The benefits of a lease option for buyer and seller
• Faster equity accumulation
• Top sales price
• Higher-than-normal rent
• Portion of rent monies going toward purchase
• Minimum cash out of pocket
• Non-refundable option deposit
• Time to repair credit, if applicable
• Peace of mind
• Highest quality tenants
• Residual income
• No maintenance
• Tax shelter is held still because the seller remains on the deed until the option has been fully exercised
• No vacancies
• Usually no down payment owed at the end of the term because part of each month rent is going to the down payment
• Quick move-in time
• Control of your home
Source: Kari McCoy
Dear Kari,
My husband just took a job offer and we are moving from Texas to California.
The prices are so much higher here and someone on the airplane mentioned something called a “lease option.” What does this mean?
Answer:
First, I would like to share with property owners who have their house for sale or are thinking of selling that a lease option will not work for the sellers who need cash immediately.
Lease options were very popular in the late 1970s and early 1980s and were typically used to avoid mortgages. There are several reasons a property seller might want to use the lease option contract, such as tax purposes, or if the seller could not obtain the price in the current market and did not need the cash from a sale.
There are various types of contracts and titles of specific methods, such as lease option, rent to own, lease purchase and so on, but we’re going to just focus on the basics.
A basic lease option is that a buyer pays the seller a sum of money called “option money” for the right to lease purchase the property. The option money may be substantial or a little as $1. Of course, this is negotiable. Buyer and seller may want to lock in the future purchase price upon execution of the option to purchase. The term of the option agreements are usually from one to three years. The option money is usually nonrefundable.
During the option period, no one else can buy the property. The buyer is not obligated to buy the property at the end of the option term, but the seller is obligated to sell at the agreed-upon terms if the buyer opts to follow through with the purchase. During the time of the lease option, the buyer will be paying a monthly agreed upon rent and some of the rent money may or may not apply to the lease option’s initial amount. Or some of the rent money may go into a different account to be applied to the purchase price of the property. If the option is not exercised, then those monies usually are returned to the buyer (also negotiable).
Please note that usually the agreed-upon purchase price is generally a bit higher than the current market value, which is an advantage to the seller. The buyer cannot offer the lease option to anyone else without the sellers’ approval. The buyers are often given the responsibility for maintaining the property and paying for all the expenses related with the upkeep and other expenses also. One may negotiate that the buyer keeps all the receipts and if the lease option is not exercised then perhaps you negotiate up front that the buyer would be reimbursed.
An independent appraisal on the property would benefit buyer and seller. You should talk with a Realtor and hire a real estate lawyer to draw up the documents and help explain everyone’s rights and consequences as well as the necessary disclosures required by law.
Also ask what might be encumbered by a loan on the property that contains alienation clauses that would give the lender the right to accelerate the loans. It would be wise to have the option to deposit any excess rent money held in an escrow account with a title company. The possibilities are endless.
Kari McCoy has been a Realtor for 25 years and owns the Kari McCoy Group, Residential Real Estate, at Coldwell Banker. She can be reached at (916) 941-9540 or at sold@karimccoygroup.com.
