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Lease Options Should I?


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What is a lease options? Should I or not? Benefits, obstacles, estrategy, a win-win outcome.

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Lease Options Should I?

  1. 1. Lease Options… Should I or Shouldn’t I? WHAT IS A LEASE-OPTION? A lease with option to purchase is a real estate sales and finance method. It is a lease for a fixed term, such as 12 or 24 months, often longer, with an option for the tenant to buy the home (or other real estate) at an agreed option price. The lease-option owner-seller is obligated to sell at the option price, but the tenant- buyer is not obligated to buy. However, when a lease-purchase is used, the buyer is obligated to purchase at the end of the rental period. A unique lease-option and lease-purchase feature is the rent credit. A portion is credited toward the purchase price if the buyer decides to exercise the purchase option. For example, on my lease-options the house rents for $1,500 per month with a 33 percent, $500 monthly rent credit when the option is exercised. If the tenant elects not to purchase, the rent credit is lost. Needless to say, the rent credit loss is a very strong incentive for the tenant to buy. The primary benefit for the seller is obtaining a responsible tenant with a vested interest in taking good care of the property and who is likely to buy it. The nonrefundable option money received by the seller is usually far more than a renter's security deposit. THE BIGGEST LEASE- OPTION OBSTACLE. Real estate agents rarely handle lease-options. The reason is they receive only a small leasing commission up-front (from part of the option money) and the balance of the commission when the tenant exercises the purchase option. Since most realty agents don't want to wait a year or two for their sales commissions, they often try to discourage lease-options. I bought my home on a lease-option and the Realtor, the top-producing agent in our town, said she viewed lease-options like money in the bank because most properly structured options are exercised by the buyers. THERE ARE ALWAYS MORE LEASE-OPTION BUYERS THAN SELLERS. Few lease-options are advertised. Most realty agents don't encourage lease-options because only part of the commission is paid up-front, with the balance paid when
  2. 2. the option is exercised. The result is a lease-option shortage, with more buyers than sellers. However, smart realty agents realize a lease-option is better than no sale at all. HOME SELLER LEASE-OPTION ADVANTAGES. The primary lease-option advantages for home sellers include: (1) STRONG BUYER DEMAND. Whether a local home sale market is weak or strong, there are always more lease-option buyers than sellers. A lease-option usually solves a home seller's problem of getting enough monthly income to pay the mortgage payment and other expenses. Also, the seller receives the tenant- buyer's nonrefundable option money, typically several thousand dollars. (2) TOP DOLLAR OPTION PRICE. Lease-option homebuyers are usually willing to agree to a top dollar option price for the residence. This option price is usually the home's market value at the time of entering into the lease-option. If the market value goes up during the lease-option term, the buyer benefits. If market value drops, the tenant often exercises the option because of the rent credit feature. (3) EXCELLENT TENANTS. Lease-option tenants usually take excellent care of the home because they plan someday to own it. (4) ABOVE-MARKET RENT. As a lease-option landlord, I find my tenants will pay 10 to 20 percent higher than market rent. For example, last year two of my tenants exercised their purchase option. They told me they considered the monthly rent to be a bargain $1,000 plus $500 in a rent credit quot;down payment forced savings account.quot; I viewed it as $1,500 monthly rental income! (5) SELLER ENJOYS THE TAX DEDUCTIONS. During the lease-option term, the seller enjoys tax deductions for the mortgage interest, property taxes, and depreciation. If a tenant complains about the lack of tax benefits, a reminder of the rent credit benefits usually more than compensates. SUMMARY. Lease-options offer benefits and solve problems for both homebuyers and sellers. Lease-options can also be used with other types of properties. There are not many software applications that can assist you with structuring lease options, however PAES Plus © (Property Acquisition Evaluation Software) and LOME © (Lease Options Made Easy) @ will help you structure any 1-4 unit real estate transaction including Lease Options. “SET The PAES on Your REI Now!”