After reviewing the basics of how a lease-option works, you decide that this type of transaction may be the right way to eventually sell your rental home. After all, the tenants you have in place are making payments timely and have not been difficult to work with. Or, you are looking for an angle to get that vacant home you own rented.
There are five owner benefits to creating a lease-option:
Higher Demand: If the home you have been trying to lease has not rented after some time on the market, you can conclude the home and your expected rent is not matching the market demand. Since there is not much you can do to change the fundamentals of the home, your choice is to reduce the asking rent. The lease-option offers a new advantage..a term that is not available from many other homes for rent. Plus, the terms of a lease-option should bring you closer to the higher rent you are seeking while you receive a nonrefundable payment for the cost of extending the option.
Top of Market Sales Price: A renter, provided the opportunity to enter into a lease-option transaction, should agree to pay a market price for the home at the top of its value range. Remember, the home ultimately still must appraise for the buyer, but market value is represented by a range of values. The option purchase price is set at the time of creation of the lease-option. For this reason, the length of the lease-option contract should be limited to two years. That way both the rent and the lease-option market risks are limited.
Great Tenants: Tenants will live in a home differently when they plan to own it. Expect a different relationship with simple maintenance requests and limited damages if the option is never executed.
Higher Cash Flow: Tenants should be willing to pay 10%-20% more than the normal market rent for the benefit of receiving a lease-option. The higher than market rent will include the rent credit you offer the tenant (usually 20-30% of the payment). The rent credit will apply against the agreed Option Sales Price when the option is executed. The credit provides the renter a down payment savings account. It provides the owner higher cash flow.
Continued Tax Deductions: Unlike a sale agreement with seller financing, a lease-option allows the owner to continue to receive tax deductions as the owner. Interest, taxes, maintenance and depreciation may still be deducted against the rent received.
Just as the owner-seller has benefits, the win-win of a lease-option also applies to the tenant-buyer. In our next post we will review five benefits the tenant-buyer will enjoy when entering one of these transactions.
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