What is the incentive for the seller to agree to a lease option if the buyer does not have anything to lose and is not obligated to buy?

Asked by Jamie, 60532 Mon Nov 9, 2009

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Yvonne Rusin, Agent, Wheaton, IL
Mon Nov 9, 2009
The buyer usually puts up option money in a rent to own lease-purchase. If the buyer does not exercise the option to purchase the property by the option date, then the seller keeps option money. The bigger the option amount, the more "skin" the buyer has in the deal and the more likely the buyer will get prepared to exercise the option. Usually the buyer has to clean up credit or pay off a car loan or such in order to be ready to exercise the option to purchase. Be sure to use a real estate attorney if you put together a lease option deal. I would recommend Lora Fausett of Fausett Law 630.221.0090. She crosses her t's and dots her i's very carefully.
Web Reference:  http://www.yvonnerusin.com
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Inaas Arabi, Agent, Naperville, IL
Mon Nov 9, 2009
Hey Jamie,

I am glad you asked this question. the benefits are as follows:

1- better tenants: usually people who are looking to buy a home after renting it for a while will treat it much better than strictly lease.
2- as stated in another answer, usually the buyer/tenant will put up some option money if they go through with the buy they get credited the deal if not then they lose it.. in this market your option money will be somewhere between 3500 to 10K. you can ask for 20% down however if a tenant will need that much money they will go on and buy instead of lease with option. if that is what they are going to do they may buy another home and not yours.
3- you can lock in a higher price on your home than what you can sell it for.. sometimes if you are in a great area with lots of appreciating then you can ask to share that appreciating with the tenants.

I would highly suggest that you work with an agent that has done these deals. last 2 years these kind of deals have become quite popular in our area due to the current market condition. I put together about 15 of them and I proud to say that so far 8 of them closed and we ware waiting on the rest..

Let me know if you have any questions or concerns, thanks.

Best Regards,
Inaas Arabi
Re/Max of Naperville
Phone: 630-329-5000
E-mail: Inaas@hotmail.com
Web: http://www.MyTop10Homes.com
Web Reference:  http://www.MyTop10Homes.com
1 vote
Don Tepper, Agent, Burke, VA
Mon Nov 9, 2009
Whole bunch of incentives.

As is noted below, usually there's an upfront option fee. It's almost never 20%. It's often closer to 3%-5%. Still, that can be a chunk of money. On a $400,000 home, you could be talking about $10,000-$15,000. It certainly could be less (or more). But even if it's only 1%, that's still $4,000.

Second, usually on a lease-option the amount the tenant-buyer is paying is slightly above market rent, with the money (or more) being credited to the purchase price. Let's say market rent is $1,500. On a lease option, the tenant-buyer typically would pay a bit more (say $1,700) with maybe $400 being credited to the purchase price. If the buyer doesn't buy, then he/she has paid an extra $200 a month. On a 2-year lease-option, that'd be $4,800. Even if the TB does buy, it's an additional $200 a month. That's a nice incentive for the seller.

Third, if the seller is having a difficult time selling the property, at least he's found someone who is interested in buying. No guarantee of a purchase, but at least there's some possibility. And in the meantime, he's got monthly cash flow.

Fourth, a properly structured lease-option makes the tenant-buyer responsible for most of the repairs and upkeep. That can reduce the maintenance headaches for the seller.

Fifth (and check with an accountant on this one), option fees aren't taxable until the option is exercised or it expires. So let's suppose someone moves in, puts up a $6,000 option fee and lease-options with $200 a month representing the option fee. And let's suppose the tenant-buyer stays there the full two years. At the end of the two years (not this year, not next year) the taxes would be due on the $6,000 plus the $4,800. Let's take a worst-case scenario: Person lease-options the property December 1 and then defaults and moves out February 1. Taxes on the $6,000 option fee wouldn't be due for the 2009 taxes; they'd be due when the TB defaulted and the option ended in 2010.

There are a whole bunch of other reasons a seller would agree to a lease option. Properly structured, they can be win-wins for both parties.

Hope that helps.
1 vote
Kelly Sourwi…, Agent, Downers Grove, IL
Sat Feb 21, 2015
I agree with most of the answers.
Rent with option to buy is great for a seller in many ways:

You usually have a renter whom treats the home as if it is their own because hopefully it will soon be their own home.

You usually get list price for the home with very little negotiating of the price.

You get a large payment upfront.

I hope this helps.
0 votes
Brandon Schu…, Agent, Western Springs, IL
Mon Nov 9, 2009
In this market Steve? Good Luck!
0 votes
Brandon Schu…, Agent, Western Springs, IL
Mon Nov 9, 2009
If the seller doesn't need the cash, then a good rent with a good tenant can give the owner a better rate of return, compared to if the money was in the bank.
0 votes
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