Desperate times require desperate measures.........

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.

Kaye,

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.

Andy

Like most financial questions, the answer to this one will vary widely between different scenarios. Really the underlying question is should the seller sell now or lease then sell later. I have an actual case that I am currently working on that deals with this, but before I talk about that example I want to clarify a few things about, what I will call, a Lease Option Buy (LOB) transaction.

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, I’ll quickly discuss the thought process behind the seller’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.

Thanks,
Justin

Justin Reese, JRealty
2711 N. Sepulveda Blvd #229, Manhattan Beach, CA 90266
o) 310 545 5269 | c) 310 980 1660 | f) 310 545 7804
justin@jrealty.org | http://www.jrealty.org | http://www.justinreese.me

I think lease options are great for maybe a seller who doesn't HAVE to sell their home right away, or a landlord. Wouldn't it be a bonus even if the leasee didn't buy the option at the end,!!!!???? you got hundreds of dollars of extra cashflow per month than you would have and if the house does appreciate (which they usually do thak to the cycles of real estate - not counting right this moment- but an average year where things arnt quite so messy). Plus your payments are being made for you, so you keep building equity. ya, they may leave you having to sell your house at a future time, or you could just lease option it out again for someone else who may or may not buy it, and increase cashflow. A lot of people INVEST in real estate. so if you are looking to make money for nothing, then it's a good idea for sellers. if you are just wanting to get rid of a house, then obviously not, but it all depends. but they arn't disasters. Just when things go wrong, which they can in all aspects of life.

Lease options can be messy, but if they are structured properly, they can be very beneficial....to the seller. There are not many situations where this is advantageous for the buyer! I have had several clients who prefer to sell homes on lease options, even if they do not have a great success rate for closing. Here are their reasons:
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...

When you don't need the money, when you can't sell or rent it. How about almost never. With a true lease- option you have agreed on a selling price and as we know the market goes up and the market goes down. It does not seem a win-win situation.

Kaye:

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.

Hi Kaye,

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.

Karen Miller

Brian.. thank you for the answer.. we just don't do too many lease options in my market but sounds like a good idea in a slow market..

That depends. Drop the price and the home will sell. If you are unwilling to do this, lease it for a year or two to wait for the appreciation train to start chugging again.

Kaye, the simple answer is a lease option is better only when you can not sell the home outright.