Home Selling in 94558>Question Details

Ljb, Both Buyer and Seller in Napa, CA

I have my house up for sale in CA - I had a few ask me if we would do a lease option to buy on our home.

Asked by Ljb, Napa, CA Sat Aug 9, 2008

How does that effect me and my bottom line. We defiently would like to sell, but are most seller doing this in this market.

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Shel-lee Davis - BRE #01817412’s answer
Lbj:

Lease / options are once again a hot item. Why? Money / Lending is tight, Buyers believe the market with continue to decline, sellers are not getting what they want for their homes today. Since this is not something we heard much about in the time of rising prices and easy money, make sure you surround yourself with an excellent professional team if you are considering this. Most importantly check with your Attorney and Accountant (or tax attorney).

My attorney told me that a lease option gives the tenant a "beneficial interest in the real estate". This significantly changes the landlord/tenant relationship so you need to understand HOW this affects you. My accountant told me that, based on how the agreement is written, the length of time, the rights of the tenant, etc. is how it will be handled for income tax purposes. You don't want any rude surprises at tax time. So find out what your attorney and accountant have to say, make an informed decision, and Dare to Dream.

Shel-lee Davis
Real Estate Consultant
RE/MAX Palos Verdes Realty
1 vote Thank Flag Link Sun Aug 10, 2008
If the lease market in your area is good and you believe prices are likely to rise, then a lease option might NOT be what you want. Why?
1. If property is renting well in your area you can rent without giving an option.
2. If you give an option and prices go up the seller does NOT get that appreciation.
3. If you give an option and prices go down the lesee probably won't buy it - they will go and find
a cheaper house somewhere else.

The time a lease option is a VALUABLE tool is when the rental market is bad. Why?
1. Tenants see it as a way to convert rent into equity. This will induce them to rent yours (lease/option)
instead of renting one of the other gazillion rentals on the market.

So, what is a lease option? It is three things; lease contract, option contract and sale contract.
A good lease option needs to have good contracts in all of these areas:
1. A good lease contract. Protects you while you are a landlord & clearly defines the tenants' rights
and responsibilities.
2. A good option contract. Clearly states the circumstances when the tenant can exercise their RIGHT
to purchase the property. Remember, it is a right that they are buying with the option contract. It
also discusses what, if any, amounts of the rents will be credited to the purchase contract and what
the price of the option is. It also should reference the purchase contract.
3. The purchase contract will discuss all elements of the purchase.

All of these contracts need to be taken seriously and written carefully to protect both the buyer/lessor and tenant/lessee.

Finally, remember that if the tenant/buyer is going to get a loan to purchase the house, the bank will have to see all the contracts. This is important because the bank will usually have rules about how much of the rent can be credited toward the purchase price. And, as always, get the advice of an attorney.

Good Luck,

John Hickey
Dilbeck Realtors, GMAC
818-541-7311
John@JohnHickey.com
http://www.JohnHickey.com
1 vote Thank Flag Link Sat Aug 9, 2008
Hi Ljb,

There are several questions you have to ask yourself to see if a lease/buy option is the best fit for you. How long has it been in the market? When was it purchased? How much are leases in your area going for. Basically if your house has been sitting in the market for over 6 months and the house is located in a desirable area and if you are not willing or wanting to make less of a profit on it then lease/buy is an option. Remember that if you pay for a mortgage every month you do not sell is another mortgage payment. If someone is willing to "pay" for part of it ( as in a lease option ) then it might be something to consider. Again it all depends on different factors. Good luck!
Web Reference: http://www.leonardoteam.com
1 vote Thank Flag Link Sat Aug 9, 2008
I just saw an agent / owner advertised a lease and / or lease with option to buy. Yes, a decent deposit is good along with a reasonable option price so that both will be satisfied when the option is finally carried out.

Some major pitfall is related to time and market - if the market drops, then the buyer might changes his mind and if the market goes up, you might regret; also, what happens if the buyer can not get mortgage, other situation changed, etc, when the time comes, .

Have a nice and tight agreement to make sure it will happen or if not, you will be compensated for the risk.

Sylvia
1 vote Thank Flag Link Sat Aug 9, 2008
Sylvia Barry,…, Real Estate Pro in Novato, CA
MVP'08
Contact
Some sellers are definitely doing this. It affects you in that you will still own the house and won't get out from under the mortgage. If you can get a decent deposit and reasonable monthly payment, you could be OK, or may even come out ahead. Consider any local regulations about tenant rights, and talk with our insurance agent before you sign anything. Best of luck!
1 vote Thank Flag Link Sat Aug 9, 2008
Let's approach this from two angles. First, you ask how it affects you and your bottom line.

Properly structured, it'll provide some up-front cash (the option fee), income slightly higher than ordinary rent, and the possibility of a sale down the road.

Let's now address some of the statements--correct and incorrect--below:

STATEMENT
If you get into a price today and prices go up tomorrow, you may be stuck with todays price in a year.
ANSWER
True. The price is usually set up-front, though it doesn't have to be. So that's why you set the price HIGHER than today's value. After all, if they could buy right now, they would. They can't. So you charge a premium for that. Let's say in today's market your home is worth $400,000. You might agree on a purchase price of $440,000 at any point in the next 3 years. Ask yourself: Would you be satisfied with that as a sales price? If yes, fine. And if the market soars and the home is really worth $460,000, that's life.

STATEMENT
The buyer usually has the option to not buy but may loose his/her option deposit. If they do purchase, then the option money goes towards the price.
ANSWER
Actually, the buyer always has the option not to buy. That's why it's called an option. And, yes, they're almost always structured so that the buyer loses his/her option deposit. Remember: It's not a downpayment, and it's not a security deposit. It's a fee (an option fee), in return for which you've given them something of value: The right to buy your property.

STATEMENT
Another thing to consider is what do you do it they don't take care of the property, because you cannot just give them a notice to move.
ANSWER
You structure the lease to make the tenants responsible for minor repairs. And, yes, you can just give them a notice to move. They're leasing the property from you. Although they may have an equitable interest (see below), they're there as tenants. Just make sure your lease complies with all state and local regulations.

STATEMENT
My attorney told me that a lease option gives the tenant a "beneficial interest in the real estate". This significantly changes the landlord/tenant relationship so you need to understand HOW this affects you.
ANSWER
I advise you to check with an attorney who knows and understands lease options. You will probably be told that the landlord/tenant relationship does not significantly change. The lease is the lease. The option is separate. But do check with a knowledgeable attorney.

STATEMENT
My accountant told me that, based on how the agreement is written, the length of time, the rights of the tenant, etc. is how it will be handled for income tax purposes.
ANSWER
I advise you to check with an accountant who knows and understands lease options. Your goal is to have two documents: a lease and an option. I'll leave it at that.

STATEMENT
If property is renting well in your area you can rent without giving an option.
ANSWER
Generally true. However, some sellers like lease-options even when property is renting well. As you note, you have your property up for sale. You'd rather sell than rent. So a lease-option at least gives you a potential buyer. Rent without the option if you wish, but if you want to sell and you don't have any buyers lined up, then at least a lease-option gives you a chance.

STATEMENT
If you give an option and prices go up the seller does NOT get that appreciation.
ANSWER
Generally true, as noted above. However, options can be structured to share that appreciation. It's all negotiable. What IS needed in the option is a clear, unambiguous way to determine the sale price. And most parties prefer a solid number. But it can be based on other factors, everything from indexing for inflation to requiring an appraisal at the time the option is exercised.

STATEMENT
If you give an option and prices go down the lesee probably won't buy it - they will go and find
a cheaper house somewhere else.
ANSWER
Maybe. But you always have the right to renegotiate the option to offer a lower price, if you wish. Or you can extend the option period. And, worst case scenario: You've collected a non-refundable option fee. You've leased the property at above-market rent. And now, if you wish, you can repeat that process.

STATEMENT
I have found most times this benefits the buyer more so than the seller.
ANSWER
Everyone's experience is different. But there are plenty of benefits to the seller. Again, up-front option fee, slightly higher than market rents, and the possibility of having a buyer lined up.

STATEMENT
The purchase contract will discuss all elements of the purchase.
ANSWER
Not in a lease-option. A lease-option is a lease and an OPTION to buy. A lease-purchase is a lease coupled with a PURCHASE agreement. And either one is fine. But recognize that they are different. A lease-option is a unilateral agreement, whereas a lease-purchase is a bilateral agreement.

Out of space. But hope that helps.
0 votes Thank Flag Link Wed May 26, 2010
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
Contact
Don't do it. Options are bad for the optionor (the one giving the option). Remember that you would be giving an option. It does not obligate the optionee to execute the option and buy your home. It also places a cloud over your ability to sell it to someone else. Say you gave an option to purchase your home to your tenant, three months later someone contacted you and offered to purchase your home for a great price; you would be stuck unless you could convince your tenant to give up their option rights, which usually means $$$, if they agree at all. Options to purchase usually aren't too good for the buyer as well (another story). It is also like giving someone a first right of refusal to purchase, it simply makes a mess and hinders your ability to sell your property.
0 votes Thank Flag Link Wed May 26, 2010
You need to be careful about entering into a long term agreement that may bite you later. Check with you accountant and take into consideration if you are behind on payments or upside down on the loan (you may owe more than the current value of the property). If you get into a price today and prices go up tomorrow, you may be stuck with todays price in a year. The buyer usually has the option to not buy but may loose his/her option deposit. If they do purchase, then the option money goes towards the price. If you have already spent the money and need it to close escrow you could be in trouble. The buyers usually also want part of their "rent" money to go towards the purchase so the rent would need to be higher than the normal rent to cover that cost. Your agent , attorney and tax consultant will be able to help you decide what is best for you. After 26 years in Real Estate, I have found most times this benefits the buyer more so than the seller. Also, if you need to do a loan modification or short sale your hands are tied with having a tenant situation and not owner occupied. Another thing to consider is what do you do it they don't take care of the property, because you cannot just give them a notice to move.
0 votes Thank Flag Link Wed May 26, 2010
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