I think most don't because of the commission not coming in til the house sells. (if at all). My company prefers us to not do rental. Drives me crazy but their policy is "we aren't property managers."

I love lease options! I set it up that if I am getting a 6% listing that I get 2% from the lease option devided by the length of the lease. Then the remaining 4% up the option being excercised. Kinda of nice to have a monthly income in this business!

I think those are valid points, but I am finding more and more in this market that buyers want to test the waters first before committing to the sale, especially on higher priced homes.  I met with one buyer from Texas last weekend who felt that due to the uncertainty of the market he felt more comfortable renting for a year to see if prices are going to go down further.  He was willing to take that risk and I have spoken to many others who feel the same way.  Let's face it, no one wants to buy a home that is going to experience negative equity six months after you buy it.  It's something I think we will all have to deal with more in the coming months.

Lease options beat NOTHING on paper. You may not get paid soon but it is set up to come later. Later is ok too. It isn't like property management if you have detailed terms in place for both parties. Just a little overseeing now and then.

I have one that has been cooking for 6 months and payoff is just now around the corner. We just have to learn to be flexible and creative in this business.

Melanie,

    This could be wonderful for you and the seller. Do a lease-option for $150 or more than the present PITI. What ever the market will allow. Usually about $300-500 more than the present rents for an area. Then you set the price of the home 5% per year higher than the present CMA says the home is worth.

Example

$2000 a month (Lease Option Price) (PITI $1700)

3% down for the option ($200,000 = $6,000)

$100 a month from the rent goes into a saving account for the buyer if they exercise the option and they also get the 3% down put toward their down payment if they excercise the option at the end of the lease.

Here is the advatage to the home seller if they don't excercise the option.

They get $300 more per month than the average rent in the area for 2 years for a total of $7500 and the deposit of $6000.

For a grand total of $13,500 and if they just rented it they would have only got their mortgage paid instead of a profit of $13,500. It truly is a win-win for both sides of the transaction.

For the buyer, they get down payment assistance at the end of two years with part of their lease money going toward down payment and if the property rises more than 5% in equity in that time they get that added bonus. If the home price for a two year lease was set at $210,000 and it skyrockets and becomes worth $300,000, they still get the home for $210,000!

It also gets you money and future buyers and sellers again if the option doesn't work out and they deside to look at another home.

WHEN WE DO A LEASE OPTION WHERE I AM LOCATED, THE HOME IS SOLD FOR THE PRICE DECIDED ON WHEN THE LEASE OPTION IS SIGNED.  IT DOESN'T MATTER IF THE PRICE GOES UP OR DOWN...THE HOME IS SOLD FOR THE PRICE IT WAS LISTED FOR AT THE BEGINNING.  IT IS GREAT FOR THE SELLER BECAUSE HE KEEPS THE MONEY THAT WAS PUT DOWN TO TAKE THE HOME OFF THE MARKET AND ANY OTHER AMOUNTS PAID (ON TOP OF THE RENT) THAT IS TO GO TOWARDS THE PRICE WHEN THE HOME IS PURCHASED.  AS FAR AS THE BUYER IS CONCERNED CAN BE GOOD OR BAD BECAUSE HE WILL LOSE THE DOWNPAYMENT PLUS THE OTHER MONIES.  IF THE BUYER KNOWS FOR SURE HE WANT TO PURCHASE THE HOME BUT CANNOT GET A MORTGAGE AT THIS POINT, THEN IT IS A GOOD DEAL.  IF HE ONLY WANTS TO CHECK OUT THE NEIGHBORHOOD NOT SOMETHING THAT SHOULD BE CONSIDERED.  STRAIGHT RENTAL IS WHAT IS CALLED FOR.

Very sticky stuff though...what happens if the home owner/landlord files bancruptcy?  The Leasee gets NADA!

Ron,

If the lease option is set up right which I make sure mine are. If the owner files bankruptsy or falls behind on the payments. The home automatically goes first right of refusal to the buyer and all option money in escrow is given back to the buyer!

My broker has no qualms with leases options. I've done several that worked out fine, never for the reason stated here. The price is also set for the lease date and a sizable deposit is necessary.  If they are unsure encourage them to rent.  I do advise the purchaser that they lose the benefit of the tax breaks by entering a lease, since the tax breaks still go to the owner of the property. I never thought about collecting a partial commission up front.

Realtor, Columbus Ga

Todd,  if the person is bankrupt, there is no money to retrieve!  The mortgage company has NO responsibility to give the right of first refusal to the buyer and in MOST mortgages, when the owner enters into an agreement to sell the home, that makes the mortgage due on acceleration.  

When I am doing a lease - purchase, I have two contracts. The first is a standard lease agreement with an addendum that specifies the amount of the lease payment that goes towards the purchase price. This includes a complete set of appropriate deposits. The purchase contract is setup for a defined period based on the lease termination date. I open escrow with earnest money. On a purchase with a set price the earnest is non-refundable. On a purchase price a variable based on future appraised value, etc the money is refundable. I typically recommend $5000 minimum for properties under $250,000 and escalating upwards as the property value increases. This seems to work well for both the buyer and seller since everything is pretty well defined.

Oh my! No commission? Most of us real estate agents don't encourage lease purchase because the buyer has crappy credit, no money down, and has an escape clause built in their favor. We work for the seller who wants to get rid of the property - not rent it. Most sellers are not investors looking to capitalize on the investment, they are people like you and me who need to unload something so they can move on. It's not "just" about the commission - we have a responsibility to the owner.

Mike,

Does when you open escrow with the earnest money. Does the buyer also give money to the Seller as a deposit in addition to the earnest money or does the seller have to wait till the end of the lease to get the "deposit/earnest money?"

All states are different on this transaction. I think Texas recently outlawed it. And you know Texas. You can't be an outlaw. And look who spoke, the Phantom.

Karen

Texas didn't outlaw it but does not support it via the state promulgated forms. They strongly advise involving a RE lawyer to draft the document to protect ALL parties. The tricky part is being involved to make sure your commission is protected in the document, as well as the fees the buyer would pay the attorney. I would like to hear some more from TX realtors who have done these.

My Brokerage here in Ohio actually manages properties as well. I can tell you that the down side (besides not getting paid for a yr or so) is that if the sale does not happen than you get nothing besides a portion equal to the first months rent (or whatever you set up). We do a lot of straight rentals and some lease options. I don't get very excited when I get a lease option because it is not a sure thing by a long shot. Better than nothing and it can help the Buyers and Sellers which is good. But if it falls through because the situation of the Buyers changes, it won't seem better than nothing!  For example, the last lease purchase I did, the Buyers ended up getting a divorce 3 months later and she could no longer afford to purchase the home as agreed. She of course forfeited the additional $200/month she was paying for the lease-option but it was very disheartening to my Sellers who just wanted to sell the property but couldn't because there were so many for sale in that subdivision.  

Ron,

  Left town and almost missed your comment. I've dealt with this twice now here and both time have won against the banks. If the seller doesn't pay, the contract with the new buyer was good enough for the first right of refusal.

  As for the acceleration clause, it doesn't come into effect unless the contract is complete, meaning complete payment. We have also tested this twice now. What happened is the bank got wind of what was happening and tried to use the acceleration clause. They said the contract was stating that the property was sold, but if you look at the way the contract is written it wasn't sold until the it has been paid in full.

It is a very fine line! That is like you filling out a contract to list your home and the bank demanding the money prior to you getting paid by a buyer for the home. That is the way the court saw it and that is the way my sellers lawyer saw it. Also, if it is a VA loan it is completly assumable by any buyer even if not a Vet! Love that one!

I know each state is different and I don't really want to argue, Love the different oppions here, but don't plan to change what is working for us here anytime soon.

RON - CONGRATS on the getting your webpage back! Sorry it was such a mis-understanding. But, I still think you were in the right and even though he isn't the one who posted it, he is still ultimately responsible for the content on his site.

Have a good night everyone!

What we've done is also two contracts.  One for the negotiated purchase price on the home, the 2nd for the lease.  The 2nd is an addendum to the first.  A nonrefundable deposit is taken.  We are paid 35% of the non-refundable deposit at time of signing.  If the sale actually takes place, our commission is paid at the closing less the money we already received.  Works for us.  :)