The Case for “Lease-Options” (Prospective Landlords/Sellers)

The current crisis in our real estate market has required the average Seller to be more creative and resourceful in trying to find ways to distinguish their home from the flooded real estate market. Values are down and many homes are simply underwater to the point that it becomes nearly impossible for many sell their homes without exploring creative solutions that enable them to have a bridge to a better market environment. Despite the current situation, what hasn’t changed is the desire for most people to own a home or the need for others to sell theirs. The market has made it a more challenging task to accomplish.

Tightening lending requirements have made it more difficult for prospective Buyers to get financing, an increased difficulty in properties appraising for market value due the amount of distressed (Short Sale and Foreclosure properties) on the market and increased downpayment requirements have closed the door of homeownership to many prospective Buyers in this market and left the remaining market of prospective Buyers smaller than ever. Thus more and more Sellers are seeing their beautiful homes sitting for months on end without any solid offers or prospective buyers.

With the current economic environment providing a great deal of stress in numerous areas, many are just not seeing the value of a Realtor and are listing their homes on their own (otherwise known as “For Sale By Owner”). While this seems to initially make economic sense for some, most have seen their homes sit on the market longer without a sale and end up spending even more in drawn out carrying costs (monthly mortgage payments and maintenance) than if they would have listed their home under the guidance of a professional Realtor. This leaves many potential Sellers asking the question “isn’t there any other way to sell my home”? And my answer to that is, “YES!”, “Lease Option” or “Lease-Purchase” contracts are valuables tool that we have used to help numerous Sellers see an instant improvement of monthly cash flow.

Most people are keenly aware of the advantages that home ownership provides: tax savings, potential property appreciation, financial and personal security. However, more and more people are having the door of homeownership shut because of the current economic climate and a “Lease Option” or “Lease-Purchase” contract is a tremendous vehicle to help many families re-open this door and walk through it down the path towards homeownership and for Sellers to position themselves with an exit strategy. This vehicle empowers Sellers to focus on their personal real estate goals, while retaining all of the financial benefits that home ownership provides in a manner that is potentially both financially rewarding and tax advantageous.

What is a Lease-Option, or Lease-Purchase?

A Lease-Option agreement (also called a Lease-Purchase) is a lease combined with an option to purchase a property within a specified period or at the end of their lease, usually 3 years or less, at a pre-negotiated sales price. Lease-Options allow a Tenant/Buyer to pay their lease monthly, with a portion of their lease payment (lease premium) being applied towards the purchase price when they are ready to buy the property. The prospective Tenant/Buyer pays an up-front option fee, generally 1.5% to 3% of the purchase price, which is credited to the purchase price. If the purchase option is not exercised, the buyer loses both the option fee and the lease premium.

Landlord/Seller Features and Benefits

Here are some of the features and benefits for a prospective Landlord/Seller:

• 12 months, 18 months and 24 months Terms – 12-24 month lease option terms allows many Tenants the needed time to repair their credit during the rental period. Offering a sliding scale adjustment on the purchase price between the 12 and 24 month period ensures that there is a financial incentive to purchase the property sooner.
• Flexible Terms for Available for Return on Investment: 1) Market Based Return Option – Lease Option “exercise price” based on market value at time of option exercise; or 2) Fixed Rate Option - 3% Premium Above Current Market Value, per annum (compounded) – Market value of home and location key determinant for fixed rate option.
• Above Market Rents – Lease Option Rents are set at a 15-20% premium above current market rents.
• Option Incentive Through Monthly Rent Credit - Each month that the monthly lease is paid on time, a fixed dollar amount (typically $200.00-$300.00/mo) of the Tenant’s monthly lease payment should be matched dollar for dollar by the Owner. This accrued credit can either be deducted from their Option Price or applied towards the down payment on the property, if they exercise their option to purchase. All funds are forfeited if option to purchase is not exercised.
• 1.5-3% Option Consideration (down payment) – the Tenant pays this at the commencement of the Lease, and it is non-refundable under all circumstances but applies toward the Option Price if exercised**
• Typically 3% in total Real Estate Commissions Paid – The standard 3% agent commission* pays our team to list your home and find a prospective Buyer. 1.5% of the commission is paid up front, at the commencement of the lease, and the remaining 1.5% is paid on the back-end when the transaction closes. In the event that another real estate agent sees one of our ads, and shows your home to their client, you would be responsible to pay a 2-3% commission to the prospective Tenant’s Real Estate Agent with 25% of the first month’s lease payment being paid up front, at the commencement of the lease, and the remaining commissions paid when the transaction closes.
• $500 Listing Fee charged upon listing of your property - The listing fee pays for online marketing and advertisements, personalized website, signage, listing flyers, professionally retouched photos and a virtual tour. The average time on the market for most properties is 30 days - 45 days, however, depending on the time of year and whether or not your property is listed within our recommended price range, it can take longer. We pay for all marketing for as long as it takes to find a buyer for your home.