Before I get into why you might want to consider a lease option, let me give you a little background on market statistics.
The other day, the National Association of Realtors (NAR) released a troubling statistic. In July, home sales across the nation dipped 27% year over year from July 2009. This was due to many buyers purchasing before the home buyer tax credit expired, but it’s still an ugly statistic for home sellers.
Obviously, the tax credit had a major impact on home sales. Everyone who would have bought a home in July or August this year, that qualified for the credit, moved up their purchasing dates to get the credit.
The credit didn’t increase sales, rather it made buyers move up their purchase to qualify for it. Waste of tax payers money? Most likely, but that’s a story for another day. Back to my post:
What Is A Lease Option?
As home sales slow moving into the fall selling season, a lease option might be something that could work for you, especially if your home is vacant. What is a lease option you say?
A lease option allows someone to lease your home with the option to purchase it. It’s like a glorified rental, in that the renter of your home has the option to purchase the home at the end of their lease agreement; usually 12 months. Here are some basic principles to a lease option:
The lease option binds the seller to sell and not the buyer to buy. The option gives the buyer discretion to buy or not. This is why lease options usually come with a larger deposit than a months rent. This deposit usually ranges from 2-5% of the home price. Of course this is negotiable between buyer and seller.
How do you determine price? Price can be dealt with in two ways. The buyer and seller can agree to a price when the contract is signed, or they can agree to price by when the date the option is exercised. Either way, it’s usually still based on an appraisal. The monthly payment is determined by buyer and seller, and it can be applied to the cost of the home or not.
It all depends on the terms of the agreement. If the payments are applied to the purchase price of the home, if the buyer decides not to purchase the home, the seller will not have to pay that back. Basically, a lease option is the same as a lease, with the option at a determined time period for the buyer to purchase the property.
Advantages Of A Lease Option For Home Sellers
A lease option opens you up to more buyers. A lease option allows you to sell your home where you otherwise wouldn’t have been able to sell it.
For example, there are many people right now that don’t qualify for financing with the increased regulations in the lending industry.
Many of these potential buyers have been taken out of the market, and a lot of times all they need is more time to qualify. They may need to pay off some debt, raise their credit scores, or save up a larger down payment. Many of these buyers are very close to purchasing, but can’t quite get over the hump.
For you the seller, this gives you an advantage in an otherwise strong buyers market. When I deal with sellers looking for lease options, I like to tell the buyers they get price or terms, pick one. Meaning, they can either get a better price with terms that are more strict, or they can pay more and get more lenient terms. As a seller, both will work in your favor. You either get a better price on your home, or you will get some great terms with a nice non-refundable down payment.
If the buyer doesn’t exercise the option to buy your home at the end of the agreement, they forfeit all rent paid, and usually forfeit their down payment. And once this happens, you go into landlord-tenant relations, giving you the right to evict and retain your home. You may also work out another agreement, either way the ball is in your court.
Another advantage is; if you have to move fast or your home is sitting vacant, you get someone to pay your mortgage payment for you. They may also do some upgrades that could add value to the home, and you get people to in your home to maintain it.
Disadvantages Of Lease Options For Home Sellers
A lease option has it’s disadvantages. One of them being having someone in your home that may not take care of it. They may trash it and leave you holding the bill, just like any renter.
Also, the buyer may not exercise the option to purchase your home and you’re left with another mortgage payment when the lease runs out.
If you are unable to make payments on two homes, if that is your situation, you might not be able to find another renter. And if you try to sell the home again, you may not be able to sell it either.
The real estate market is still declining here in Logan. If you sign a lease option today, in 12 months from now when it’s time for the buyer to purchase, your home may be worth less. If you take if off the market today, you won’t have the chance to sell it for today’s prices. You’re locked into the agreement unless the buyer defaults.
Interest rates may go up. If interest rates go up, the buyer who could afford your home today may not be able to afford it tomorrow. Even if interest rates go up only a point, it could disqualify many buyers from purchasing your home.
Why Should Struggling Home Sellers Do A Lease Option?
If you’re home is sitting vacant, there are many renters right now in the Logan UT real estate market. These people are calling my brokerage everyday asking for lease options or rentals. I can’t speak for other markets around the country, so I would talk to a local Realtor about markets where you live.
If you’re tired of showing your home, a lease option could help you get out of the market, out of your home, and get someone who will pay part of your mortgage for you.
If your not getting any showings and you can’t reduce your price, a lease option is a great way to wait out the market. Even if the buyer doesn’t buy your home at the end of the option period, you still have someone paying you rent, and you can negotiate keeping a nice down payment. Plus, you could always try to sell when there is less inventory and get a better price.
All in all, if your a home seller, I truly understand how difficult it is right now. A lease option may be something you could try if your home isn’t selling and you’re struggling to make ends meet. If you do a lease option, be sure to consult with an attorney about terms of a contract, or talk to a Realtor about the options we can provide.
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