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Kaye Thomas, Real Estate Pro in Manhattan Beach, CA

Should Sellers offer a lease option on a home?

Asked by Kaye Thomas, Manhattan Beach, CA Thu May 17, 2007

When is a lease option a better idea then putting your your home up for sale in the usual manner

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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.
Web Reference: http://brian-brady.com
2 votes Thank Flag Link Fri May 18, 2007
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
4 votes Thank Flag Link Thu May 21, 2009
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...
3 votes Thank Flag Link Sun Nov 11, 2007
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.
1 vote Thank Flag Link Sun Nov 11, 2007
Roberta Murp…, Real Estate Pro in Carlsbad, CA
MVP'08
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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
1 vote Thank Flag Link Sun Nov 11, 2007
Kaye, the simple answer is a lease option is better only when you can not sell the home outright.
Web Reference: http://www.flippingpad.com
1 vote Thank Flag Link Thu May 17, 2007
Deciding to offer a lease option on a home instead of selling is a complicated decision that can have a lot of different financial implications for all parties involved. The answer is also different depending on the terms of the agreement for each party.

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!
0 votes Thank Flag Link Fri Jan 23, 2015
When the sellers really don't want to sell. Personally with over 25 years of experience behind me I can say with some authority I've never once seen a lease option be anything more than a lease. In most instances I find these are extremely savvy sellers preying on much less savvy buyers and they never intend for the buyer to successfully meet the terms fo the contract and plan on taking the house back after getting the buyer to pay them well above average rental rates. If by chance the buyer does manage to somehow meet all the terms of the contract the Seller is OK with it as they got well over market price for their home.

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.
0 votes Thank Flag Link Wed May 28, 2014
In my opinion, the lease option is a lawsuit waiting to happen. If the price goes up, the seller does not want to sell. If the price goes down, the buyer does not want to buy and probably can't quality for a loan; the buyer will also lose his deposit.

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"
0 votes Thank Flag Link Wed May 28, 2014
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.
0 votes Thank Flag Link Fri May 22, 2009
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
0 votes Thank Flag Link Fri May 22, 2009
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.
0 votes Thank Flag Link Sun Jun 15, 2008
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.
0 votes Thank Flag Link Sun Nov 11, 2007
Pam Winterba…, Real Estate Pro in Danville, VA
MVP'08
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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..
0 votes Thank Flag Link Wed May 23, 2007
Kaye Thomas, Real Estate Pro in Manhattan Beach, CA
MVP'08
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