My partners and I are frequently asked about lease options or rent-to-own situations. Since we spend 24/7 representing umpteen properties here in Marin County that are listed for sale, and as leasing agents (http://www.marinrentals.blogspot.com) working with rental clients who are eventually looking to buy, we've come up with two basic hard-and-fast guidelines. But I'd better first offer some groundwork on the mechanics of what we're all talking about: how a lase option contract can work. The explanation taken from http://www.ShowYourHome.com , a website specializing in bringing together motivated buyers and sellers looking for creative solutions like home swaps, owner financing or lease options:
A lease option or "rent to own" contract can be negotiated in almost manner that is acceptable to both tenant/buyer and landlord/seller. Traditionally, the homeowner requires a certain amount of non-refundable option money (usually anywhere between 1 - 10%) in consideration for taking the home off the market while the tenant/buyer rents and lives in the home for a specific period of time. A very motivated seller might take no money down. Sometimes a security deposit--just like those for traditional rental--is given as well.
During the lease period the seller holds the title of the property and is usually liable to pay the annual taxes of the property as well as perform routine maintenance. A pre-negotiated portion of the monthly rent then credits to the eventual purchase price. Usually, the more money a tenant-buyer puts down, the higher his rent credit will be. Rent credits vary--like all the terms mentioned above--and the amount depends entirely on what the buyer and seller negotiate and agree to via contract.
At any time during the lease, or at the end of the option period, the tenant-buyer has the option to purchase the home at the pre-negotiated price. If the buyer decides against buying the house then the entire rent credit amount stays with the seller--non-refundable option money included--and both parties move on.
If you are an owner looking to sell, and I'm a leasing agent with a tenant looking to buy who likes your house, there is easily a win/win situation possible. But before we sign that contract there are a few risks both buyer and seller should consider.
As a homeowner there are two main risks to think about. First, how likely is your tenant/buyer to actually purchase the home and what are the costs to you if they don't? Just because the very nice couple relocating from Minnesota with their two declawed cats claim they want to buy your home within the next year doesn't mean they can or will, especially during the current economic credit crunch. Bad credit today does not turn into great credit within one year--so if you are making concessions during the negotiating process like taking your home off the market, accepting a lower rent than you could get on the open market, or signing over a first right of refusal, make sure it's likely that this couple will be able to come through in one year. Or, make sure you don't care of they do or don't. For example if you're going to lease the home anyway, and the Minnesota couple is very well-qualified as tenants, then best case they buy the house, worst case you've had great tenants for the year. Second, evaluate your lease option tenants just as you would traditional tenants. Are they smokers? Do they have rental references? Secure jobs? Pets? Are they putting up a security deposit? (Yes, even if they do put up the option money, a security deposit should be held to secure your asset and to encourage your would-be buyers to take care of the property even if they do not decide to purchase.)
If you're a tenant/buyer, a lease option is not without risks for you either, especially if you're putting up non-refundable option consideration funds. Evaluate this home as if you were purchasing it today. Spend the money for an inspection--a home with $10k in pest problems, for example, should be reflected in the purchase price when you're negotiating the lease option. Does this person you're about to sign a rental agreement with actually own the home? Is the title clear? Is this homeowner current on his/her mortgage payments? Who will maintain the home if the roof leaks? Toilet clogs? Who pays HOA? Is the home insured?
The last important point to cover is the issue of the non-reundable option money. As mentioned above, I have two lines of thought on lease options: either make your lease option a great deal with easy, attractive terms to help entice a tenant/buyer, OR treat the lease option as an offering with set terms (like 10% down required) and hold to your terms.
As the sales market began to slow in Marin, my first reaction was to advise my clients who asked me how I wanted to market their lease option, "Well...if you really want to sell the house then make a lease option as attractive as possible! No option money required!" But as I started to think about the process, and see more and more proposals, this started to make a lot less sense. When you as homeowner sign a lease option contract, you are signing over a certain amount of control to your tenants. If your Realtor brings you a great buyer sometime during the tenancy, you likely cannot accept the offer (depending on how your rental contract reads and how you've structured the deal), because you are essentially under contract with your tenants.
On the other hand, if you're a tenant/buyer and the seller is requiring significant option money, you can likely find another home to lease option that does not require a large sum of cash up front. There's risk to tenants too, who put up option money. What if the home goes into foreclosure during the tenancy?
The bottom line? If you're considering a lease option as either a buyer or a seller, you have to think about what makes sense to you. We're in a buyer's market and homeowners want to stand out from the crowd--which a lease option can help do--but you also have to understand the risks on both sides and make sure the terms make sense for your situation.
(And, of course, a word of caution: tenants, buyers, landlords, sellers....always, always consult an attorney before signing any important document!)
I'd love to hear success (or nightmare!) stories out there: who has bought or sold a home successfully through lease options?
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