Lease option vs renting

Im still learning new aspects of REI. Please tell me if I got this right!

A lease option is basically when you have a place that you offer someone to lease it from you, while you still have ownership of the place, and the person that is leasing it has the right to purchase the property within a certain amount of time. If they dont execute that right, they still can lease the property from you but they can no longer have the right to buy the property from you.

Now, is the difference between renting/landlording and lease optioning that when renting, the renter does not have the option to purchase it from you?

Thanks for clearing this up.

In a nutshell, you’re correct. A straight rental is simply having a tenant in your property who is renting. No option to purchase is involved.
Leasing with an option adds the possibility that the tenant/buyer has the right to purchase your property for an agreed to price at any time during the lease agreement.

Thanks. Is one better than the other?

Right now, renting seems better because you will always own that property…so you can virtually have an infinite amount of income until you sell that property. Why would a property owner set up a lease option instead of a rental?

Why Lease Option…

  1. More money.
  2. Less hassle.

In my area I can get $300-$400/month more for the average house with a L/O over a straight rental. I have no management costs. And the buyer-to-be takes care of the house.

I’d rather have money in hand (cash flow) than money in the bush (possible future appreciation).

You need to be very careful with lease options. Above market rents and non-refundable option fees look more like a sale than a rental if the tenant claims he has an equitable interest in the property. That turns an eviction into a foreclosure.

That’s an urban myth. Simply isn’t true.

Statements like this are made to sell “guru” courses.

If your contracts are written properly you will NOT have a problem.

missjen- if you are looking at sf homes then, in my opinion, lease options are much more appealing than just straight renting. But that’s just my opinion. You have to weigh the pros and cons for yourself and then make your best decision and go with it. Second guessing yourself will just keep you procrastinating and sitting on the sidelines with the Bin brothers (Woulda Bin, Shoulda Bin and Coulda Bin). :biggrin

LOL sounds good! One more question, why DO you get more money with a lease option? Is it because there are no property management fees or what? Thanks again for everyones help.

Why doesn’t the doctrine of substance over form apply? If it looks like sale, it will be treated like a sale. Just because a tenant-buyer is ignorant doesn’t remove the risk. Posters on this site continuously encourage transfers that violate the due on sales clause of mortgages based on the low probability of enforcement. That makes the risk less. It doesn’t make it an urban myth.

Actually not. Gurus push high option fees, above market rents, transferring maintenance and repairs to the tenant-buyer, and making the tenant-buyer pay taxes and insurance. Those are the elements that make lease options attractive and they are the same ones that can prove the lease-option is more a like a sale.

I will agree that you need properly written contracts, but what’s proper? That’s ultimately up to the judge. The lease risky I could devise were no-fee right of first refusal for the purchase and adding the taxes, insurance, etc to the sales price instead of making the TB pay on an on-going basis. That deal limits the benefits if the option isn’t exercised.

The risk is real, but probably as likely as a lender calling the loan based on the due on sales clause. Anyone doing lease options should be made aware of the risks and benefits of various contract terms and decide for themselves if it makes sense.

You can get more money down because the t/b is looking for a place to BUY not RENT. You can also charge more for the payment because YOU are essentially the bank in this deal.

So if someone with terrible credit comes to you to purchase a home you are essentially charging them a higher interest rate (just like a bank does when you apply for a traditional loan. The lower your credit score, the higher your rate.)

This also helps when the buyer goes to apply for a loan in 12 months. You can prove that they can afford the payments which will make them more likely t o be qualified for a loan.

Also, when you rent, you get a deposit, which you have to give back at the end of the term. When you perform a l/o, you collect a non-refundable option consideration which gives the buyer the right, not the obligation, to buy.

Just remember to keep your lease and option agreement seperate with your t/b and you’ll be fine. Good Luck. :cool

This also helps when the buyer goes to apply for a loan in 12 months. You can prove that they can afford the payments which will make them more likely t o be qualified for a loan.
When you set the rental price, do you aim for basically what they would pay for their eventual financing, then calculate what part of that you’d credit back to them based on going rentals (leaving an extra amount for yourself each month)?

Sale price @ 8-10% amortized for 30 yrs. That is your rental amount. If there isn’t any money left for cash flow then there is no deal.

Their rental credit will come off of the back end once they finance the loan.

BLL is right that you need to know the laws in your area. In my area evictions and foreclosures take about the same length of time, so it’s not really an issue for me.