Hi all, totally new to REI so hoping to get some clarification on this…
I have a friend who is sick of landlording, he has like 5 properties that he rents out. I was just trying to explain to him why he might want to consider L/O his properties, instead of continuing to rent them out. He even knows of one family that would really like to buy one of his properties which they are currently renting, but they can’t afford to buy it.
Anyway, as I’m knew to all this, I did the best I could in trying to explain to him why L/O can benefit both buyers and sellers. But he just could not be convinced that he wasn’t “taking advantage” of a tenant-buyer in doing a L/O. His objections were these:
Why would a tenant give option $ upfront? They might lose all that money if they decide at the end of the term that they didn’t or couldn’t buy the property.
Why would a tenant contract the option to buy a property for a specific price (current market value or more) when the RE market might drop/dip/tank at the end of the lease term and the buyer would then have to walk away it, and lose their option $.
Why would I want to tie my property up in a lease when I lose control over when and how much I could sell it for in the future?
I explained to him that someone who isn’t able to buy a home in a conventional way might be attracted to a L/O because it allows them the option of getting into something they couldn’t do any other way. But he still was extremely skeptical. He’s probably someone who may just not be a good candidate to offer a L/O, but still - the issues he raised got me thinking, well if he’s thinking this way, what keeps a tenant-buyer from voicing the same concerns … ‘Why would I give you $10k option money that I will lose in 4 years (or whatever) if I can’t/don’t buy the property?’ … or … ‘Why would I agree to buy the house in 4 years for more than it’s worth now - the market could be in a down cycle at the end of the 4 years and then I’m forced to buy a house for less than it’s worth or lose the $10k I inveseted in option money?’
Are these common concerns? Are they just risks the buyer takes if he is really interested in owning? How do you repsond to these questions/issues?
Thanks for any input/insight!
lease option buyers aren’t raising those objections. they want to get into the home, and they don’t think they won’t be able to buy the home later (we all think we’ll be better off down the road, right?).
and if they do raise those types of objections, an easy way to sell around anything they object to is, “well that’s fine, just go on down to the bank and get a mortgage then.”
lease optioning or other owner financing, for A LOT of people, is THE ONLY chance they have to own a home. they aren’t raising objections, they are just happy to have a chance.
the biggest problem is finding people who have that kind of cash to pay the option money. that’s the challenge to worry about, not the buyer’s objections.
Thanks cecsix, I appreciate your opinion!
If your landlord friend is so negative about lease options, then it’s doubtful that he’d be real successful in doing them.
However, to answer your concerns:
They give an option fee upfront because they want to have the opportunity to buy the house. In my options, that fee is applied to the purchase price should they close on the property, so it’s not wasted $$$. As a professional investor, I give my t/b’s every available outlet to make sure that they are able to close on the deal by the time the option expires. A mortgage broker pulls their credit BEFORE they sign the l/o and tells them what they need to do to fix their credit so that they will qualify. They receive rent credits for timely payments which are applied to the purchase price. Yes, they lose the option fee IF choose not to purchase or if they are evicted. If they don’t qualify at the end of term, I’ve did all that I could to help them. They have to follow the steps to make sure that they qualify.
The RE market could drop/dip/tank, that’s correct. Wouldn’t be better to be out $1-3K, then be on the hook for a $100K loan? The market could also shoot through the roof, too. Wouldn’t be good to have an option for $100K on something that’s worth $150K?
Well, that’s part of the deal, right? You’re obligating your property for a specific time period. However, I have in my l/o agreements the ability to sell the property to whomever I choose whenever I choose. The only stipulation being that the terms and conditions of the lease and option agreement are fully transferred to the new owner. That gives me the option to selling to another investor if I no longer wish to deal with the property anymore.
Options fees tend to vary from market to market, but generally speaking, 1-3% is about tops for an option fee. Sure, you can ask for more, but it takes alot longer to lease, so you’re just losing rents to get a higher option fee.
A fee of 10% or higher is hard to get, as it takes some pretty messed up credit not to be able to get some form of financing if you’ve got 10% down. If the credit is that bad, then they may not be the best candidate for lease/option (If their credit is so bad, that the broker doesn’t think that it can be repaired in 2 years, I don’t l/o to them. Believe me, you’re doing them a service).