Are there any unsold houses and condominiums in your town? I’ll bet there are a one or two! Even in the few cities where the home sales market is relatively robust there are unsold homes. Good times or bad, there is always a substantial inventory of homes for sale. The best way to tell how your local home sales market is doing is to get the total number of houses and condos listed for sale in the local MLS (multiple listing service) and divide that number by the number of home sales in the last 30 days. The result will tell if you have a local “buyer’s market” or “seller’s market.” If you are not a real estate agent, just ask your favorite MLS member realty agent for this information – he or she should be glad to share it because it is easily available just by pressing a few buttons on the agent’s computer. EXAMPLE: Suppose the result is 68 days average days on the market in your town (be sure to get the sales statistics for your town, not for an entire region which might be served by a large regional MLS). Anything below 60 days average on the market is considered to be a home seller’s market – meaning there are fewer homes for sale than there are qualified home buyers. However, when the number of days on the market exceeds 90 days, that is definitely a buyer’s market with more homes listed for sale than there are qualified buyers. Most towns are currently in a buyer’s market, or a “neutral market” with a relatively balanced number of home buyers and sellers. WHAT IS A LEASE-OPTION? Although many realty agents are complaining about the “slow market” in most towns for home sales, with the sales volume being down substantially from 2006 and 2005, few agents are adapting to the reality of market conditions. But the smartest agents realize, if they are to survive and thrive, the marketing methods which sold homes a year or two ago won’t work as well today. To further complicate matters, mortgage lenders have recently changed their lending requirements, making 90%, 95% and 100% mortgages very difficult or impossible to obtain even for well-qualified borrowers.
Lease-options, also known as “rent to own” in some areas, are a combination real estate rental, sales, and finance technique. It is primarily a lease with monthly rent paid by the tenant to the property owner. Secondarily, a lease-option is a purchase opportunity for the tenant to buy the property from the landlord at an agreed price and terms. A lease-option obligates the landlord to sell, but the tenant does not have to exercise the purchase option to buy. It is a unilateral contract of a promise by the owner to sell to the tenant on stated terms. When the tenant gives notice to the landlord of intent to exercise the option to purchase, then the lease-option becomes a bilateral contract – the landlord’s promise to sell for the tenant’s promise to buy. Please be aware there is also a lease-purchase plan. That is really just another name for an installment sale. With a lease-purchase, the tenant must buy, usually within 12 to 24 months, as specified in the lease-purchase contract. Good times or bad, I’ve been an avid user of lease-options as both a buyer and a seller. Long-time subscribers will recall the story of how I bought my personal residence where I live today on a lease-option. The grim reality was I didn’t have enough cash for a 20% down payment and I was unwilling to pay the stiff PMI (private mortgage insurance) premium if I got a 90% mortgage. EXAMPLE: When I realized I was “cash challenged” until I could get my previous residence sold (much like many of today’s prospective home buyers), I decided the only way to buy the house I wanted was to offer a lease with option to purchase. But I had a big problem! My buyer’s agent, a long-time very experienced top sales agent, had never done a lease-option before. I had to politely educate her and get her enthusiastically on my side. When she realized she would earn a sales commission on both the house I wanted to buy on a lease-option, and on the residence I planned to list with her for sale, she became very enthusiastic and wouldn’t give up negotiations until the sellers accepted my lease-option offer. Structure the lease-option to be fair to both home seller and buyer. Having used lease-options to buy and sell houses for almost 30 years, I’ve learned they are such a “good deal” for both parties there is no need to even try to take advantage of the other party to the transaction. However, occasionally I spot greedy landlords who try to take unfair advantage of their naïve tenants, such as by offering only a tiny 10% rent credit toward the purchase price – that usually isn’t enough of an incentive for the tenant to exercise their purchase option. PROS AND CONS OF LEASE-OPTIONS. There are always plenty of lease-option buyers and always a shortage of lease-option sellers. The reason is primarily an education problem – most real estate agents don’t have a clue how lease-options work so they don’t recommend them to their buyers and sellers. But after reading this special report, you will have a major advantage over most real estate agents, as well as property buyers and sellers because you will know how to put a lease-option sale together. If you are trying to sell your house or condominium and it is listed for sale with a real estate agent, talk with that agent about lease-options. Show him or her this special report. Here is the key phrase to use with the listing agent: “Isn’t it better to use a lease-option to create a future sale than to not sell my home at all?” This statement works especially well if the agent hasn’t brought any purchase offer and the listing is about to expire. However, if you want to sell your house or condo and it is not currently listed with a real estate agent, you probably don’t need a professional agent to make a lease-option sale. After reading this special report, you will understand more about lease-option benefits than 99% of professional real estate agents know. Before we get to the pros and cons of lease-options, let me explain how real estate agents and do-it-yourself home sellers can easily market a lease-option property (please be aware lease-options work with commercial properties too, but are primarily used with houses and condominiums). Here is the most effective type of ad you can use (changing the numbers for your situation, of course): $5,000 MOVES YOU IN Run that ad in both your city newspaper and any small weekly newspapers in your area under the categories of “Houses for Sale” and “Houses for Rent.” I suggest running the ad in Friday, Saturday, and Sunday newspapers. Create a “marketing blitz!” Tell your friends, relatives and anyone who might be looking for a home to buy. If you are a prospective home buyer, or a real estate investor, would that ad get your attention? Of course it would. But please don’t get greedy. A few years ago, after I spoke at a breakfast meeting of the local Association of Realtors, the next weekend one of the attendee brokers ran an ad like that for his unsold condominiums. But he used the headline “$50,000 Moves You In.” Needless to say, that amount was far too high. By the way, that Realtor is still very active today, at age 90, buying and selling real estate. The total lease-option move-in amount should be (a) the first month’s rent ($2,000 in the example above), plus (b) non-refundable option money ($3,000 in the example above). Keep this total amount reasonable if you want to be successful. Before leaving the topic of marketing lease-options, let me warn you NOT to include your phone number in the ad. I did that a few times and my phone rang almost constantly with questions. Instead, I suggest posting an information sheet in the front window of the house because the “early birds” will drive by a day or two before your Sunday open house. Those are very serious prospective buyers so put your phone number on the window information sheet because, when they phone you, they are seriously interested. 1 – LEASE-OPTION PROS AND CONS FOR SELLERS. Some home sellers and real estate agents think lease-options are bad for sellers and good for buyers. I strongly disagree. As both a buyer and seller, lease-options have been very good for me. As a seller, if you market your lease-option correctly, you will have your pick of buyers. Not many sellers can say that! Here are the primary lease-option pros and cons for sellers (and their real estate agents): A – Seller Advantage: There are always more lease-option buyers than sellers. Serious home buyers are not dummies. They often know more about home market values in a neighborhood than do real estate agents trying to sell homes there. When a prospective buyer learns of a properly-structured lease-option, that home is as good as “sold.” Whether you own a less than perfect house in a slum area, or a multi-million dollar estate house, you will be amazed at the strong buyer demand for your lease-option. B – Seller Advantage: Lease-option tenants are usually above-average quality tenants who will treat your house like owners. As experienced landlords know, it is important to screen tenant applicants before renting to them. The same rule applies to lease-option home buyers. My experience has been most lease-option applicants are high quality people who eventually want to own their home and they will usually treat the residence very well. I only had one bad experience with lease-option tenants. It was my fault because I didn’t properly check out my applicants. EXAMPLE: Based on a glowing recommendation from a trusted friend, I lease-optioned a house to a charming unmarried couple, Chris and Andriana. I didn’t run a credit report or check their rental history with previous landlords, as I should have done. When their 12-month lease-option expired, this couple split up. Meanwhile, without my permission (I have a no pets rule!), they brought a little ferret pet into the house! I had never even seen a ferret before. It looks much like a rat! Somebody later told me it is illegal to keep a ferret as a pet, but I’m not sure about that. That little critter did extensive damage to the woodwork and carpet. But Chris and Andriana were paying above-market rent (as most lease-option tenants gladly will do), so I really wasn’t too upset when I discovered the damage after they moved out. More important, by not exercising their option to purchase, Chris and Andriana lost their $6,000 rent credit (earned at the rate of $500 per month) plus their forfeited option money of $3,000. That was more than enough to repair the damage. Actually, I was very grateful because when the tenants moved out, the local home sale market was “hot” and I sold that house for considerably more than their option purchase price. C – Seller Advantage: Lease-option tenants will pay above-market rent (in return for a generous rent credit toward the option purchase price). Lease-option tenants know they have a “good deal.” The result is they are willing to pay higher than market rent for an equivalent house or condominium. How much higher? I don’t know. At least 10% higher, often more. Lease-option tenants realize this is a great way to acquire the home they always wanted to own. It may not be their ultimate dream home, but they’re willing to start with something less than perfect, often while they straighten out their personal finances and upgrade their FICO (Fair Isaac Corporation) credit score so they can qualify for a home mortgage. EXAMPLE: A few years ago, one of my lease-option tenants explained this to me. Ginin educated me how she and her husband, Jose, viewed their lease-option (which they renewed annually for five years, by the way). “We pay you $1,500 per month rent with a $500 per month rent credit toward the purchase price. We view that as $1,000 low rent for a nice house and $500 into a ‘forced savings account’ toward our down payment.” Although I didn’t tell Ginin, as the owner I viewed their lease-option as $1,500 above-market rent to pay my mortgage payment and all expenses for that house. Incidentally, lease-option sellers should be sure to report ALL the monthly rent received from a lease-option tenant as rental income on Schedule E of their income tax returns. If the tenant doesn’t exercise their purchase option, then the IRS cannot say the landlord failed to report all the rental income when received. Schedule E is, of course, the place where the landlord reports the rent received and deducts the applicable expenses for the lease-option house or condo, such as mortgage interest, property taxes, insurance, repairs and depreciation, thus offsetting the rental income to make it all or mostly tax-free. When the tenant exercises the purchase option, as Ginin and Jose did, their rent credit is subtracted from the home’s gross sales price as a selling expense, much like a Realtor’s sales commission is subtracted from the gross sales price to arrive at the net or “adjusted sales price.” D – Seller Advantage: If desired, the landlord can shift expenses to the lease-option tenant, thus creating a triple-net (NNN) leased investment property. Depending on the circumstances, especially when you are the lease-option buyer, it may be advantageous to create a triple-net (NNN) leased investment for the property seller. Many sellers would like to get rid of their maintenance and repair responsibilities. When I am a lease-option buyer, I like having complete control over the property, so I can decide which repairs and improvements to make. EXAMPLE: Although long-time subscribers have heard this story before, the best lease-option I ever negotiated was for 15 years (you didn’t expect me to tell about my worst lease-option did you?). It was brought to me by Mark Benson, one of my favorite local Realtors. The house seller, who lived in Sri Lanka (formerly Ceylon), had recently foreclosed on his second mortgage on a house in Pacifica, California. Because there were no bidders at the foreclosure auction, he got back title to the house. Mark knew this man wanted steady monthly income either from another sale or possibly a lease-option. Because the seller was in town for just a few days, Mark arranged a meeting at a local coffee shop. Although I had not inspected the house (because it was still occupied by the lady who lost the house in foreclosure), I prepared a lease-option offer (I was short of cash for a regular down payment purchase). When I got to the lease-option term on the printed form, I filled in 15 years (because when I previously filled in 5 or 10 years on other lease-option offers, I usually got cut down to just two or three years). To my surprise (and Mark’s), the seller didn’t object to locking in the $125,000 option purchase price for 15 years. But he did object to the 50% rent credit! Neither Mark nor I remember how he negotiated me down to only a 17% rent credit. But we agreed a NNN lease would be best so I could pay all the expenses, including the mortgage payment and property taxes, in return for a low $500 per month net rent to the seller. To clinch the deal, I offered the seller a year’s net rent paid in advance ‑ $6,000! Two days later, we met at a title insurance company office to sign and record a “memorandum of option” so I could cloud the seller’s title because I did not plan to live in the house. Also, I wanted an owner’s title policy to be certain the seller held marketable title as of that date. The lady who lost the house by foreclosure agreed to stay as a tenant, thus saving face with her friends and neighbors. She remained for 13 years! All went well for 11 years. Every Christmas I sent my seller a FedEx overnight letter to Sri Lanka with a Christmas card and 12 post-dated rent checks of $500 each so all he had to do was deposit one check each month in his local Bank of America branch in Columbo. But then the seller died of a heart attack! His will left all his assets to a Chinese gentleman in Hong Kong who thereafter received my $500 NNN rent check each month through the Hong Kong and Shanghai Bank. Two years later, I decided it was time to exercise my purchase option because the house had appreciated in market value to about $220,000. My locked-in option purchase price was still $125,000, minus the 17% rent credit for my monthly payments and repair expenses. That reduced my net out-of-pocket option price to about $77,000. Of course, I could have wired the money to Hong Kong. But I wanted to be certain the deed I prepared for the seller to sign and have notarized at the U.S. Consulate in Hong Kong was in proper form for recording in the U.S. So I had to make a tax-deductible trip to Hong Kong! I still recall meeting the mysterious “man from Hong Kong” in the conference room at his attorney’s office of O’Connor, Goldberg, and Wei on Ice House Street in Hong Kong. He spoke virtually no English and had an interpreter. I wasn’t able to get very well acquainted and never learned how or why he inherited the house. If you ever need a brilliant well-connected lawyer in Hong Kong (or for business transactions in mainland China), I highly recommend Eric Wei, Esq. who made sure this option transaction went smoothly. By the way, Mr. Wei is a graduate of Stanford Law School! E – Seller Advantage: Landlord receives non-refundable option money and/or prepaid rent. To have a valid option to purchase a property, the buyer-tenant must pay some form of non-refundable option consideration, usually money. Technically, $1 would be enough. My experience has been the larger the buyer’s option money amount, the greater the probability the tenant will soon exercise the purchase option. That’s why I like to get at least several thousand dollars in non-refundable option money. This cash takes the place of a security deposit in a normal rental situation – there is no refundable deposit with a lease-option. Until the purchase option is exercised, the option consideration money need not be reported to the IRS on your income tax returns. The reason is the seller doesn’t know if this money will become part of the buyer’s down payment which is partially non-taxable return of investment and partially taxable capital gain. If the option is not exercised, as in my earlier example of Chris and Andriana, then the forfeited option money becomes ordinary taxable income to the landlord. A few tax advisors recommend the option money be reported to the IRS in the tax year of its receipt by the property owner. However, these tax advisors fail to explain what the landlord should do if the option is not exercised but the option money has already been reported and taxed as ordinary income. Also, how does the tax accounting work if the option is later exercised and part of the option money is non-taxable return of investment and partly taxable capital gain? F – Seller Advantage: Lease-option buyers will pay top dollar for the option purchase price. As a long-time seller of houses on lease-options, I can’t recall a buyer ever questioning my option purchase price (based on recent sale prices of comparable nearby homes). I always set the price at the top of the range of market values for the property. Because lease-option buyers are so thrilled to find a lease-option, they won’t argue over the price or terms unless they are very unreasonable. As a seller, I prefer 12-month lease-option terms. But, as a buyer, I prefer as long a term as possible so I can lock-in the option purchase price (as I did with that 15-year lease-option). However, my experience has been most lease-option tenant buyers aren’t ready to exercise their purchase option when their lease-option expires in 12 months. That’s fine with me! At that time, we can renegotiate the (a) monthly rent, and/or (b) option purchase price. This is especially important in a rising market. As a seller, I’ve extended my one-year lease-options as long as five years, but not always on the original terms. G – Seller Advantage: During the lease-option term, the seller keeps the income tax deductions, including the very important depreciation deduction. This is a major advantage for lease-option sellers which should be strongly emphasized by buyers and real estate agents. However, when the purchase option is exercised by the buyer, the seller will report a sale on Schedule D of their income tax returns, including any “recapture” (that means taxation) of depreciation deducted during the rental period. When the house or condo has been the seller’s principal residence, the seller should remember the major tax benefit of Internal Revenue Code 121. If the seller has owned and occupied his principal residence at least 24 of the last 60 months before its sale, then the seller can claim up to $250,000 tax-free capital gains (up to $500,000 for a qualified married couple where both spouses meet the occupancy test). Sellers should be aware if they lease-option the residence for longer than 36 months after moving out, they lose this major tax break. Consultation with a tax advisor is highly recommended. If the lease-option property is owned by an investor, when the tenant exercises the purchase option, the investor can make a tax-deferred Internal Revenue Code 1031 exchange. To qualify, the acquired property must be of equal or greater cost and equity. For full details, please consult your tax advisor. H – Seller Disadvantage: Lack of an immediate cash sale. If you absolutely need an immediate cash sale of your house or condominium, a lease-option might not be right for you. However, if you are in no rush to sell but you need income to pay the mortgage payment, property taxes, and other expenses of the property, a lease-option can be ideal so you can enjoy all the lease-option advantages explained above. If the property skyrockets in market value during the lease-option term, the tenant-buyer benefits. That’s why I recommend owners only sign one-year lease-options. I do not recommend a lease-option saying the option price is to be negotiated or determined by an appraisal ‑ that leads to many possible problems you don’t even want to think about. Instead, as the seller, be happy for the buyer if the market value goes up, even if you don’t receive absolutely top dollar for the property. 2 – LEASE-OPTION PROS AND CONS FOR BUYERS. Now let’s shift focus and look at lease-options through the eyes of prospective tenant-buyers: A – Buyer Advantage: It’s usually cheaper to rent than own. As a real estate investor-buyer, I much prefer to lease-option a house than to hold title to it. The reason is the out-of-pocket costs are usually considerably lower to rent than own. EXAMPLE: With my 15-year lease-option, it cost me approximately $950 per month out of pocket (remember that was a NNN lease where I paid all the expenses) for the rent to the owner, mortgage payment, property taxes, insurance and repairs. But I collected $1,000 per month rent from tenant. Of course, I had the risk of unexpected repair costs. During the 13 years before I exercised my purchase option, I put a new roof on that house and had the exterior painted. But I don’t recall any other major maintenance expenses. B – Buyer Advantage: Market Value Appreciation Benefits the Buyer. During the lease-option term (12 months recommended for sellers; as long as possible from the buyer’s viewpoint), if the property appreciates in market value, the buyer benefits because the option purchase price is locked in. Of course, if the market value goes down, the tenant probably won’t exercise the option to purchase. C – Buyer Advantage: Low up-front cash requirement. Lease-option cash requirements to move in are typically 1% to 5% of the option purchase price, negotiable with the seller, depending on the seller’s cash needs. But this low cash requirement is a major reason why, as an investor, I prefer a lease-option rather than to take title to a property which will usually require at least 5% to 10% cash, often more, plus the hassles of obtaining mortgage financing. D – Buyer Advantage: Owning a property is often more expensive, on an out-of-pocket cash basis, that controlling the property with a lease-option. As a lease-option buyer, you get CONTROL of the property without the burden of holding title. As shown by my 15-year lease-option, I benefited from the house’s gradual market value appreciation. By renting it, with an option to buy, my expenses were far less than if I had obtained a new mortgage and held title. If you are an investor-buyer who won’t be occupying the property, be sure the lease-option terms allow you to (a) sublease to sub-tenants, and (b) make renovations, including painting, carpeting, and landscaping. Frankly, most lease-option property owners will gladly agree to allow their tenants to improve the property, but it’s best to get this permission in writing as part of the lease-option to prevent misunderstandings. E – Buyer Advantage: Try out the property before taking title. Have you ever bought a “bad house?” I have! Despite having professional inspections and checking out an investment property before purchase, occasionally there will be major unexpected problems with a house or condominium. If you haven’t seen the movie “The Money Pit” be sure to rent it at a nearby video store. Although it is supposed to be a comedy, investors can relate to much of this horror movie. But a lease-option can prevent the mistake of taking title to a money pit property. F – Buyer Advantage: Rent credit toward the purchase price. This is a major benefit of being a lease-option buyer. As my lease-option tenants explained to me, they viewed their $500 per month rent credit (33% of their monthly rent) as a “forced savings account” toward their down payment. If they failed to exercise their purchase option, they would have lost that rent credit. Incidentally, a few states have laws requiring lease-option sellers to set aside rent credit money into a separate account or escrow. Where I live in California, this is not required. Unless required by your state’s law, I do not recommend doing so because the tenant-buyer never gets this money refunded so there is no need for an escrow account. Be especially careful that the lease-option form you use clearly states the rent credit is not refundable to the tenant under any circumstances. My good friend John Schaub, however, gives his tenants who don’t exercise their purchase options a partial refund, sort of as a goodwill gesture. But this is not required by law and I do not recommend making any refund promises, especially if you wind up with tenants like Chris and Andriana, as mentioned earlier. How to determine the rent credit. From the tenant’s viewpoint, the larger the rent credit, the better. From the seller’s viewpoint, the smaller the rent credit, the better. Everything is negotiable. I once gave a lease-option tenant a 100% rent credit because (a) the house was in very bad condition (the flat roof leaked in mysterious places) and (b) I didn’t have the cash at the time to repair the house which I had recently purchased for nothing down. Looking back, a 100% rent credit was far too generous (although my tenant did a great job of upgrading that house during his 12-month tenancy before exercising his purchase option). I’ve found a 33% rent credit (one-third of the rent) is fair to both the landlord and the tenant. Some stingy landlords give only a very low 10% rent credit, but this is usually not enough to get the tenant to exercise the purchase option. G – Buyer Disadvantage: No itemized income tax deductions. I’ve had some prospective lease-option tenant buyers raise this objection. When that happens, I politely say “Which is worth more to you – your “forced savings account” rent credit toward the purchase price or the homeowner’s itemized income tax deductions?” They quickly understand the rent credit toward their purchase price, such as $500 per month, is far more valuable to them than an income tax deduction as a homeowner. H – Buyer Disadvantage: Some mortgage lenders won’t treat lease-option rent credits as down payment cash. Fannie Mae and Freddie Mac, the major buyers of conforming home mortgages in the secondary mortgage market (up to $417,000 in 2007), have a stupid rule stating lease-option rent credits count toward the down payment only if the actual rent paid was above market rent for the house or condominium. EXAMPLE: Suppose a house would rent for $1,200 per month but a lease-option tenant agrees to pay $1,500 per month rent with a $500 per month rent credit. Fannie and Freddie would only allow $300 of the rent credit toward the purchase price instead of the full $500 agreed by the landlord and tenant. If this becomes an issue when the tenant exercises the purchase option, most experienced mortgage brokers can work around this foolish lender rule. One way I discovered was for the buyer to obtain an adjustable rate mortgage (ARM) because this rule doesn’t seem to apply to ARMs held by lenders in their portfolios. Another way is to give a repair credit at the closing, or the seller can agree to pay for some of the buyer’s non-recurring closing costs. If the buyer is obtaining a jumbo mortgage (exceeding the $417,000 conforming mortgage limit for 2007), I haven’t encountered any lender problems with this issue. One way or another, this problem can be overcome when the tenant buys the house if a new mortgage is then obtained. HOW TO SELL YOUR HOUSE OR CONDOMINIUM ON A LEASE-OPTION. If you are a motivated home seller or an anxious real estate listing agent, the easiest way to market a lease-option house or condominium is to run newspaper ads like the one suggested earlier. If the house is listed in the local MLS, be sure the listing says “Seller will lease-option (rent-to-own).” The biggest drawback of dealing with a real estate agent on a lease-option is the sales commission. Some agents try to get their full sales commission up front even before the buyer exercises the purchase option. Instead, I suggest the seller agree to pay only a typical leasing commission (5% of a year’s rent where I live) up front and the balance of a sales commission when the tenant exercises their purchase option. Or the seller can negotiate on commissions. To illustrate, when I entered into that 15-year lease-option, as the buyer I paid broker Mark Benson a $3,000 leasing commission and, 13 years later, I paid him an additional $3,000 sales commission. As a lease-option seller, if your property is not already listed for sale with a real estate agent, I do not recommend hiring a Realtor unless you find a realty agent with considerable lease-option experience. The reason is most agents have never done a lease-option and they are often obstacles rather than helpers. If you need assistance, hire a smart real estate attorney instead. Be extremely well-prepared for your Sunday afternoon open house. Whether you are a real estate agent or the seller, expect at least 50 to 100 visitors if you properly market your Sunday open house. Have enough hand-out flyers with all the details to give to each visitor you greet. Be sure your flyer includes the lease-option details, including all the advantages for the buyer. Just so you won’t be accused of illegal discrimination, and to make the job of selecting the best applicant easier, be sure to staple to each flyer a rental application form. After a prospect fills out the rental application, insist on receiving a refundable deposit check for at least $1,000, or more. This deposit shows the applicant is serious. Explain the deposit is refundable if the prospect is not accepted after running a credit, income, and background check. Don’t accept a rental application without a hefty deposit check! If you market the lease-option correctly, at the end of the Sunday open house you should have received at least two or three completed applications and deposits. On Monday morning, run a credit report with FICO score on each applicant. Check their references, including previous landlords. Then get the lease-option agreement signed as fast as possible with the top applicant. Discrimination is illegal – treat every applicant exactly the same. After your best applicant signs the lease-option agreement, and you have received the full CASH payment due, then promptly mail back the deposit checks of the applicants who were not accepted. BUT DON’T GIVE ANY REASON FOR REJECTING THEM! I once made that mistake when I said something about another applicant was better qualified. The rejected applicant was a lawyer who accused me of discrimination! Fortunately, there is nothing in the Fair Housing Act which prohibits discrimination against lawyers – or obnoxious people! HOW TO FIND HOUSES AND CONDOMINIUMS WHICH CAN BE PURCHASED WITH LEASE-OPTIONS. My experience has been very few lease-options are advertised in the newspaper classified ads or in the local MLS. They must be created! Here are several methods which work: 1 – Check the newspaper “houses for rent” and “houses for sale” ads. Look for houses or condos which have been for rent or for sale over 30 days. Follow up on these ads. Many reluctant landlords would really prefer to sell but they haven’t been able to sell in the current buyer’s market in most cities so they are advertising for renters. When you inspect a house for rent or for sale which has lease-option potential, ask the owner (or the listing real estate agent) “Would you consider a lease with option to purchase?” If the answer is “yes,” briefly explain all the benefits for the seller, such as higher than market rent, prepaid rent (if you wish to prepay rent instead of making a large nonrefundable option payment), and continued income tax deductions. Don’t let a real estate agent discourage you. Whether you are a prospective lease-option buyer or seller, don’t let a real estate agent discourage you – the best agents will embrace a lease-option as a great way to get action in a slow local market. If the property owner is reluctant to do a lease-option, tempt him or her with a net, net, net (NNN) lease. That was the “clincher” when I made my offer for that 15-year lease-option. No management work with a net monthly rent check every month is a big incentive for the owner. If you are the buyer, making the mortgage payment direct to the lender assures you the payments are made on time each month and the mortgage won’t go into default. 2 – Run your own “House for Rent Wanted” Classified Newspaper Ad. I learned this technique from my well-known investor friend Jimmy Napier. He suggests running a 30-day low cost “rate holder” classified newspaper ad under “Houses Wanted” or “Houses for Rent Wanted” such as “Executive needs 3 BR, 2 BA house on five-year rent to own. $5,000 option money. Call Jimmy (555) 555-5555.” You won’t get many phone calls, but all you need are one or two from motivated home sellers, landlords, or their real estate agents. WHERE TO OBTAIN LEASE-OPTION AND RENTAL APPLICATION FORMS. The best source of excellent lease-option, rental application, and other real estate forms I’ve found is www.TrueForms.com. This amazing website offers a very complete four-page lease-option form. Check out their other superb real estate forms for virtually every real estate situation you can imagine. If you are not Internet savvy, their phone is 1-800-499-9612. LEASE-OPTION SELLERS: DISCLOSE KNOWN DEFECTS IN THE PROPERTY, SELL “AS IS” AND DON’T PAY FOR APPLIANCE REPAIRS. Most states now have required Seller Transfer Disclosure (TDS) forms for home sellers. Be sure to provide the lease-option tenant with a TDS disclosure form for your state. If you are a lease-option buyer, be sure to obtain a professional inspection of the home before moving in so you will be aware of any defects the seller “forgot” to disclose. If, as the owner, you include in the rental any appliances, such as refrigerator, dishwasher, washer, and dryer, be sure they are in good working condition. But specify in the lease-option that the landlord will not be responsible for any appliance repairs. The lease-option contract should also state if the tenant is expected to pay for all repairs, or just minor repairs up to $100. I also like to include the services of a gardener in the rent – however, be sure your gardener agrees to report to you if the tenant is not maintaining the property, such as failing to water the lawn when needed. Regarding the “as is” sales term, in the terms and conditions section of the lease-option I suggest wording such as “When the purchase option is exercised, the property is to be sold in its then ‘as is’ condition and the seller is not responsible for any appliance or other repairs.” Of course, unless agreed otherwise in the lease-option, the landlord remains liable for major repairs, such as roof leaks, during the rental period. CONCLUSION. Lease-options, or “rent to own,” should be win-win for buyer and seller. They work especially well for houses and condominiums in a slow “buyer’s market,” but they also work for commercial properties where the business wants an option to buy the property being leased. If you are a real estate agent, a lease-option can “save” a listing which is about to expire and make you stand out from other agents who don’t know about lease-option benefits for both sellers and buyers. Please consult your tax advisor and/or real estate attorney for more details on the tax and legal aspects of lease-options.
ENTIRE CONTENTS COPYRIGHT 2007 BY ROBERT J. BRUSS, ESQ. This publication is intended to provide accurate and authoritative information. It is sold with the understanding the publisher is not engaged in rendering legal services to readers. If legal or other expert assistance is required, services of a real estate attorney or other professional should be obtained. |
