What Are Lease Options?
A lease option, or lease with an option to buy, is a real estate contract that offers a property renter the opportunity to purchase the property after the lease period concludes. The contract entails an upfront option fee paid by the renter for the potential to buy the property, along with a monthly fee contributing to the down payment if the renter chooses to exercise the buying option.
During the lease term, the property owner is restricted from selling the property to anyone other than the tenant. If the renter decides not to buy the property at the lease’s end, they forfeit the option fee and any down payment funds already paid.
How Does Lease Options Work?
A lease option offers potential property buyers the flexibility to rent from an owner without a mandatory purchase at the lease term’s end. Unlike regular lease-purchase agreements, a lease option allows renters to opt out of buying. The property’s price is usually set upfront between renter and owner, aligning with current market value. This can benefit renters by potentially enabling a purchase below market rate. However, exercising the option may involve fees, up to 1% of the property’s sale price, charged by owners.
What’s Required For Lease Options?
A comprehensive lease option contract should cover the following essential details:
- Lease term: Clearly state the duration of the renter’s occupancy before they can exercise the option to buy.
- Option fee: The contract must include the agreed-upon fee paid to the property owner for the opportunity to purchase the property.
- Purchase price: Whether the renter buys the property or not, the contract must specify the purchase price.
- Rental amount: Both parties should agree on the monthly rent amount for the lease duration.
- Rent credit: Outline the portion of the monthly rent that will be credited towards the future down payment.
- Mandated homeowners insurance: While not obligatory, it’s advisable for renters to ensure that the property owner maintains homeowners insurance throughout the lease term to safeguard the property’s value in case of unforeseen events.
How to Use a Lease Option to Invest in Real Estate
Utilizing a lease option offers creative real estate investment avenues. One approach is the straightforward lease option, where you become the lessor. You locate a tenant-buyer, engage in the lease option agreement, and either sell the property or find a suitable buyer. Alternatively, you can be a lessee-investor, signing with the property owner to sublet. The owner charges minimal rent, and you and the owner share subletting proceeds. Advanced investors might explore a “lease option sandwich” tactic, acting as a lessee to secure an option from an owner. Then, signing the property with a potential tenant for a rent-to-own setup, the investor retains the profit difference.
Why Do Property Investors Enter Lease Options?
A property owner might consider a lease option agreement when facing difficulties in directly selling their property. Such an option could widen the pool of prospective buyers, making the house appealing to a diverse group.
Additionally, if an owner contemplates selling their home in the near future, the lease option offers an opportunity to charge a rent higher than the prevailing market rate. In the least favourable outcome, if the tenant opts not to purchase, the owner can still market the property for sale and retain the surplus paid over the regular rental fee.
Tax implications may also arise from selling the property now rather than later. While the lease option doesn’t guarantee a future sale, it heightens the chances of having an interested buyer at the end of the agreement.
In conclusion, lease options offer a feasible route into real estate investment and an alternative for home payment without a significant down payment. Reflect on the aforementioned approaches thoughtfully, but keep in mind the potential risks associated with lease options. If you’re the lessor, you must be prepared to sell your property to your tenant if they choose to buy at the lease’s end.