Using Lease-Options Can Be Good Strategy to Buy or Sell Home

Are you having difficulty selling your home? Or are you having problems buying a home because you are short of down payment cash, you are new in town and aren’t sure in which neighborhood you want to buy a home or you haven’t sold your old home yet?

A lease with option to buy may be the solution.

A residence lease with option to buy is a combination of a lease, usually for 12 months or longer, coupled with an option for the tenant to purchase the property at an agreed price. The agreement often includes a rent credit toward the down payment for all or part of the rent paid.

For example, the most recent property I leased to a resident with an option to buy is a $285,000-house that rents for $1,500 per month. Each month the rent is paid on time, the resident receives a $500 rent credit toward his down payment.

At the end of 12 months, the resident will have built up a $6,000 rent credit toward the down payment.

In addition, the $1,500 non-refundable consideration the tenant paid for the option also will be credited toward the down payment for total “forced savings” of $7,500 in one year.

Is this a good deal for the tenant? Obviously. The resident gets to try out the house before buying, has time to arrange the rest of the down payment and the financing, and has a strong incentive to eventually own the house.

But is it a bad deal for the property owner? No. A lease-option also is profitable for the owner. Some of the benefits for the owner include income tax deductions during the lease-option, a top-quality tenants who will treat the home as if they already own it and monthly rental income.

Since few property owners know about lease-option benefits, it is up to the prospective lease-option tenant to create the lease-option. The best candidates are vacant houses that have been on the market for sale or for rent several months with a motivated owner who needs immediate income with which to pay the mortgage and other expenses.

Other indicators of good potential lease-option properties are difficult-to-sell condos or houses, fixer-upper properties and houses offered for-sale-by-owner.

Of course, use all the standard bargain-finding techniques such as working with a creative real estate agent, daily reading of the newspaper classified ads under both houses for rent and houses for sale and keeping your eyes open for vacant houses whose owners might benefit from a lease-option.

In many towns the market for home sales is stagnant. Yet there are thousands of anxious sellers who want to move, perhaps to a new out-of-town job, to a larger home or for other reasons. A lease-option can solve many problems.

For example, when I found a house I wanted to buy for my residence (which had been on the market for many months), I first needed to sell my old residence to raise the cash for my down payment.

At first, my real estate agent wanted nothing to do with a lease-option. This is a typical agent’s reaction to lease-options because they want their sales commission immediately. But then I explained that she would get the listing on my old home, and it was like money in the bank to be entitled to the commission when I exercise my purchase option.

My agent then worked extremely hard to persuade the sellers to accept my lease-option offer. Three days later, I moved in, and within a few months my old residence was sold and I exercised my purchase option to buy my current home.

If your condo or house has been on the market for several months but has not sold, next week run a newspaper classified ad under both “Homes for Rent” and “Homes for Sale” with a headline such as “$5,000 Moves You In. Lease With Option to Buy. $1,500 per Month Rent With a $500 Rent Credit Toward Down Payment. (Property description) Open Sunday 1-3 p.m. (Phone).”

But I must warn you. Be prepared for your phone to ring almost constantly with calls from eager home buyers. Of course, you can change the move-in money, rent and rent credit to fit the situation. But don’t get greedy by setting the option money or rent too high.

The written lease with option to buy spells out the details. I use the excellent lease-option form from Professional Publishing Corp. (122 Paul Drive, San Rafael, Calif. 94903; phone (415) 472-1964 for orders).

But I add special clauses, such as the rent check must be mailed by the first day of the month to get the rent credit; the option is assignable and can be sold without the property owner’s permission; the tenant may cancel the lease at any time, but thereby forfeiting the purchase option and any rent credit (this clause is very reassuring to tenants); when the option is exercised, the property is sold in its then “as is” condition (until then the owner should pay for normal maintenance), and the lease portion cannot be assigned without the owner’s permission, which will not be unreasonably withheld.