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:
If you get into a price today and prices go up tomorrow, you may be stuck with todays price in a year.
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.
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.
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.
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.
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.
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.
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.
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.
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.
If property is renting well in your area you can rent without giving an option.
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.
If you give an option and prices go up the seller does NOT get that appreciation.
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.
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.
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.
I have found most times this benefits the buyer more so than the seller.
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.
The purchase contract will discuss all elements of the purchase.
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.
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.
Real Estate Consultant
RE/MAX Palos Verdes Realty
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
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.
Dilbeck Realtors, GMAC
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!
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.