What are Lease Options?

Following on from last week’s piece on Land Contracts, another strategy sophisticated investors use to sell properties are Lease Options.

Lease Options – The basics…

This is where you lease or tenant the property to a prospective buyer and give them an option to purchase the property by a certain date at a certain price. This can take several forms, but essentially you agree on a price and a date by which the prospect must take up the option to purchase.

If you wish, you can take additional rental payments, to cover a deposit, if the prospect is confident, they wish to purchase the property, but other times, the prospect just wants the option to purchase.

Advantages of Lease Options is that you can often tenant the property for a higher amount, sometimes over market value, giving the tenant the chance to put together a deposit so they can get financing to purchase.

Further, you can often get an excellent price, as you are giving the prospect the opportunity to purchase a property that they would not have had otherwise.

Full market value for the property and even more – 110% – 120% is not unusual in these cases and 12-24 months to purchase can be popular as well.

Disadvantages are that there is no guarantee the prospect WILL purchase the property; it is just an ‘option’.

Now if you are getting additional rent as a deposit then chances are they would be pretty serious, but you would also need to be sure that your contracts etc was extremely clear what happens with the additional ‘deposit’ monies if in fact the option to purchase is not exercised.

There is no right or wrong here, just so long as all parties are fully aware of the stipulations, whether the deposit funds are returned, or kept.

Further, it helps to get your property solicitor (I would not do a lease option, nor land contract, without a solicitor) do some due diligence and checks on the prospect.

There have been cases where the prospective buyer was never in a position to purchase or even pay the rents correctly, so you will need to screen these applicants extremely carefully…

Certainly an option when looking to sell properties, particularly good in flat markets and can be quite profitable strategies when done correctly