When you sell on a lease option basis, you generally get to collect higher rent, and sell at a higher price. Then, if the buyer doesn’t exercise the option you may be able to keep the deposit and sell the home for even more. The downside? Bookkeeping can be tricky, and many tenants don’t complete the purchase (this can be an advantage actually, but it does mean more work for you).
There are many potential buyers out there who can’t buy at the moment. This is not always due to a bad credit score. They may be uncertain if they want to stay in an area. They may have good credit, but no money for a down payment. They may work for a good company, and have great opportunities for advancement, but not yet have a good salary. There are many reasons that people look for a rent-to-own or lease-option situation.
There are also many ways in which these deals are structured. The basic concept is that buyers rent the home, and have an option to buy it at a set price by a set date. (An option means they have the right, but not the obligation, to buy.) This gives them time to save money for a down payment, to increase their income, and to find financing.
Often there is a non-refundable deposit. It might be RM1,000 or RM10,000. This is sometimes called an option fee. It is generally applied towards the purchase price when the buyer closes the deal. If he decides not to buy the home, he loses the deposit. As the seller you obviously want to get a large option fee if you can.
It is also common to apply part of the rent towards the purchase price. This makes it possible for the buyer to more easily come up with a sufficient down payment to get reasonable financing terms. Rent is often higher than normal, to account for this credit, and as the seller, you benefit from that higher rent if the buyer doesn’t buy.
Another interesting aspect of lease-option deals is that, unlike with normal rentals, it is common to make the tenant responsible for maintenance. They are buying the home, after all. There are many variations in how this is done. The tenant might be responsible for the first RM200 of repairs or maintenance in any given month, while you have to pay for anything beyond that (It really wouldn’t be fair to ask the tenant to pay for a new furnace three weeks after he moves in.)
Pricing is normally higher than market. This is possible because you are making it easier for a buyer to own a home. It is also because you may be selling the home to him in two years, so it seems fair that he pay what it is worth then, which will presumably be higher in most areas. In other words, if the assumption is that the home will be worth 15% more in two years than it is worth now, that might be the price at which the buyer can exercise his option – but in the end this is all negotiable.
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