Why You Should Use Lease Options in 2024

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Why Explore Lease Options? 

 

Selling real estate with Lease Options has more upside than many investors or homeowners realize. And a lot less downside. The downside is better than being “just” a landlord… Here, I share my knowledge and information with homeowners exploring their selling options. Read more on different creative financing strategies to add to your toolkit here. 

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. The new income can cover the mortgage payment and hopefully more to give you cash flow.  You will also collect a nonrefundable option fee from the tenant buyer in the beginning of the transaction (usually 3-5% of the sales price). And last, but not least, you will receive the difference between what you owe the seller and what the tenant buyer is paying you for the home (should be a good amount more). (Read more about getting started with Lease Options HERE.) 

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. 

Tenantbuyers have skin in the game. This begins with the nonrefundable option fee. Tenant– Buyers 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 qualified financially. 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. You will want to do a credit and background check. Tenantbuyers 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 leaves 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 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.  Normally you can build the repairs into the option agreement – not the rental agreement.  If a tenant (or tenant-buyer) needs a repair done you have to do it, however, there are ways to word the details in the option agreement to add those to the final purchase price, etc. (Read more on how to screen potential tenant-buyers HERE.) 

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. Read more on different creative financing strategies to add to your toolkit here. 

**I encourage you to use three separate contracts. One is the lease/rental agreement, option agreement and sales contract/purchase agreement. Separate agreements protect you as the seller in case any repairs are outlined in the option agreement discussed above.  If you have to evict the tenant you can evict based on the rental agreement/lease.* 

Typically, the option fee goes towards the down payment (only when the purchase is completed and a lender knows how to apply it) and this fee should be documented in the option contract – not the lease agreement. If for any reason a lender will not allow the option fee to be applied as the down payment then you should reduce the purchase price by the same amount. That is the fair and ethical way to do it. (All downloadable forms, contracts and instructions are included in my full courses.) 

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 (but in the option agreement not the lease/rental 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. Hopefully, you now understand why Lease Options are one of the safest and lowest entry point ways to invest in real estate.  

There will be details to work out. As soon as you have the conversation started, you’re going to want to have all of the tools that you’ll need in your toolbox: 

 

 

As always, I love to hear back from you on any questions or success stories that you have. Connect with me here: WendyPatton.com/Connect 

 

To Your Success, 

Wendy Patton 

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Why You Should Use Lease Options in 2024

Why Explore Lease Options?    Selling real estate with Lease Options has more upside than many investors or homeowners realize. And a lot less downside.

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