Lease Options for Dummies? NO - for smart sellers!

Have you ever heard of a lease option? Over the past year, the term has been thrown around a bit more than it used to, but very few people understand what a lease option is. And that is such a shame, as it is a great tool for making it easier to sell a home - especially in times where credit is tight.

So what is a lease option? I describe it as kind of like a cross between a lease and a purchase. The first part of the lease options is - what else - a lease! The Tenant-Buyer enters into a lease agreement, usually for a period of 12-24 months. The second part of the lease option is - you guessed it - the option! This is another agreement where the Seller gives the Tenant-Buyer the option to purchase the home, within the option period - usually the length of the lease.

There are a few other key items to understand about lease options. The first is that the Tenant-Buyer and the Seller agree upon a purchase price up front. There is no negotiating the price later when the Tenant-Buyer decides to exercise their option and buy the property.

Next, the option to buy the home is usually given to the Tenant-Buyer when an option payment is provided by them. This is negotiable and can vary, but can be between 3-10% of the agreed upon purchase price. This option payment is credited towards the purchase price, so it is much like a down payment.

Also typical of lease options is that a portion of the monthly rent paid by the Tenant-Buyer is credited towards the purchase price. However, in return for this, the Tenant-Buyer usually pays rent that is higher than the market rent. Then the excess rent is usually credited towards the purchase price, typically more than dollar-for-dollar.

So what if the Tenant-Buyer doesn't want to - or can't - buy the home at the within the option period? Well, that's good news for the Seller but bad news for the Tenant-Buyer. The Seller gets to keep the option payment AND the excess rent that the Tenant-Buyer paid, AND they get to find a new buyer, tenant, or tenant-buyer for their home. The Tenant-Buyer gets to walk away without their option payment or rent credit.

So what is the benefit of a lease option? For sellers, it can make their home more marketable by providing an additional financing option. And for Buyers, some may need or want some time to pass first before buying a home. For example, there may be some buyers who need a year to repair their credit so that they can qualify for a loan. Or there may be business owners who need some time to see how their business is going to be performing in 6 months, at which time they will be able to get a loan.

Lease options are not for everyone. Obviously, the best situation would be for a buyer to buy a home from a seller in the traditional manner - money provided in exchange for the deed. And in many cases, a home seller needs that money to buy their next home.

But for those sellers who do not need the money from the sale of their home immediately, a lease option is a viable one. In fact, it is perfect for home builders with new homes for sale, investors with income properties for sale, or even an older adult who can wait for the money.

Lease options may sound complicated, but a knowledgable Realtor can help their clients with all of the lease option details.