UTILIZING LEASE OPTIONS TO GET YOUR PROPERTY SOLD

Many of our would be sellers are becoming frustrated at their inability to get their properties sold, during the current downturn in the real estate market.  With this in mind, we are providing this information, in the hope you will find it to be profitable in getting your unsold properties producing income, and bringing you one step closer to a sale.

As the housing market continues to slow to what just a few years ago we called "normal," the use of lease-options is likely to become more widespread, and provides another arrow in the quiver of effective marketing techniques. Lease-options are not new, and have been used by many individuals over the last 50 or so years, as a means of acquiring a property they might not otherwise have purchased.

Properly structured, lease-options work well to sell a house or condo, even in a downturn market. Lease-option buyers available within a given market often exceed the number of sellers offering such terms of sale. As the housing market continues its slow down, it pays to understand lease-option pros and cons, and how, when utilized in the right situations, both buyers and sellers can and do benefit.

WHAT EXACTLY IS A LEASE-OPTION? A lease option is a real estate lease of a house or condominium, which by its nature, gives the tenant an option of whether or not to buy the property, and offers both the tenant and owner/landlord many advantages. The tenant has the choice of buying the property or not by the end of the lease term.

However, a lease-option should not be confused with a lease-purchase. With a lease-purchase, the tenant actually contracts to purchase the property, but typically has a delayed closing, sometimes a year or two in the future. But a lease-option does not require that the tenant ever close on the property, if he chooses not to exercise his option.

Lease-options work especially well in a market like we're currently experiencing. They are best utilized when there is an oversupply of house and condo rentals or an oversupply of houses and condos listed for sale.

WHAT IS THE KEY TO LEASE-OPTION SUCCESS?  Obviously, everybody wants to feel they're the winner when negotiations are complete. The real key to the success of a lease option for both the tenant and the property owner lies in the amount of the monthly rent being credited toward the tenant-buyer's down payment.  This means that for every dollar of rent being paid, a given percent is being credited back to them, if and when they choose to exercise their option.  This is referred to as "rent credit."

Because of the "rent credit" factor computed into a lease option, a landlord can often charge a higher-than-normal market rent when utilizing a lease option.  If, for example, a house were to rent for $1,800 per month, and offer a $600 per month rent credit, at the end of 12 months, the tenant will have built a $7,200 rent credit toward his purchase price, to be used toward down payment or closing costs.  

Although it's true that the tenant does not benefit from the normal tax deductions associated with real estate ownership during the rental period, the rent credit may actually benefit the tenant more than the tax benefits of ownership would have.

The percentage of credit actually given is a matter of negotiation between the property owner and the tenant.  However, the greater the credit, the more incentive for the tenant to actually exercise his option at the end of the lease period.  Typically, credits amounting to 20 percent or more are utilized.  Offering very low credits, such as 5 or 10 percent may not be enough incentive for the tenant to exercise his option, especially if market conditions have not improved.

In some situations, owners may offer 100 percent rent credits. This could be utilized when a house is in bad shape and the owner doesn't have the funds at the time to fix it up.  You might then find a tenant who could fix it up at his expense during the lease-option term. In the end, if he exercises his option, he has bought a house for essentially nothing down. Yet you, as the seller, have made a handsome profit on a property that otherwise might have continued to deteriorate.  And if the tenant walks away, deciding not to go through with the purchase, you have are not only the beneficiary of the rents collected during the option period, but benefit from the tenant's efforts of fixing up the property as well. 

HOW DO TENANTS PERCEIVE THE VALUE OF LEASE-OPTIONS? Let's look a the scenario above, where the tenant has paid $1,800 per month for a period maybe two years.  When the day actually comes that they must make a decision, they are likely to have a hard time walking away from not only the $14,400 which you are giving back to them in the form of rent credit, but the initial option money they gave you as well.  Often tenants recognize that, while they may be paying a higher than market rent, the difference between what they are paying  over what might be otherwise considered fair market rent is like forced savings for them.  If they were not forced to pay it every month, that money would surely be spent, and they would have nothing.  So, when they finally arrive at the closing table, they may actually thank you for affording them the opportunity to own something that otherwise they might never have been able to purchase.

In addition to the rent credit, lease options have numerous other advantages for both the owner and the tenant:

1. The owner collects "up-front" move-in cash from the tenant, which is the first month's rent and non-refundable option money

2. The "up-front" money for the tenant is less than the costs which might be incurred as closing costs, were he actually closing on the property at that time

3. The rent credit often outweighs the fact that no mortgage interest and property tax deductions are available to the tenant

4. The buyer actually gets to experience or try out the house or condo, as well as the associated lifestyle, before committing to a purchase

5. The option purchase price is locked-in for the lease term, and is likely to be higher than a seller might otherwise realize for the sale of the property

6. The amount of time it takes to complete the paperwork, and allow the buyer to move in may be considerably less than what it would take to complete a sale transaction, meaning the buyer can move in more quickly, and the seller's income stream will start sooner.

7. The owner continues to reap the benefits of income tax benefits, including depreciation deductions, until the option is exercised

8. The owner gets monthly rent cash flow instead of having a vacant house or condo

9. The owner often collects above market rent, during the term of the option

10. The lease-option tenants usually treat the property very well because they expect to someday own it.

IS A LEASE-OPTION A VIABLE ALTERNATIVE FOR YOU? Let's face it... Now is a time when many properties are sitting on the market for rent or sale, and the ongoing costs of ownership continue to spiral upwards. So, if you need to sell, or at the very least generate some income against your expenses, a lease-option is certainly better than no sale. And the best part it, lease-options work in all price ranges!

Just picture a listing in the local MLS or an ad in the newspaper for your property which reads "$10,000 MOVES YOU IN!"  Obviously, you could change that amount up or down to suit your particular situation, and add a little verbiage that describes your property and its features and benefits. But include the desired monthly rent and the vital words "Rent to Own" or "Lease-Option." What a neat way to get potential buyers out to a weekend open house.

It is essential, however, that you have pre-determined your terms and benefits, including the option price and rent credit.  Information flyers, rental applications, credit authorizations,  and required disclosures should be available for interested prospects. Just as earnest money usually accompanies an offer to purchase, serious prospects should be expected to attach a $500 or $1,000 deposit check to their rental applications, and if an amount is to be withheld for credit checks or other use, those amounts should clearly be disclosed upfront. It makes good business sense to run a credit check on all lease-option applicants before a lease-option is signed and becomes binding. 

For a property listed for sale with a real estate agent,  a portion of the agent's commission should be paid when the lease-option is signed, with the balance of a sales commission to be paid when the tenant exercises the option.

  A good real estate attorney will be able to assist you in the preparation of necessary papers, and advise you as to other considerations you might want to address when considering a least option.  We strongly recommend, before entering into a lease option agreement, regardless of whether you are a property owner, or a tenant wishing to utilize a lease option to purchase a property, you consult with your attorney or tax professional before signing any binding agreements.

This Website has been designed and maintained by Spanish Wells resident

Marti Timple ~ John R. Wood Inc., REALTORS ~  (239) 405-1608

Email me at: TheTimples@InsideSpanishWells.com