Selling real estate with lease options has more upside than many investors or homeowners realize. And a lot less downside. The downside is less than being a traditional landlord without other options. My team and other investors that have profited by selling with lease options are fully aware of the many benefits. Here, I share my knowledge and information with homeowners exploring their selling options.
The biggest benefit from selling with lease options is the ability to almost immediately begin bringing in an income from a property that is otherwise draining an owner financially. When you have a vacant home that you are making payments on, turning it into positive cash flow is a benefit X 3. The new income both covers what you are paying out for the mortgage plus immediately puts money in your pocket every month. You’re also going to collect a nonrefundable option fee. And still to come is all of your profit from the final sale.
Benefits When Selling Real Estate with Lease Options
Done correctly, selling on a lease option brings you much better tenants. This is where several of the benefits are at when selling real estate with lease options.
Tenant/buyers have skin in the game. This begins with the nonrefundable option fee. Tenants understand if they become delinquent with the rent or fail to comply with other terms, they will be out the option fee. Traditional tenants only risk a small security deposit.
Tenants are better financially qualified. People wanting to purchase a home are more motivated than average tenants. They don’t get into your house until they come up with the option fee. They have demonstrated the ability to manage and save money. A wise seller does a credit and background check. Tenant/buyers should meet with a mortgage broker to understand the steps needed to qualify for a mortgage before the end of the option period. Overall, these are among the most financially sound tenants you can find.
Tenant/buyers reduce your ownership costs. Few traditional landlords shift maintenance and repair costs to the tenant. However, this is common when selling real estate with lease options. Tenant/buyers can certainly be contractually responsible for yard care. And they can be responsible for other upkeep. Maybe it’s a fresh coat of paint, cleaning leafs out of the gutters in the fall, or repairing a fence that blows down in a windstorm. Typically there will be a financial limit. The tenant may only be responsible for up to $300 per month in maintenance and repairs. Or it could be the first $2,000 to replace a roof that blows away in a storm ($2,000 should cover your insurance deductible). Just as importantly, the anticipation of ownership encourages them to take better care of the property. And you won’t be getting calls on Sunday morning to deal with a plugged toilet.
You remain the owner of title. As the property owner, you do not transfer title to your property until the purchase is complete. You only transfer the title after you receive all of your money when the deal closes.
Deal Structure When Selling Real Estate with Lease Options
Selling real estate with lease options is about creative financing. You are free to customize the agreement in almost any way that you want. I do believe in win-win agreements. You want to completely protect yourself and get top dollar for your house. Also, the agreement should positively motivate the buyer to complete the deal so that he/she gets their home and you get your money.
I encourage you to use two separate contracts. One is the lease agreement. The other is the option to purchase agreement. Separate agreements protect you as the seller so that monthly rent payments aren’t interpreted as being applied towards ownership. Typically, the option fee goes towards the down payment (only when the purchase is completed) and this fee should be documented in the option contract – not the lease agreement.
Almost everything else is negotiable. Usually the purchase price is agreed to at the beginning of the option period. However, there are methods to establishing the price shortly before the sale closes. You also have a lot of flexibility when writing the maintenance/repair agreement.
There needs to be a contract clause clearly explaining what happens if conditions of the lease agreement aren’t fully met. There also needs to wording describing what happens if the purchase isn’t completed before the option period expires. In a seller’s market, you want to be able to sell to another buyer. You may also want to be able to collect another fee to extend the option period. In a buyer’s market, you may prefer language enabling you to waive an additional option fee. What works best for both you and the tenant/buyer is what should go into the agreements.
For many reasons, selling real estate with lease options is better than most sellers realize. When the tenant/buyer completes the purchase, the seller accomplishes the goal of selling the house and also earns rent from the beginning. In addition, lease option buyers are willing to pay top dollar due to their unique circumstances. The seller receives more money for the home.
There are even more benefits to selling with lease options. Without a doubt, you now understand why I fully believe that lease options are the fastest, easiest, and least expensive way of investing in real estate.
By Wendy Patton
For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.
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