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Why A Lease-Option Could Be The Right Choice For Your Rental

"Will the owner consider eventually selling to us?"

The question comes in from an existing tenant.  More often, we receive it when a home is for lease.  There are certain tenants who see themselves as a renter for a short period of time.  They want to be a home-owner.  The home they move to for rent they want to make the home they purchase.  The problem is usually that certain events do not make these prospects home-buying candidates...today.  For this request, we leave open the concept of a "Lease-Option" agreement.

Some owners may think seller-financing when they hear a request for a lease-option.  Also, don't confuse a lease-option agreement with a lease-purchase agreement.  A lease-option is neither of these two alternatives.  A lease purchase is similar to pre-closing occupancy when a purchase agreement has been negotiated but a closing will not take place prior to the buyer needing to occupy the home.   Seller financing involves a change of ownership rights and includes concepts such as land contracts.

Here are the key features of a lease-option agreement.

Fixed Term

The lease-option is similar to a lease as there is an end date to the agreement.  Lease-option agreements will typically run for a period of one to two years.  In the agreement, the tenant is given an option to buy the home.

Agreed Sales Price

In the lease-option agreement, the price to purchase the home is established.  The owner is obligated to sell the home at that price to the tenant during the fixed term of the agreement.  The buyer is not obligated to purchase during the agreement but they have the right to execute a sale at the established price.  This price is typically identified as the option price.

Rent Credit

The lease will contain a monthly lease payment that will be on the upper end of the market.  A portion of the monthly rent will be credited toward the purchase price and considered a rent credit.  The accumulated credit provides equity toward the tenant's mortgage down payment.  The rent credit is lost to the tenant if they do not purchase the home.  The tenant just paid top market rent for the length of the lease.

Non-refundable initial option payment

In lieu of a security deposit,  funds typically paid as a security deposit become the up-front option payment for the consideration of the owner creating the lease-option opportunity.

Tenant rights

The occupant of your home is a tenant.  No rights of ownership are exchanged.  A lease is created just like any other lease with two additional terms.  An agreed sales price will be established and an additional amount collected to create a credit that a lender will consider as equity or buyer contribution.

Benefits

Owners find a lease-option attractive when they ultimately wish to sell their home but are willing to wait a period to officially sell.  The extra cash received can be helpful if the owner's expenses out-strip the rent income normally received.  The owner has to keep in mind that those extra proceeds may be needed if the sales price, less the rent credit received, ends up being less than the owner's mortgage.

Many owner's reluctantly turn to renting.  To know there is a plan to officially sell and not stay a landlord is appealing.  Tenants find a lease-option a way to build a forced down-payment while living in a home they love and wish to stay in.  The lease-option can work as a great solution for both parties.

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