On a recent airline flight to Chicago, I sat next to afascinating gentleman who told me he was 74. He was returning from acompetitive swimming event. Needless to say, he looked like he was in greatphysical condition.
More interesting to me was that he develops real estate,mostly condominium complexes. Then he told me condo sales (along with mosthousing sales) have recently slowed down.
Purchase Bob Bruss reports online.
Knowing his condo sales frustration, I asked if he ever usedlease-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 hisunsold condos producing income.
As the housing market slows down in most cities to what we afew years ago called “normal,” lease-option use is expected to becomemore widespread. Personally, I’ve been using lease-options more than 25 yearsto buy and sell houses. I even “bought” my current residence on alease-option.
Properly structured, I’ve never encountered a situationwhere a lease-option won’t work to sell a house or condo. They are also usedfor commercial properties.
There are always more lease-option buyers than there aresellers. As the national home sales market slows down, it will pay tounderstand lease-option pros and cons for use in the right situations.
WHAT IS A LEASE-OPTION? A real estate lease of ahouse, condominium or commercial property, which gives the tenant the option tobuy the property, offers both the tenant and landlord many advantages. Muchlike a new car lease, the renter has the choice of buying the property or notby 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 tobuy.
Lease-options work especially well when the local market haseither an oversupply of house and condo rentals and/or an oversupply of housesand condos listed for sale.
THE RENT-CREDIT KEY TO LEASE-OPTION SUCCESS. For boththe tenant and the property owner, the amount of the monthly rent credit towardthe tenant-buyer’s down payment is the key to a successful lease-option.
The rent credit means part of the tenant’s rent applies tothe down payment if the lease-option tenant elects to buy. Thanks to the rentcredit, the landlord can usually charge higher-than-normal market rent.
For example, suppose a house rents for $1,500 per month witha $500 per month rent credit. At the end of 12 months, the tenant will havebuilt a $6,000 rent credit toward the purchase price.
Although the tenant doesn’t get any tax deductions duringthe rental period, the rent credit is even better for the tenant than theownership tax benefits.
Over the years, as a landlord I’ve given between 33 percentand 100 percent rent credits. The house on which I gave the 100 percent rentcredit 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 itup at his expense during his one-year lease-option term. The happy results werehe bought a house for essentially nothing down and I made a handsome profit ona fixer-upper home sale.
But I must hasten to add that when a landlord offers a verylow rent credit, such as only 5 percent or 10 percent of the tenant’s rentpaid, that’s usually not enough incentive for the renter to exercise thepurchase option.
However, 20 percent to 33 percent rent credit is usually anadequate incentive. Personally, when I “bought” my current home on alease-option, I asked for and received a 100 percent rent credit.
HOW TENANTS LOOK AT LEASE-OPTIONS. Severalyears ago, my lease-option tenant exercised her option to buy the house, whichshe and her family had been renting from me for five years. At the closingtable, after all the papers were signed, she thanked me for letting her buy thehouse and for making such a fair deal.
Then she explained how she viewed the $1,500 per month rentshe 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 creditwas 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 homepurchase closing costs, (2) the rent credit outweighs lack of mortgage interestand property tax deductions, (3) the buyer can try out the house or condobefore 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. Whetheryou are a home seller, builder or real estate agent, a lease-option sale isusually better than no sale. Lease-options work in all price ranges.
The most effective newspaper classified ad headline formatI’ve used says “$10,000 MOVES YOU IN.” Of course, change the amountup 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 usuallyprovide fast results. Be prepared with at least 100 information-sheet flyerswith an attached rental application form. To anticipate prospect questions,spell out the lease-option terms and benefits, including the option price andthe rent credit.
Serious prospects should be expected to attach a $500 or$1,000 deposit check to their rental applications. Owners then can run creditchecks 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 purchaseoption.
Lease-option advantages for owners include (1) income taxbenefits, including depreciation deductions, until the option is exercised, (2)up-front move-in cash from the tenant, which is the first month’s rent andnon-refundable option money, (3) monthly rent cash flow instead of having avacant 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 propertyvery well because they expect to someday own it.
SUMMARY: Properly structured lease-options offer significantbenefits for home sellers, buyers and realty agents. More details are in myspecial report, “How to Profitably Use a Lease-Option to Buy or Sell YourHome or Investment Property,” available for $5 from Robert Bruss, 251 ParkRoad, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instantInternet delivery at www.BobBruss.com.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News