WHY WOULD I WANT TO LEASE-PURCHASE MY INVESTMENT PROPERTY TO A BUYER?
There are many advantages for investors if they lease-purchase a home:
1. The tenants are much more likely to take incredible care of the home. In their minds, this is THEIR home - they are just renting-to-own it from you. They tend to take a lot more pride of ownership when it will be their own home shortly! Many will add improvements - new flooring, adding a pool, landscaping the yard, etc. If they don't close on the home, guess what? Those improvements just brought your home's value UP, at no cost to you!
2. Down payment and rental income. Lease-purchase agreements have down payments attached to them, and depending on how leveraged you are in the home, you may also cash-flow it. While the down payment and excess rental amounts are to be credited to the buyer if they purchase the home, you are allowed to earn interest on these funds.
3. In reality, very few buyers are able to close on the home at the end of the lease-purchase term. Buyers who have credit problems usually continue that trend; it's a hard habit to break. They often think they can make vast improvements in their credit standing in a short period of time, when it actually takes years to undo major damage. If they are unable to qualify for a loan, you retain their down payment and ALL rental funds. They've almost certainly taken great care of the home, making it much less expensive and time-consuming to re-rent or sell the property.
4. Lease-Purchases can 'stop the bleeding'. Do you currently have a home for sale that has been vacant for a long time, due to over-saturation of the area? Do you want to recoup SOME money each month, rather than NO money, but are concerned about being a landlord? Offering a Lease-Purchase option on the home may be your solution! Typically less-risky than a standard lease, since there is a higher deposit and tenants who will better care for the home, this may allow you to lower or eliminate the loss of full house payments each month. Consider it a 'band-aid' on your mortgage wound, until the housing market recovers in your area.
5. You want to build your real estate portfolio via 1031 exchanges. Many lease-purchase contracts run for 2-3 years, although the length is always negotiable. If you sign a 2 year lease-purchase agreement on a home you just purchased, at the end of the lease when you sell the home, you are subject to far less tax penalties. Consult a tax advisor to discuss your particular situation.
WHEN SHOULDN'T I LEASE-PURCHASE MY INVESTMENT HOME?
1. If your home is in an area where NO ONE is buying, there likely are not many renters in the pool, either. However, by considering a lease-purchase, you may snag that ONE buyer out there for the area with credit problems. Remember: It only takes one person to want your home!
2. You should be secure enough in the property that you won't have to sell it prior to the end of the lease-purchase term. If you are on the cusp of late payments or foreclosure, it is unwise to lock into a long-term lease on this property. Consult a tax or financial consultant to weigh your options.
3. With all tenants, there is SOME risk. While as a whole, lease-purchase tenants do take better care of the property and are usually more responsible with rental payments, there's a bad apple in every bunch. Be aware that there is always the possibility of default, damage, or disappearance of tenants.
If you would like more information on lease-purchases, real estate investment in Phoenix, or Phoenix area market updates, please contact us at info@WeAreAZRealEstate.com. We'd be happy to assist you!
Sharon Kotula, ABR
Adam Tarr, e-PRO
Your Phoenix Area Real Estate Source