There are plenty of renters who don’t have the kind of credit they need to secure a loan from a mortgage company, yet they want to own a home. If you’re a real estate investor, you’ll want to become familiar with how a lease option can help you and what cons to consider.
> Pros of a lease option
Cash flow right away – If you want to sell the home, but don’t want to take the risk of it being vacant for months and months, arranging a lease option gets someone in there right away with the intention of purchasing it. You get a down payment, monthly cash flow, and can consider the house “sold” should the tenant hold up their end of the deal. Most of the time, a lease option is between two and five years, giving ample time for the renters to acquire the funds to purchase.
Better tenants – Lease options attract better tenants because if the tenant plans on owning the house one day, they’re more likely to make payments and take better care of it. They also don’t want to lose their deposit or down payment.
Tax benefits – When you sell a home through a lease option, you get to take the tax benefits, including depreciation, because they don’t actually own the house until they’ve fulfilled the contract.
Higher rent – Lease options tenants tend to be alright with paying a higher rent because they figure it’s worth it if they can buy the home at a later date. Usually, they’re interested in lease options because they have poor credit or unusual financial circumstances. This gives you a bit of leverage when working with monthly rent prices.
Down payment – You, as the seller, get to require a non-refundable down payment. In your lease option agreement, you’ll specify that if they don’t follow through with buying the home, you get to keep their deposit. It’s a good idea to have an attorney look at your lease option agreement to review the terms of the contract.
Minimal repair costs – Have the lease agreement state that the tenant is responsible for minor repairs on the home. Ultimately, this will save you money and time. And, tenants are more apt to keep up with the repairs, as they feel like the home is theirs.
> Cons of a lease option
If the home’s value increases more than you expected, and you’ve already locked in the price the tenants will pay for the house, then they could end up getting the home for less than market value. This could cost you some money unless you are using my specially crafted option agreement to ensure you always maximize your profit. Also, should the tenants back out of the agreement, deciding not to purchase the home, you’re back at square one. Generally, this is good for you also if you follow our training and get a sizable down payment from them.
However, the good news is that there are plenty more people out there who will be interested in lease options, so you’ll have someone in there in no time.
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