A Lease Option is
much more complex than a purchase.
Aside from the sales price, you have to negotiate
rent credits
option consideration
repairs
closing costs
AND you have to anticipate future depreciation or appreciation.
A few Tips:
PRIOR to negotiating the option agreement:
KNOW how to structure the agreement so the LENDER will
accept it.
Be sure to get pre-approved for the
loan you need to exercise your option, according to today's
Lease Option underwriting requirements. Who knows what lenders
will want tomorrow, but I doubt it'll get any easier than it
is now.
Interest rates change without notice.
When
interest rates go up you may not qualify for the loan anymore.
Lease Option contracts don't usually contain loan contingencies.
If you can't exercise your Option, you usually
lose your option money and the rent credits. (Unless otherwise
agreed upon in WRITING.)
Be realistic about Fair Market Value, and yes, sometimes
prices go down.
Don't count on appreciation!
If the property doesn't appraise before your Option expires,
you won't be able to purchase unless you're willing and able
to bring in the cash for the difference between appraised value
and option price. (Unless otherwise agreed upon in writing.)
Be careful with rent credits.
Most lenders
will only allow the portion above fair market rent to count
towards the down payment.
Example: Houses
in the area rent for $1,000 and you negotiate a rent of $1,500
with a 100% rent credit. Most lenders will only count $500 per
month towards your down payment.)
Be sure you have a termite and property inspection as
part of your Lease Option Agreement.
The contract should spell out all terms of the sale just
like a Sales Contract.
The only difference is that
you have the option to buy until the option expires.
Professional Publishing, (800) 288-2006, used to have an excellent
"Residential Lease With Option To Purchase Agreement."
From their October 1995 Update Letter:
"...
In order to avoid misunderstandings and possible litigation,
it is preferable that the option contain all of the essential
terms of the purchase."
The 1995 form called for
all inspections and other contingencies to be satisfied prior
to occupancy and clearly set forth all of the provisions of
the purchase as well as the lease.
Get EVERYTHING in writing!
Agents and sellers often promise all kinds of
goodies such as appreciation, low interest rates, financing,
repairs, improvements.... Politely ask that they put these promises
in writing.
Be sure you UNDERSTAND
what you're signing.
Hire another broker or an attorney
to have the contract reviewed and explained to you PRIOR to
signing.
Most real estate agents, even IF well
meaning and honest, know even less about option agreements than
about sales contracts.
If you can buy with 3% down, why bother with an option?
Occasionally an option makes sense because of tax consequences
for the seller or because the buyer KNOWS that s/he will be
able to exercise the option.
Hoping to win the lottery
or waiting for an inheritance doesn't usually work.
Sellers need to be aware that real estate agents often
try for a Lease Option when all else failed.
The
agent usually gets at least some cash at the time the option
is ratified. Something beats nothing. An expired listing = nothing.
AND they often get to "double end" (double commission)
the deal.
Most buyers are only interested in a Lease
Option because they can't get a loan due to no money and/or
bad credit.
Guess what, a year later, the buyers
STILL can't get a loan because they STILL have bad credit and/or
no savings! The seller will be asked to lower the price, carry
financing, give credits .....
Landlords and investors have a much better chance of
successfully completing lease options than home owners who want
to sell their residence.
Bob Bruss, syndicated
Bay Area real estate writer, has sold many properties through
lease options. It's a great way to find tenants who'll take
good care of the property and pay the rent on time.
Not only is Bob Bruss a real estate broker, he is also a California
attorney. *HE* knows his contracts.
"$5,000
moves you in" advertised in the Bay Area real estate sales
section will have buyer/tenants stand in line to complete the
applications. Those $5,000 make a great security deposit and
I don't think Bob Bruss cares when a tenant fails to exercise
the option. He doesn't NEED to sell.
Bob Bruss also
used to teach "Legal Aspects of Real Estate" at the
College of San Mateo, one of the best college courses I've ever
taken. There's nothing like a class taught by an instructor
who knows what he's talking about.
Summary
MOST sellers accept Lease Options because their property
is overpriced.
MOST buyers seek Lease Options because they can't get
a loan.
Put the two of them together, and what do you get?
The unqualified buyer contracts to purchase
an overpriced property.
What happens when the above Lease Option is about to expire?
All hell breaks lose for everybody involved.
The real estate agents and/or buyers scramble from mortgage broker
to mortgage broker, often they submit fraudulent loan applications.
There's a good chance that the property doesn't appraise.
Sometimes the buyers give up and lose their option money and
rent credits. Rarely will sellers grant a one year extension so
the buyers can get it together.
Sometimes a funky deal is arranged with seller financing and/or
a crappy A- ARM, and there's a good chance the buyers will be in
default a few years later.
I hate to have to be so negative, but these have been my experiences
with Lease Options in the San Francisco Bay Area throughout the
90s.
It's not impossible to structure a sensible lease option,
I just rarely see it happen.
You're still interested? There is a lot more to Lease Options
than I can publish here. Attend a LEASE OPTIONS seminar by someone
as qualified as Jim Little.
And, BEFORE you get
serious about a Lease Option, read this incredible, but so typical
Lease Option nightmare "Her House," submitted by Steve
Schmidt.
A Lease Option is
much more complex than a purchase. 