What is a lease options? Should I or not? Benefits, obstacles, estrategy, a win-win outcome.

1. Lease Options…
Should I or Shouldn’t I?
WHAT IS A LEASE-OPTION?
A lease with option to purchase is a real estate sales and finance method. It is a
lease for a fixed term, such as 12 or 24 months, often longer, with an option for the
tenant to buy the home (or other real estate) at an agreed option price.
The lease-option owner-seller is obligated to sell at the option price, but the tenant-
buyer is not obligated to buy. However, when a lease-purchase is used, the buyer is
obligated to purchase at the end of the rental period.
A unique lease-option and lease-purchase feature is the rent credit. A portion is
credited toward the purchase price if the buyer decides to exercise the purchase
option.
For example, on my lease-options the house rents for $1,500 per month with a 33
percent, $500 monthly rent credit when the option is exercised. If the tenant elects
not to purchase, the rent credit is lost. Needless to say, the rent credit loss is a
very strong incentive for the tenant to buy.
The primary benefit for the seller is obtaining a responsible tenant with a vested
interest in taking good care of the property and who is likely to buy it. The
nonrefundable option money received by the seller is usually far more than a
renter's security deposit.
THE BIGGEST LEASE- OPTION OBSTACLE.
Real estate agents rarely handle lease-options. The reason is they receive only a
small leasing commission up-front (from part of the option money) and the balance
of the commission when the tenant exercises the purchase option.
Since most realty agents don't want to wait a year or two for their
sales commissions, they often try to discourage lease-options. I bought my
home on a lease-option and the Realtor, the top-producing agent in our
town, said she viewed lease-options like money in the bank because most
properly structured options are exercised by the buyers.
THERE ARE ALWAYS MORE LEASE-OPTION BUYERS THAN SELLERS.
Few lease-options are advertised. Most realty agents don't encourage lease-options
because only part of the commission is paid up-front, with the balance paid when

2. the option is exercised. The result is a lease-option shortage, with more buyers
than sellers. However, smart realty agents realize a lease-option is better than no
sale at all.
HOME SELLER LEASE-OPTION ADVANTAGES.
The primary lease-option advantages for home sellers include:
(1) STRONG BUYER DEMAND. Whether a local home sale market is weak or
strong, there are always more lease-option buyers than sellers. A lease-option
usually solves a home seller's problem of getting enough monthly income to pay
the mortgage payment and other expenses. Also, the seller receives the tenant-
buyer's nonrefundable option money, typically several thousand dollars.
(2) TOP DOLLAR OPTION PRICE. Lease-option homebuyers are usually willing to
agree to a top dollar option price for the residence. This option price is usually the
home's market value at the time of entering into the lease-option.
If the market value goes up during the lease-option term, the buyer benefits. If
market value drops, the tenant often exercises the option because of the rent credit
feature.
(3) EXCELLENT TENANTS. Lease-option tenants usually take excellent care of the
home because they plan someday to own it.
(4) ABOVE-MARKET RENT. As a lease-option landlord, I find my tenants will pay
10 to 20 percent higher than market rent. For example, last year two of my tenants
exercised their purchase option. They told me they considered the monthly rent to
be a bargain $1,000 plus $500 in a rent credit quot;down payment forced savings
account.quot; I viewed it as $1,500 monthly rental income!
(5) SELLER ENJOYS THE TAX DEDUCTIONS. During the lease-option term, the
seller enjoys tax deductions for the mortgage interest, property taxes, and
depreciation. If a tenant complains about the lack of tax benefits, a reminder of the
rent credit benefits usually more than compensates.
SUMMARY.
Lease-options offer benefits and solve problems for both homebuyers and sellers.
Lease-options can also be used with other types of properties. There are not many
software applications that can assist you with structuring lease options, however
PAES Plus © (Property Acquisition Evaluation Software) and LOME © (Lease
Options Made Easy) @ www.paesplus.com will help you structure any 1-4 unit real
estate transaction including Lease Options.
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