At least once every year I have someone who wants to look into doing a lease option. It is usually a buyer I am working with, but it can also be a seller.
There are quite a few reasons a person would want to do an lease option. Usually it is because financially their situation will be different a year from now. Perhaps they want to save money for a down payment or they expect to be receiving money that could become a down payment. They need to move now and would really like to just move once: rent today and buy tomorrow.
I am currently working on a property that I represented the seller on who accepted a lease option. It is a very unique situation. Aging parents noticed the house for sale across the street from their daughter and son-in-law. Parents were not certain how their health and their personal situation would look a year ago. They entered into a lease option with my seller to “test the waters” with the house. It has worked out very well for them and they are now buying the house.
For my client, the seller, he appreciated the sound financial standing the buyer was able to demonstrate. In addition, he negotiated a good sales price by being willing to work with the option. He was not living in the house, having already moved. So his circumstances fit the situation as well.
Here is how the option worked. The buyers put down a very large, non-refundable option fee. This fee was paid directly to the seller. So the seller got a nice sum right up front. That option fee is being applied to the price of the house now that the option is being exercised. The buyers moved in and began paying rent. 10% of the rent they have paid for the last year is also being applied to the purchase price now that the option is being exercised. So the seller got money up front and got steady rent for a year. The buyer has already paid a portion of the purchase price through the rent and the option fee. It is coming together pretty smoothly.
However, there is risk. A seller needs legal council before entering into a lease option. That council needs to review his loan documents to see if the “Due on Sale” Clause usually contained in a mortgage can be triggered by a lease option. If it can, and the lender finds out about the option, the lender can call the loan due in full. This could create a bit of a crisis for both the seller who now has to cash out a mortgage,
and for the buyer who may or may not want to buy the house.
I also think that most of the folks I council about lease options really are not in a position to do one. This is because if the reason for the option is lack of funds today, then they don’t have the means to pay an option fee up front.
My last comment is that a buyer wanting a lease option is probably better off simply finding a rental until they are ready to buy. There are very few sellers willing to do lease options. So finding a home you love, that is also available with a lease option, really narrows your house selection.
Real estate has so many things going on and, yes, lease options are one of them. It may even be something that would fit your current circumstances. Do not hesitate to give me a call if you have any questions.
Dianne, 503-803-6298