Home Selling in Charlestown>Question Details

Rayna Bengsch, Real Estate Pro in Charlestown, IN

Thinking about lease to own house

Asked by Rayna Bengsch, Charlestown, IN Wed Jan 12, 2011

I am thinking of leasing to own my house out. I would like the pro's and con's on these types of transactions.

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4
Becca Potter’s answer
There are definitely pros and cons to each side. I have effectively lease optioned and sold homes on contract for my clients. It really depends on your goals and circumstances. You can call me for a consultation at no cost! #502 681 3728
0 votes Thank Flag Link Tue Apr 10, 2012
Darn, there's a lot of bad advice out there. And there have been whole books and courses written on the subject. (I personally really like them--that's just my preference.) A few very quick thoughts:

First, everything's negotiable. The length of the lease. The length of the option. The rent. The amount to be credited to the purchase price. The purchase price itself. Sure, there are some rough guidelines, but one of the beauties of a lease-option is that they can be tailored to fit the needs of both the owner and the tenant-buyer.

Very, very generally:

Pros
You open your market up to a wider number of people. Rather than just appealing to renters (as with a lease) or buyers (as with a sale), you can appeal to both.

Many tenant-buyers do take somewhat better care of the property than do straight renters. Also, if the lease and option are structured properly, you (the owner) can shift most of the burden for upkeep and maintenance to the tenant-buyer.

You can find a buyer now but--if values rise--sell for a price that reflects some of that increase in value.

Cons
It doesn't work if you need all the cash from a sale right now. The sale, if it occurs, will be at some point in the future. And there's no assurance of a sale.

It can be trickier getting rid of a tenant-buyer than a straight tenant. With a straight tenant who isn't paying, you can evict him/her. If the lease-option isn't done properly (or even if it is), the tenant-buyer can assert equitable interest in the property, perhaps requiring you to foreclose on him/her.

A lot of people think they understand lease-options, but don't. For example, the option fee generally is non-refundable (that's good for the seller), but a lot of tenant-buyers don't understand that and claim they've been ripped off when they don't get their "deposit" (it's not a deposit) back.

A lot of real estate agents aren't enthusiastic about lease-options because they'll only receive their commission if and when the sale closes. (Actually, there are some ways around that, but most agents aren't aware of them.)

A few other quick thoughts:

There are ways for both buyers and sellers to protect themselves in a volatile market. And there are ways for tenant-buyers to protect themselves (such as filing a notice of agreement to cloud the title, and to take steps to make sure that the owner continues to pay the mortgage). There are ways for the seller to protect him/herself against the "due on sale clause" in his/her mortgage. And so on.

Bottom line: Most real estate agents don't know much about lease-options. And, really, a lot of lawyers don't, either. Before working with either, try to probe to make sure that the "professional" really knows the subject.

Hope that helps.
0 votes Thank Flag Link Wed Jan 12, 2011
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
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Pros: You will get an extra amount of money each month for the option to purchase it at the agreed price in 1 or 2 years, whatever you agree on. This can be $100 or more added each month to the rent. It is set aside and you get to keep it if the renters don't buy by the agreed time.

Renters with option to buy normally take batter care of the house because they think it might be theirs.

Many renters think rent to own is a good deal so your house might rent quicker by offering it.

Cons: You need to hold the option money in an escrow savings account for the renter and use it as part of his down payment to buy.

You need a lawyer to draw up the rental documents to protect yourself.

These deals RARELY ever go to sale because a renter is a renter for a reason and they rarely can work out of the problems they have with credit or cash.

Renters can start to take poor care of the house once they realize they can't buy it as they thought and when they realize you are going to keep the option money they have paid.

You might have to force them out.
0 votes Thank Flag Link Wed Jan 12, 2011
Dear Rayna,

Everyone's situation is different, and every transaction is different; so I am sure the repsonses you will recieve will vary accordingly.

Generally speaking....
Pro:
should you find a property you like but just need a little more time to secure a downpayment, the lease to own could allow you to move into the property and then purchase it at the time specified in the contract.

Con:
It is a risk to both the buyer and the seller.

For the seller, they are taking the home off the market and should the deal fall through they have to start all over to sell it. Also for the seller should the market improve, by the date it closes, perhaps the property is worth more by then.

For the buyer, often the contract is written so that the deposit is kept by the seller should the property not close on the future agreed upon date. Depending on the amount of the deposit this could be a serious risk. Also there are alot of unknowns, just like for the seller the property could increase in value, in this market it is alsp possible for the buyer that there is a risk the property will decrease in value by the time they close and could be hard to get financing on the contract price.

I could go on and on.... but bottom line it is all about *how* the contract tis written,
I suggest you contact a locat Realtor who can guide and advise you through this process.

Best Regards,
Maureen
0 votes Thank Flag Link Wed Jan 12, 2011
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