7 Awesome Benefits of Lease Options For Landlords

Posted on: June 16, 2011

Categories: How To Sell, Profit

Author: lbuen

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Lease options Image by Paragon Apartments via Flickr

What are Lease Options?

Lease options is short for “Lease with the Option to Purchase”. As the name suggests, two events are expected to take place – the lease and purchase of a property, where the latter action is at the discretion of the buyer/tenant. In this contract, you as the seller are bound to sell, but the buyer/tenant is not bound to buy.

How Do Lease Options Work?

By paying a valuable consideration upfront, the buyer/tenant gets an option to buy a property at an agreed price at the end of an established period of lease, typically one to three years for residential properties, but could get longer due to the present credit environment. The consideration, which is often nonrefundable, is usually at two to three percent of the market value of the home. This is preferable for buyers compared to paying a lump sum of five to 20 percent of the value of the property as down payment. In the event that the buyer defaults in his rental, he can be evicted from the property. However, if he makes good with his payments and finally decides to make use of his option, he can buy the property at the end of the set rental period.

Advantages of Lease Options For Landlords

1. Protects the Property from Vandalism. Your tenant will take care of your property like it is their own home already, after all, they are intending to buy it in the near future. Gone are the days when you wince at the sight of a clogged sink, stained carpets, vandalized walls, and other similar scenarios.

2. Highly Negotiable Terms. You can set your own terms when you offer lease options to suit both your tenant’s and your needs. You can raise the consideration a little if he negotiates for a slightly lower monthly rental fees. You can extend the period of the term, you can pass on the responsibility of maintenance and repairs to the tenant, and so on.

3. Gets Rid of the Hassles of Maintaining the Property. As mentioned earlier, you can make the tenant shoulder the cost of maintenance and repairs depending on what you agree on. Even without this agreement, maintenance may not be as costly since he will take care of the property, may even make improvements, since he is planning to be officially making it his home.

4. Motivates Tenants To Pay on Time. A default in payment can cost the tenant his future home, or at least, the consideration he put upfront. This is good reason enough to make him pay on time.

5. No More Periods of Vacancies. With your tenant intending to buy the property within one to three years, there is a lesser chance of vacancy.

6. Non-Refundable Deposit. The consideration that the buyer pays upfront is your protection in the event that he defaults and your property becomes vacant and you have to go back to marketing the property to other buyers.

7. Cushions Against Falling Home Values. Since you have locked in the selling price of your property to the agreed amount, you are protected in the event that values of properties fall within the given period. However, this could also work against you in the event that the value of your property goes up, you may incur an opportunity loss for having to sell it at the agreed price even if you could have sold it for more.  But this is the hook for the tenant in order to get them to agree to your proposal.  The tenants have potential upside depending of how the market appreciates.

Lease options are a great exit strategy for real estate investors: it protects their property from vandalism, vacancies, falling values of properties, saves them from the hassles of maintenance, and motivates tenants to pay on time and take care of the property.

 7 Awesome Benefits of Lease Options For Landlords
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