On a recent airline flight to Chicago, I sat next to a fascinating gentleman who told me he was 74. He was returning from a competitive swimming event. Needless to say, he looked like he was in great physical condition.
More interesting to me was that he develops real estate, mostly condominium complexes. Then he told me condo sales (along with most housing sales) have recently slowed down.
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Knowing his condo sales frustration, I asked if he ever used lease-options to sell his condos. To my surprise, he hasn’t used lease-options. So I mailed him some information that I hope he finds profitable to get his unsold condos producing income.
As the housing market slows down in most cities to what we a few years ago called “normal,” lease-option use is expected to become more widespread. Personally, I’ve been using lease-options more than 25 years to buy and sell houses. I even “bought” my current residence on a lease-option.
Properly structured, I’ve never encountered a situation where a lease-option won’t work to sell a house or condo. They are also used for commercial properties.
There are always more lease-option buyers than there are sellers. As the national home sales market slows down, it will pay to understand lease-option pros and cons for use in the right situations.
WHAT IS A LEASE-OPTION? A real estate lease of a house, condominium or commercial property, which gives the tenant the option to buy the property, offers both the tenant and landlord many advantages. Much like a new car lease, the renter has the choice of buying the property or not by the end of the lease term.
However, a lease-option is not the same as a lease-purchase. With a lease-purchase, the contract requires the tenant to buy the property, usually within a year or two. But a lease-option doesn’t force the tenant to buy.
Lease-options work especially well when the local market has either an oversupply of house and condo rentals and/or an oversupply of houses and condos listed for sale.
THE RENT-CREDIT KEY TO LEASE-OPTION SUCCESS. For both the tenant and the property owner, the amount of the monthly rent credit toward the tenant-buyer’s down payment is the key to a successful lease-option.
The rent credit means part of the tenant’s rent applies to the down payment if the lease-option tenant elects to buy. Thanks to the rent credit, the landlord can usually charge higher-than-normal market rent.
For example, suppose a house rents for $1,500 per month with a $500 per month rent credit. At the end of 12 months, the tenant will have built a $6,000 rent credit toward the purchase price.
Although the tenant doesn’t get any tax deductions during the rental period, the rent credit is even better for the tenant than the ownership tax benefits.
Over the years, as a landlord I’ve given between 33 percent and 100 percent rent credits. The house on which I gave the 100 percent rent credit was in bad shape and I didn’t have the funds at the time to fix it up.
However, I had no problem finding a tenant who could fix it up at his expense during his one-year lease-option term. The happy results were he bought a house for essentially nothing down and I made a handsome profit on a fixer-upper home sale.
But I must hasten to add that when a landlord offers a very low rent credit, such as only 5 percent or 10 percent of the tenant’s rent paid, that’s usually not enough incentive for the renter to exercise the purchase option.
However, 20 percent to 33 percent rent credit is usually an adequate incentive. Personally, when I “bought” my current home on a lease-option, I asked for and received a 100 percent rent credit.
HOW TENANTS LOOK AT LEASE-OPTIONS. Several years ago, my lease-option tenant exercised her option to buy the house, which she and her family had been renting from me for five years. At the closing table, after all the papers were signed, she thanked me for letting her buy the house and for making such a fair deal.
Then she explained how she viewed the $1,500 per month rent she had been paying. She knew that was higher than market rent at the time, which she estimated at $1,000. Then she revealed the $500 per month rent credit was like a “forced savings account” toward the purchase price.
Lease-option advantages, in addition to the rent credit, include (1) up-front “option money” is smaller than typical home purchase closing costs, (2) the rent credit outweighs lack of mortgage interest and property tax deductions, (3) the buyer can try out the house or condo before buying, (4) the option purchase price is locked-in for the lease term, and (5) the buyer can move in within a few days after signing the lease-option.
HOW TO SELL HOUSES AND CONDOS WITH LEASE-OPTIONS. Whether you are a home seller, builder or real estate agent, a lease-option sale is usually better than no sale. Lease-options work in all price ranges.
The most effective newspaper classified ad headline format I’ve used says “$10,000 MOVES YOU IN.” Of course, change the amount up or down for your situation. Then describe the house or condo benefits, monthly rent and the vital words “Rent to own” or “Lease-Option.”
Advertised open houses on Saturday and Sunday usually provide fast results. Be prepared with at least 100 information-sheet flyers with an attached rental application form. To anticipate prospect questions, spell out the lease-option terms and benefits, including the option price and the rent credit.
Serious prospects should be expected to attach a $500 or $1,000 deposit check to their rental applications. Owners then can run credit checks on all lease-option applicants before selecting the best qualified.
If the property is listed for sale with a real estate agent, the agent should receive a leasing commission when the lease-option is signed, and the balance of a sales commission when the tenant exercises their purchase option.
Lease-option advantages for owners include (1) income tax benefits, including depreciation deductions, until the option is exercised, (2) up-front move-in cash from the tenant, which is the first month’s rent and non-refundable option money, (3) monthly rent cash flow instead of having a vacant house or condo, (4) there are usually more lease-option buyers than sellers, (5) above-market rent, and (6) lease-option tenants usually treat the property very well because they expect to someday own it.
SUMMARY: Properly structured lease-options offer significant benefits for home sellers, buyers and realty agents. More details are in my special report, “How to Profitably Use a Lease-Option to Buy or Sell Your Home or Investment Property,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.
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