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Christine Baker
BayHouse.com

 

 

Lease Options ...

... can seem like the solution to your problems,

... but easily turn into disasters.

  •  No two deals are alike.
  •  Everything is negotiable!
  •  Terms are much more important than price.  

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.

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