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Why leases with an option to buy may be a better way to go for sellers and buyers.

Real Estate Agent with Mountain Lakes Realty

Instead of an outright purchase of a home, a lease with the option to buy can make more deals happen.  Here are some benefits that often occur in these type transactions:

Seller Benefits:

1.  Instead of selling a property with seller financing, when a seller does a lease option they still have the title to the property.  If the buyer does default for whatever reason, then the seller can usually evict the lessee in a much more timely manner than going through the foreclosure process.  The lessee is not the owner.

2.  Instead of receiving a down payment on the sale, the seller/lessor will receive an option deposit.  Whether this option deposit is $5,000 or $500,000 it is typically treated just like a security deposit.  It is not reported on the sellers tax return until the option either expires or is exercised.  This can in effect postpone the capital gain taxes on the sale for several years depending on when the option expires or is exercised.

3.  The seller/lessor will still be allowed to depreciate the mobile home park improvements until the option is exercised.  This depreciation can shield some of the income that the seller/lessor receives from the lessee during the option period.

4.  The seller/lessor is relieved of the day to day management duties and can be freed of that responsibility.  Instead of running the park themselves, they step aside and collect a monthly rental payment from the lessee until the option is exercised.

5.  By using a lease/option an owner that may have only owned the property for a few months may be able to convert a short term capital gain into a long term capital gain.  This would happen as long as the option is not exercised for at least 1 year from the date the owner acquired the property.  

6.  By doing a lease/option instead of a purchase/sale/owner finance, the current financing can be left in place until the option is exercised without triggering a due on sale clause.  If the property is in need of being turned around and it would be hard to get a new loan this may be the best option for the buyer and seller.  

7.  The seller/lessor can continue to make the mortgage payments and not be in default.  If the buyer does default it should not be a difficult process to get rid of the buyer.

Buyer Benefits:

1.  For a buyer with less than perfect credit, this may allow them to get into a property while their credit is being built up and then complete the purchase when they can qualify.

2.  During the option period, the buyer can build equity so long as the property increases in value.  This is the usual case.

3.  If the property declines in value, then the lessee is not required to exercise the option.  As long as the option deposit is not more than the decline in value, it shifts some of the risk.

4.  The seller/lessor is usually more readily available to help in the case of problems with a lease option than an outright sale.  They don't usually want the property back so they will be available to answer questions and give other advice.

5.  Instead of the depreciation deductions, the lessee will be able to deduct the monthly rent payment to the owner.  While this is amount will probably be less than the mortgage interest and depreciation, if the lease payments are structured that a portion of them reduce the option price, this can be a benefit as well.

6.  The lessee is able to work the property as if it were their own and if done right will be able to increase the value of the property above the option price.  Then when the option is exercised it will be much easier to obtain financing.

7.  The lessee may be able to sell the option rights to another purchaser which is often easier than buying a property and selling a property.  They are just selling the right to buy the property at a predetermined price.

Konnie Mac McCarthy
MacNificent Properties, LLC - Cobb Island, MD
Broker/Owner - VA & MD "Time To Get A Move On!"

You don't find them to be sticky..in this market, when do you set the sales price....it's a gamble no matter what you do.. :)

Feb 22, 2009 07:55 AM

Life is a gamble but it is still worth living.  When sellers are finding it hard to move a property this is at least a possible way to get the system moving.

Feb 22, 2009 08:50 AM