1) There are three separate agreements associated with this transaction.
a. A residential lease agreement (CAR FORM LR)
b. An option agreement (CAR FORM AO)
c. A purchase agreement (CAR FORM RPA)
2) The lease agreement must be executed, but the option and purchase agreement may or may not be executed. The Tenant has the option to buy the property, not the obligation to buy it
With that said, Iâ€™ll quickly discuss the thought process behind the sellerâ€™s decision to pursue a LOB.
The seller has a property that is currently worth about $350,000. However, the seller has about $450,000 worth of debt on the asset. The seller is not behind on their payments. The seller thinks that, in about 2 years, the property will be worth around $450,000. The seller wanted to find a LOB Tenant.
I found out that market rents for this property were about $2,000 per month. I found a tenant and negotiated rent of $2,200 per month, for 2 years. The option period was 2 years and there were several contingencies, including a provision for on-time rent payments, cash requirements at closing, and other financial requirements. The purchase price, if executed, would be $475,000.
This outcome worked out terrific for the seller. They are current with their mortgage payments, they have extra income from higher rents, income from the option purchase, and an higher than expected sale price. If the option is not executed, the seller has only came out better because we are nearing the end of the downward pressure on housing prices and the tenant financed the seller through the difficult period.
I am currently doing this with several properties. I am getting very experienced with this scenario and happy to discuss/ answer any questions. Please see http://jrealty.org/landlord.htm and http://justinreese.me Please feel free to contact me at any time.
Justin Reese, JRealty
2711 N. Sepulveda Blvd #229, Manhattan Beach, CA 90266
o) 310 545 5269 | c) 310 980 1660 | f) 310 545 7804
firstname.lastname@example.org | http://www.jrealty.org | http://www.justinreese.me
1. They get option money which is often much greater and sometimes in addition to a security deposit. Option money is typically non-refundable.
2. They get a higher amount of monthly rent.
3. They have a guaranteed sales price on the home if it closes.
4. They have a guaranteed tenant for the next few years.
4. If it does not close, it is often in better condition because the "renters" were going to buy it, and hence, took better care of it....sometimes much better condition. I have had clients who have gotten free landscaping, garages, kitchen remodels and fences, courtesy of a "buyer" in a lease option who didn't buy...
Advantages for the seller: The option money and extra rent paid are non-refundable. The price may or may not be locked in.
Advantages to the buyer: You may be able to purchase a home tomorrow at today's depressed prices. You are also buying a home you know.
It is a transaction that can make sense to both in certain challenged markets.
I would answer "never". If the seller doesn't want to sell at the current price, lease, and then put the property back on the market. Lease options can get very messy and rarely result in a sale. I would save yourself and your seller the headaches.
Outside of a lease purchase option, there are many options when selling a home is difficult, I'd be happy to help you figure out what will work best for you and your personal situation. Reach out to me any time!
The only other lease options I've seen are when the seller cannot get the house sold in any other manner.
There are some other excellent answers below for you and your clients to consider.
I would say only if the seller is in financial straights and signs a disclaimer stating he is well aware the market may go up and he is relieving the agents of all liability. I also get the buyer to sign a disclaimer and advise the buyer the seller is doing it for financial reasons.
Jo Ann Rodda, "The Old Pro"
The only way I would consider a "lease option" is with the prospective buyer paying a HUGE deposit up front. Enough to protect my investment and identify their level of seriousness.
Financially, it may be a good idea. That is case by case. Without seeing your client's details, I cannot say yes or no. But I would like to mention that this idea may bring more legal issues to your client and youself. You have warn your client. That is why typically, I agree with Justin.