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How To Sell On Lease Option

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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The advantages and disadvantages of selling a home on lease option.

1. Advantage: Having an immediate buyer. Like all free trade markets, the housing market continually shifts between a buyer’s and a seller’s market. In a seller’s market, buyers are readily available and willing to pay asking price or more for the home. However, eventually all seller’s markets turn to buyer’s markets. At this point, there are few buyers, who can take their time and offer less for your home. A common driving force for a buyer’s market is higher interest rates and a lack of readily available financing. In this scenario there are fewer buyers because a substantial percentage of the buyers cannot get financing through conventional means. In the current market, credit is the major issue. Banks are having to hold fast to their cash reserves to stay afloat and are only willing to provide mortgages to only the best credit scores. In this situation, there is a glut of buyers sitting on the sidelines, with plenty of cash flow to own a home but lacking the credit to buy a home. Offering a lease option gives these buyers a chance to purchase you home when otherwise they could not. For the person in a hurry to sell their home this could mean everything.

2. Advantage: Typically for a seller to agree to a lease option, the buyer needs to agree to purchase the home in the future at the asking price or at a higher price. The seller is yielding up their future appreciation to the buyer by setting a permanent contract and should expect to get their asking price or more. The seller should also expect to get some money down to partially cover the risk of the person choosing not to exercise their option.

3. Advantage: Along with the favorable selling price, the seller will also receive monthly payments to cover the seller’s monthly expenses and possibly more. How much more depends on the conditions in which the seller bought their home. If the interest rate is lower than the current rate or if there is equity in the home, the monthly payment the buyer would be expected to pay will be more than the monthly expense. The difference is income with virtually no work involved. There is probably not much hope for passive income if you have a high interest rate adjustable mortgage with negative equity, but in that situation, a short sale of your home may be a better option if available.

4. Advantage: Lease options are considered less risky than renting because of the down payment the buyer makes and the vested interest the buyer has in the home. I personally would not consider a lease option if the buyer did not offer a significant down payment because it would be too much like renting. Something that I find a little risky for my tastes. However, with a lease option, the buyer is expected to make a down payment to secure the advantages of the option, including access to future appreciation. In the lease option, the buyer has two very good reasons to keep the home: the down payment and the potential of equity growth. Unlike a rental, the home has been sold; it is just the transaction that will occur in the future. The buyer is now responsible for the maintenance and upkeep of the home, not the seller.

5. Disadvantage: One big disadvantage of a lease option is limited access to the home equity. When you offer a lease option, you must maintain your current mortgage and any other loans on the home or pay them off yourself. If you have thousands of dollars in equity in the home, that money will not be made available until the lease option is exercised. Sure, you could refinance your mortgage to get the equity out, but will incur the costs of the refinance and a higher interest rate, which is probably not worth it. As such, the rate of return on your money over the life of a lease option is dependent on how much equity is tied in your home. With little to no equity in a home, a lease option can result in a very high relative rate of return on your money. Even with a lot of equity, the option can be quite profitable.

6. Disadvantage: A lease option is an expressed intent by the buyer to purchase your home in the future. They pay you some money down, but have no obligations except to pay you a monthly payment until that time. However, there is a risk they do not pay you on time or at all. However, as far as your own mortgage is concerned, it must still be paid, and if the occupant has not given you the money to pay the mortgage, you must dig into your own pockets to find the money. Fortunately, you have the down payment to fall back on though only for a while. A lease option is a safer bet when you have enough income to afford that second mortgage payment.

7. Disadvantage: If the lease option buyer chooses not to buy the home during the lease period, then the home falls back to your possession along with the costs of repairs, if any. If they do not exercise their option, you do get to keep the down payment which helps to pay for any restoration provided the repairs do not exceed the amount of the down payment.

8. Disadvantage: When you sign a lease agreement, the seller obligates themselves to sell the home in the future for a predetermined price. If the price of the home increases in value over the life of the lease option, the buyer benefits from the value increase provided they choose to exercise their lease option.

In summary, we have discussed numerous advantages and disadvantages to offering a lease option. Ultimately, it depends on your situation. If your mortgage payment is too much of a burden for you and you need to sell fast, offering a lease option will bring more buyers offering a larger selling price. You must also look at your personality. If you do not feel comfortable with another person using a home that you are ultimately responsible for, a lease may not be good. However, if you are comfortable with other people living in the home, have a decent interest rate on your current mortgage, and are investment orientedFree Articles, a lease option may be just right for you as the passive income can range from 20% to 100% of your invested equity per annum. A handsome return for a low risk investment.

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