, the consideration is grossly insufficient and a judge will tell you so.

And, unless you add a title restriction to the title on a property, the owner in title CAN sell the property with a valid option given to another party, it doesn't transfer any title interest but only an equitable interest to the extent of the consideration, the option price. The property is sold subject to the rights of the optionee, the buyer is then obligated to sell at the option price if the optionee takes the option, if they fail to exercise the option, the buyer owns the property.

There is a lot of bad information out there that new folks get tied up with, gurus all over the place and most fail to look deeper beyond what popular thinking may be. Popular thinking is not correct.

A construction contract could be included in a lease agreement, but the construction agreement will have nothing to do with the lease and the owner will need to pay for items in order to account for and expense as required to do so.  A lease doesn't transfer title interests that allow the tenant to do construction. The tenant/contractor can then  buy, you're entitled to labor and your management at that point too.

And, most likely, if you write a construction contract, in most areas you will then need a contractor's license, if you don't have one, your contract is then invalid, you're acting contrary to related legal requirements. Without a license, you may not be able to file a lien against a property to save your investment. Then you're looking at legal fees trying to save the ball.

Why understand this stuff? So a newbie doesn't get involved improving a property and then losing his money because his contracts and interests were not correctly structured.

Not just me, search the forums as to L/Os, you'll find various regulatory and legal requirements apply that are different from popular belief or what the gurus preach. Good luck :)    

@Bill G. You have gone off the deep end. I am not asking for legal advice here. Nobody is talking about violating tax law or construction.  I said repairs, which can be paid for by either party.  My $1 example was option money, not interest or property ownership. Go read a law book and leave investing to those of us who are actually doing it.

Originally posted by @Anthony Dooley :

@Bill G. You have gone off the deep end. I am not asking for legal advice here. Nobody is talking about violating tax law or construction.  I said repairs, which can be paid for by either party.  My $1 example was option money, not interest or property ownership. Go read a law book and leave investing to those of us who are actually doing it.

LOL, like someone with 2 years in RE? All RE is local, go talk to your attorney or Broker. When you are talking about tenants doing repairs you are talking about tax matters. As an owner, you're talking about allowing a tenant to obtain an interest in the property as well.  

Also, might search how options are valued, it's a fiancé matter that goes much deeper than you probably are aware of, basically, the present value over the term of expected appreciation over the term, saying one dollar is laughable if you have to enforce that option.

However, all any contract does is to govern the parties to a settlement, if there is never any deal that blows up on you, probably won't have an issue, but not all deals go as planned. Need to CYA yourself.

LOL, made an offer on a residential property last Friday, get out there and go get'em. :) 

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