Home not selling? Try the lease-option.

By
Education & Training with Network Funding LP NMLS #116235

Are you having difficulty selling your home or other real estate? Or would you like to buy a home or an investment property but you don't have enough cash for a down payment? If you answered "yes" to either question, a lease with option to purchase may solve your problem. But it's important to understand the pros and cons of lease-options to maximize your benefits.

What is a Lease-Option?
A lease-option is a combination real estate rental, sales and finance technique. It is a property lease for a fixed time period, such as 12 or 24 months, with an option for the tenant to buy the property at an agreed option price during the lease term. Buyers like lease-options because little up-front cash is required. Sellers also like lease-options because they provide necessary cash flow to pay the mortgage and property taxes from a tenant who has a vested interest in treating the property well and who is likely to buy it.

What is a Lease-Purchase?
A lease-purchase is different from a lease-option because it obligates the tenant to purchase the property at the end of the lease. With a lease-option the tenant has the right, but not the obligation, to purchase the property.

With both, however, the tenant usually pays an above-market rent and receives a monthly rent credit toward the down payment. Of course, both a lease-option and a lease-purchase obligate the seller to sell the property on the agreed terms.

Advantages For Sellers
Unless your property is located where there is very strong demand from buyers, lease-options can be especially advantageous for home sellers.

Primary property seller advantages are:

  • Strong Demand From Prospective Buyers
    No matter how slow the local real estate market might be, there is almost always a strong demand from lease-option buyers. Many prospective home buyers can usually afford the monthly payments but they have often have insufficient cash for a down payment. The lease-option solves this problem by giving the tenant-buyer a rent credit toward the down payment. It's like a "forced savings account." In addition, the tenant-buyer usually pays up-front nonrefundable consideration for the option, typically several thousand dollars.
  • Top Dollar Option Price
    Because of strong buyer demand for lease-options, when done correctly, home sellers can demand and get top dollar for their properties. Usually, the option price is set at the market value when signing the lease-option. If the home's market value goes up during the lease-option term, the buyer benefits. Should the property drop in value, then the tenant usually doesn't complete the purchase.
  • Top Quality Tenants
    During the lease-option, the tenant-buyer usually take good care of the property as if they own it.
  • Above-Market Rent
    Another seller advantage is earning above-market rent. Landlords can charge tenants 10 to 20 percent above market rent.
  • Seller Keeps the Tax Deductions
    During the lease-option period, the seller retains all the property income tax deductions. If a tenant complains about not receiving any tax benefits, a reminder about the rent credit toward the down payment usually ends the discussion.

Advantages For Buyers
Lease-option benefits are not one-sided. Advantages for buyers include:

  • Small Amount of Up-Front Cash Required
    The amount of up-front cash required to acquire a home or other property on a lease-option is usually small, often just a few thousand dollars for the first month's rent plus non-refundable option consideration. This option money is in lieu of a security deposit.
  • Monthly Rent Credit Builds a Down Payment
    The unique characteristic of a lease-option is the rent credit toward the buyer's down payment. Typically, the rent credit is 10 to 100 percent of the monthly rent, depending on how motivated the seller is to sell. The higher the rent credit percentage, the greater the probability the tenant will buy.
  • Try Out the Property Before Buying
    Another special lease-option benefit for the tenant is the ability to try out the property before buying. If it is undesirable, the tenant hasn't tied up a large amount of cash in a home that might be difficult to resell.
  • Control Property With Very Little Cash
    The ability to control a property and profit from its market value appreciation with very little cash is called leverage. Lease-option buyers have this unique advantage.
  • Longer Terms Mean Greater Profitability
    Although most residence lease-options are for short terms, such as one or two years, smart investors seek lease-options with the longest possible term. They reason the property is likely to appreciate in market value over the long term.
close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Location:
Washington King County
Tags:
lease
home
selling
buying
leasing
option
rent

Spam prevention
Show All Comments
Rainer
68,846
Christopher Benedict
BIG Realty - Collegeville, PA
AskTheBigGuy
I haven't used this before, but with the market chagning I may consider it when selling off some rental units!
Sep 17, 2007 02:56 AM #1
Rainmaker
37,433
Jason Schweiger
Network Funding LP - Auburn, WA
Loan Originator / Branch Manager NFLP
We are very active with lease-options and advising many clients to consider the lease-option. Some need to sell or need the money. Taking out a home-equity loan prior to leasing may be one option, if you need the cash. It is much better than making empty house payments and as long as you secure the property with a good tenant and usually if you receive enough cash down and do your research, you should be fine.
Sep 17, 2007 03:00 AM #2
Rainer
41,968
John Klassen
M & T Bank - Kingston, NY

The key is to make sure that the tenant credit qualified. This is not a good way for a seller to help someone get their credit in order. If they have good credit and need help saving $$$ for ther down payment this can be an excellent plan.

I am going to look up th elender guidelines and provide an additonal post to support this. Good points.

Sep 17, 2007 03:06 AM #3
Rainmaker
130,007
Jim Little
Ken Meade Realty - Sun City, AZ
Your Sun City Arizona Realtor
As I understand it, never having done these before, the agent doesn't get paid until escrow closes on the sale of the property. In my area, I have not heard of any of these actually completing to close. How do you deal with that?
Sep 17, 2007 03:21 AM #4
Rainer
136,625
Terry Lynch
LAR Notary and Closing Services - Saint Clair Shores, MI

Jason

We are seeing an increase in lease options on our MLS, mostly due to investors who can't sell.The problem here is we are seeing so much depreciation that buyers may not see the value when they exercise their options.

If I'm working as a buyers agent I would want to take the possible depreciation into the option and that usually doesn't work for an investor or homeowner already on the edge of bringing money to closing.

Sep 17, 2007 03:23 AM #5
Rainmaker
37,433
Jason Schweiger
Network Funding LP - Auburn, WA
Loan Originator / Branch Manager NFLP

Jim,

 When I help a client exercise a lease option, I usually negotiate a small payment at the signing of the lease for both agents for the work to be done. A good rule of thumb is half of the first months rent, then you still receive a commission if the deal closes in the future. For a home being leased for $1800 a month it only amounts to $900, but you are doing your client a favor plus you still have the commission to look forward to, if the deal closes later.

Sep 17, 2007 03:31 AM #6
Rainer
1,919
Brian Hirai
Brio Realty - Bothell, WA

Jason,

 Yes, this is a alternative option if a home is not selling.  I did the finanacing on a lease option last year and you may want to talk to me or a mortgage broker first and find out what the lender guidelines are before you start quoting how much rent will go towards down payment.  There are several factors involved, like the buyer's credit score, income and debt to income.  Plus every lender has their own set of guidelines on how much rent they are willing to allow for the down payment. This is food for thought. 

 

Brian Hirai

Brio Realty/MTG Finance

425-478-1954

Sep 17, 2007 04:14 AM #7
Rainmaker
37,433
Jason Schweiger
Network Funding LP - Auburn, WA
Loan Originator / Branch Manager NFLP

Brian,

 I agree with checking the lenders policy as well. However, they will vary and change between now and the purchase. I have closed several lease-options and have just included some general ideas and the amount towards the down is decided between the tenant and owner. Of course, the lender may change the amount when they try and purchase and yes, the tenant/buyer will need to qualify for the loan. Worst case is they don't qualify and the seller was able to lease the home and retain the option fee.

Sep 17, 2007 04:38 AM #8
Rainmaker
130,007
Jim Little
Ken Meade Realty - Sun City, AZ
Your Sun City Arizona Realtor
Jason, thanks for the reply. At least doing it this way gets gas money, instead of nothing. I appreciate the tip
Sep 17, 2007 07:09 AM #9
Anonymous
Danielle Blue, Brio Realty

HI Jason,

 This is a great blog, thanks for the useful info. I am currently looking for a lease purchase with a client and find this info most useful. I thought that lease-purchase does not bind you to buy but does give option without the nonrefundable? Is this correct?

   

Sep 24, 2007 08:07 AM #10
Rainmaker
37,433
Jason Schweiger
Network Funding LP - Auburn, WA
Loan Originator / Branch Manager NFLP

Danielle, The lease option gives you the option and the lease purchase is a lease with a purchase and sale agreement. On the option, the money is non-refundable and the purchase, the earnest money is forfeited if they walk away from the purchase agreement.

 Let me know if that helps. If not, you are welcome to call or email me and I will be glad to help.

253-315-5580 or visit my site and email me www.www.mynwagent.com or jason@mynwagent.com

Sep 24, 2007 01:17 PM #11
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainmaker
37,433

Jason Schweiger

Loan Originator / Branch Manager NFLP
Ask me a question
*
*
*
*

Additional Information