Deconstructing the Lease - Option Agreement
If you're a real estate investor, you've probably heard other investors talk about using a "lease-option agreement" to sell investment or rental properties, but you've probably never done it yourself. Like all avenues of sale, lease-options have their place, but should only be thought of as one more tool in your bag of tricks to sell real estate.
The definition itself is quite simple: a lease-option agreement is a lease agreement that offers the tenant the option to buy the subject property for a specific price, within a specific time frame. Easy enough so far, right?
Lease-option agreements don't lock the tenant into buying the subject property (like a sales contract does), but it does lock the landlord in at a certain sales price. Why is this beneficial for the landlord? In a rapidly appreciating market, or seller's market, it's not beneficial in the least to the landlord.
That said, in a slow market, or buyer's market, it can be an effective avenue to sell a rental property without having to carry the house while the it sits on the market. It also removes the real estate broker as the middle-man, saving the landlord/seller from paying a sales commission.
Lease-option agreements should not be confused with installment contracts, which are similar but differ in several important ways. Installment contracts actually transfer the title of the property after a specified period of time, theoretically anyway (though the tenant/buyer usually has to refinance the property, thus paying off the landlord/seller, for the change in title to be recorded). Lease-option agreements, alternatively, require a separate contract of sale and a purchase settlement, instead of a refinance settlement.
Where can one find a lease-option agreement? Some local governments provide them for free on their websites, and plenty of private companies offer them on their websites. Here's a link to one site I've worked with many times that offers a good lease option agreement.
Before using a lease-option agreement, verify that the tenant/buyer is capable of obtaining a loan to purchase the property. Check their credit, income, and employment history. Finally, never assume that a tenant will exercise their option to buy, because there's no guarantee when or if they'll ever do it, even if they say they will. Lease-options are a viable, alternative avenue in selling real estate, but only for investors with the time and patience to become a landlord.