Lease Option Benefits for the Landlord/Seller 

1.     Debt Relief

The number one benefit for property owners that will convince them to Lease Option their house to you is your guarantee that their monthly PITI (Principle, Interest, Taxes, and Insurance) payment will be paid on time during the term of the Lease Option.

The number one motivation there is for the property owner to allow you to put a tenant buyer in their home is relief from or mitigation of their monthly financial responsibility to their lender.[1]

The need to get rid of debt far exceeds their apprehension about having someone live in their home.[2]

As an investor you need to convince the property owner (guarantee them) that you are the solution to their need for debt relief problem; you will cover their PITI payments until your Tenant Buyer exercises their option to purchase the property and pays off their loan. If the Landlord Seller Lease Options their property to you, their problem is solved. They will have immediate relief from their monthly payments.

Guarantee them that their monthly payments will be paid if the property is vacant or not You will make the payments until your Tenant Buyer qualifies for a loan and pays the sellers loan off even if it takes a year or two. It may take that long for the Tenant Buyer to correct their minor credit blemishes in order to qualify for a loan.[3]

How do Landlord Sellers get into this situation?

1.      They are making double mortgage payments.

a.     Their property is vacant

      Perhaps the real estate market is slow and therefore it is taking a long time to sell or rent their property.

b.     Their tenants aren’t paying their rent.

c.      They moved into their new home before selling their present home.

2.     They lost their job

3.     They got a divorce

4.     etc.

2.     Saves Sellers Credit

Preserving their credit is the number two reason why a Seller will Lease Option their property to you rather than let you take over the monthly payments on their loan and taking back a second mortgage or wrap-a-round mortgage.[4]

They could sell you their property and take back a second mortgage if they wanted to, but they are unlikely to do so because the loan stays in their name and they want it out of their name before they will turn loose of the deed.[5] 

Even in cases where the Seller has very little equity, they still will not convey title to you because they want to make sure their credit is preserved. They are not sure you will make the payments on time or if you will walk away from the property if it does not work out for you.[6] 

If that is the case you have no choice but to go into the Lease Option mode.[7] 

You may also have saved the Sellers credit by covering the monthly debt service on their property.

3.     Minimal Property Management 

Most Landlord Sellers do not like to deal with tenants and property maintenance. If they are not convinced that you are capable of taking care of the management of their property, they are in all probability not going to Lease Option their property to you.[8] 

As an Investor you need to convince the Landlord Seller that you are capable of handling all the property management for them. You need to show them how you are going to solve their problem.[9]

Explain how you will find a tenant, maintain the property, pay the mortgage, taxes, insurance and send them a net check each month, if any. You are in fact, better than a property manager. You are not just collecting rent, you are guaranteeing it whether the property is occupied or not.[10]

They will be relieved of the management problems associated with the maintenance of property. They will not have to worry about their lawn being mowed and they will never receive a 2 a.m. phone call to fixing leaky faucets or unclog an overflowing toilet.

Guarantee the Landlord Seller that you will pay for all minor repairs up to $200 per incident or $1,500 per year. There will be no calls about a broken sink disposal.

4-         Seller Receives Full Asking Price

When Sellers Lease Option their property on favorable terms they can usually receive their full asking price.

When a buyer pays cash s/he could reasonably assume that s/he would be given a discount on the purchase price. However, if a buyer purchases on credit or delayed payment terms they understand that they will be paying full price

By offering the Landlord Seller their full asking price on a Lease Option the Tenant Buyer Investor should expect favorable terms such as a long Lease Option period, the right to assign and/or sublet, at or below fair market rent (or rent that may be below the PITI when dealing with expensive homes) and rent credits..[11]

5-         A Lease Option Transaction Is Quick 

There are an abundant number of prospective Tenant Buyers even in a “slow” real estate market wanting to buy a home. A Lease Option can be consummated as quickly, or perhaps even faster than it would take to lease a property.

Only 57% of property owners who have listed their homes for sale have a suitable offer within 90 days. It takes another 30 to 60 days to close escrow due to the loan. (Statistics based on National average of homes sold.)

A Lease Option can be consummated within days or a few weeks not months.

What if the seller is being transferred (s/he needs to know his home is taken care of before he leaves), lost his job (s/he can not afford to wait for his house to sell), divorced (with income cut in half, they usually have to downsize) etc. Time is of essence to these sellers, they need to sell their homes quickly.

Due to fact that a house can be Lease Optioned so quickly, the property owner will save a lot of money on advertising their home for sale.[12]

A Lease Option is a “fast” solution to the “nice” house in a “slow” real estate market scenario.[13]

6-               Minimal Risk to Seller 

Risk is minimized since the Seller retains ownership to their property.

With a Lease Option the deed stays in the name of the Landlord Seller until the Tenant Buyer/Investor exercises their option to purchase.

A Tenant Buyer/Investor who has Lease Optioned property from a Landlord Seller is treated the same as an “ordinary” renter if they do not fulfill their agreement. The Landlord Seller can evict them just as if the Tenant Buyer/Investor had rented the property.

A Lease Option is far less risky that the traditional “low down” or “no down” owner-financing arrangement, where the title to the property is transferred to the buyer who subsequently defaults. The Seller would have to regain possession of his property using expensive foreclosure procedures.

With a Lease Option the title to the property stays in the sellers name and since the Lease is a separate agreement from the Option the Landlord Seller can evict the Tenant Buyer using the faster less expensive “Unlawful Detainer” procedure that is designed especially for tenants that fail to make their rent payments. Eviction is always easier and less expensive than foreclosure.

From the Sellers prospective it is better to keep the deed in their name until the Tenant Buyer purchases the property and pays off the seller’s loan.

A Lease Option offers additional security to the Seller in the form of “up front’ Option Money that is non-refundable unlike a rental security deposit which is refundable.

Note: Landlord Sellers are more inclined to accept your Lease Option offer if you propose to give them “non-refundable” option money that they could keep if you did not purchase their property rather than a security deposit that would have to be refunded if you did not exercise your option to purchase.

7-         Investor Gets Best Qualified Tenant Buyer to Lease Option Sellers Home.

The Investor wants the best qualified Tenant Buyer in the property because the Investor (and therefore the Seller) gets paid when the property is sold.

Investors make their profit by buying a property wholesale (in the case of a Lease Option wholesale can be the current fair market value for the house) and selling retail (a price that is increased to more than current fair market value due to the financing terms provided to the Tenant Buyer).

Investors want to find the best qualified Tenant Buyer to Lease Option the Seller’s house as possible. They want someone that will take care of the property and eventually secure the financing that will pay off the seller’s loan.

The Investor is highly motivated to make sure that the Tenant Buyer will exercise their option to purchase as soon as possible in view of the fact that most of the Investors profit comes when the property is sold. For that reason Investors will be of assistance to Tenant Buyers in the loan qualification process and direct them to lenders that will show them what must be done to get qualified so the transaction will close in a timely manner.[14]

8-         Peace of Mind

The Landlord Seller will have peace of mind knowing that someone that has a vested interest in your property will be living on site that will watch and guard your home as if it were their own, against vandalism, fire etc.[15]

This is the equivalent of having a security guard living in your house who pays you rather than you having to pay them.[16]

When a property is vacant for more than 30 days, the property owner runs the risk that their insurance company will cancel their insurance. Which properties are primarily at risk?

·       There may be a vacancy for several months in a “slow” real estate market and especially for “hard to sell” properties.

·       Rentals in a market that has been over built with rental property may take more than a month or so to rent.

·       Property owners that have been transferred or have moved to a new home are afraid to leave their property vacant and want to have someone that is reliable live in their house as soon as possible. [17]

9-         No Real Estate Broker Commission

With a Lease Option the property owner doesn’t need a Realtor®. It is as quick and easy to use as a standard lease. 

You may want to hire a “transaction coordinator” to make sure you are providing the buyer with all the property disclosures that are required by Federal, State and local law. A transaction coordinator charges about $300-$350 in San Diego (year 2004)

By dealing with the Buyer directly the Seller will save 6% to 10% of the sales price, which is the standard Real estate commission.  

Note: As an Investor you would want to try to negotiate a 6% to 10% discount on the purchase price of the house. Find out what the standard real estate commission is for your area and what percent difference there is between the asking price and the sales price of property in the neighborhood. If you can find an article in the newspaper or in the local Board of Realtors magazine about the difference in asking price and sale price, bring it with you when you are negotiating.

10-           Seller Retains Tax Benefits

During the Lease Option period the Seller remains on title (retains ownership) of the property, and therefore all income tax deductions continue on with the property owner until the Tenant Buyers exercise their Option to Purchase and buy the property.

As a landlord, the property owner can also depreciate the property as well as retain the property tax and mortgage interest tax deductions. As a result, not only is the Seller’s loan payment sheltered from income tax, a “paper” loss is created that can be used to shield ordinary income from income tax as well. 

If part of the monthly payment received from the Tenant Buyer is called “Option Consideration” (the rent credit portion) the Seller MAY be able to defer paying tax on that amount under Section 1234 of the Internal Revenue Code.  (The amount paid that is more than fair market rent can be tax deferred.) See index for said code section.

If the property was the Sellers personal residence, as long as they do not Lease Option the property for more than three out of the last five years, the Sellers can still qualify for the capital gains tax exemption under the Taxpayer Relief Act of 1997 which reads as follows: 

“Effective for home sales after May 6, 1997, up to $250,000 of gains can be excluded from gross income, provided you owned and lived in the home for at least two of the previous five years. Married couples filing jointly can exclude up to $500,000 of gain if both spouses meet the two-year residency requirement.”

Courts have ruled that as long as the lease was incidental to the sale, the property will still qualify as a personal residence and not a rental. See index for Bolaris v. Commissioner, 776 F.2d 1428 (9^th Cir 1985)  

11-           Easier to Sell “Hard to Sell” Properties.

Hard to sell properties are easier to dispose of whether the difficulty is due to the economy, the location of the property, the marketplace (a buyers real estate market) or for whatever reason. There are an abundant number of prospective Tenant Buyers that desire home ownership 

Hard to sell properties may be houses that are over financed such as in California where many are 100% to 110% financed. A Tenant Buyer in a Lease Option scenario does not typically question the price of the property they are more interested in how much they have to put down as Option Consideration and the monthly payments.

A Lease Option expands the number of potential Tenant Buyers since the typical up front payment is equal to the first and last months rent and a security deposit.[18] 

As an Investor, call the last month rent and the security deposit non-refundable Option Consideration and the Seller will be more likely to do a Lease Option since they can keep the Option money if the Tenant Buyer does not perform, where as they would have to refund the security deposit and credit the last months rent if the Tenant Buyer does not exercise their Option to Purchase.

 A Lease Option is a way to successfully negotiate an ostensibly unworkable deal. [19]

12-           A Tax Planning Device

A Lease Option can be used to delay the actual sale of property from a current high income year to a following year(s) giving the Seller time to plan for and/or create a tax shelter for the capital gain tax of the sale.[20]

13-           Property Owner can sell their home to an investor but delay moving.

A seller may want to build a new house. S/he can sell to an Investor and remain in the house until the new home is built. This would benefit the Seller in that s/he would not have to move twice. Meanwhile the Investor has plenty of time to market the home to a qualified Tenant Buyer so when the Seller moves out the Tenant Buyer can move right in. [21]

14-       Helps Seller Qualify For Financing on a New Home.

The Seller can provide the potential lender for their new home a written Lease Option Agreement showing that they have a serious Tenant Buyer who has already put down Option Money to buy their home and also pays them a steady monthly rental income that covers their present homes mortgage payment. With this information the lender would be more inclined to provide financing for the new home.

14-           Seller Benefits by Giving Optionee (Tenant Buyer or Investor) a Rent Credit

To Induce the Landlord Seller to give a monthly rent credit, offer the following: 

·       Guarantee that the rent will be paid on time by paying one month in advance.

·       Take care of all the routine maintenance on the property and pay for all repairs up to $200 per incident or $1,500 per year.

·       Pay for all the sellers closing costs (not real estate commissions) when the property finally closes.

·       To give the Seller Non-refundable Option Consideration (equal to whatever s/he wants over and above the first months rent) that the Seller can keep even if the Tenant Buyer/Investor does not exercise their Option to Purchase rather than a security deposit and last months rent that the Seller would have to credit the Tenant Buyer if they did not exercise their Option to Purchase.[22]

 

 Foot Notes