BENEFITS OF RESIDENTIAL LEASE OPTIONS

Motivations to enter into lease option agreements (also called lease-to-own) are a reaction to today's declining real estate market. These motivations are not typical of a "normal" real estate market in which properties are appreciating at a reasonable rate.

SELLERS

Current sellers are motivated to enter into options because they can't sell their house any other way. Why?

• Too much inventory
• Too few buyers
• Lingering stubbornness by sellers who have yet to "re-calibrate" their notions of value and drop their prices far enough to meet willing and able buyers.
• Difficulty in obtaining financing.

Sellers should also consider that, in a market predicted to decline for the foreseeable future, granting an option right now allows them to lock the price in today’s market value.
Here’s a rough example: Seller is asking $500,000 which is reasonable for the area, but the damn house still hasn’t sold. Seller grants a one year option at that price. Home prices continue to decline 16% (last year’s decline for Nevada County, California). After the one year period, the property is worth $420,000, but the seller still gets $500,000. Capiche? Yeah, yeah, the figures are rough and don’t account for this and that, but you get the idea.

BUYERS

Current buyers are motivated to enter into options because it is the only way they can manage to own a home.

• Their credit is crappy, but fixable during the option period.
• They don’t have enough cash for down payment and closing costs, but will be able to get it or save it during the option period.
• They have assets that are temporarily tied up somewhere else.

Buyers also need to know that the value of the property will (or may) decline during the option period. This depreciation can have serious implications with financing the buyers’ purchase loan when it comes time to execute the option.

BACK IN THE DAY

In an appreciating real estate market, the whole scenario is flipped on its head. Now it is the buyers who are most eager for options because they can lock in today’s price, sit back and watch the value go up up up during the option period.

What would motivate sellers to enter into options in this kind of market?

• A sales price above current market value
• A handsome option fee
• Both

In the next blog, I’ll discuss the kinds of contracts and documents you need to set up lease-options.