In my last article on lease options [Advantages of Selling on a Lease Option], I listed the many benefits to you (the Optionor) of leasing to your tenants with an option to buy. This article will continue the discussion in more detail.
What are the primary problems of managing and owning a portfolio of single family homes?
- Occupancy
- Turn over expense
- Finding good tenants
- Selling costs
- Time commitment
- Repair and maintenance costs
- Bookkeeping
- Acquisition expenses
- Financing
- Cash flow (to your pocket)
The lease option solves most of these problems for you. This strategy contemplates that the tenant will eventually become the owner.
If the tenant’s performance is satisfactory (he pays the option deposit, makes timely rental payments, and takes care of the minor maintenance), he earns the right to exercise his option and buy the house. If not, he forfeits a majority of the deposit.
As an incentive to leave the house clean and in good repair, I agree to return to the tenant what would have normally been required as a security deposit.
So, if the tenant cannot exercise the option (and we cannot/will not renegotiate with him), he at least has an incentive to leave the property in good shape and cooperate with showings to prospective new tenant/buyers.
You might consult with your attorney regarding the legality of all of this, but from a practical standpoint it works! My philosophy has always been to make all of the details of a lease option VERY clear up front.
Then, if the tenant cannot exercise the option, he knows from day one that he will lose all of his option consideration except the amount normally charged as a security deposit.
We have never been in court over this issue and would diffuse any legal challenge through negotiation. Most “adults” won’t challenge you if you are clear and fair in the beginning of the lease option process.
We are obviously building into our options “incentives” to exercise and buy the property. We make a lot more money in the short run if they buy than if they don’t. However, in the long run we make more money if they forfeit their deposit, and we resell the house at a higher price.
With regards to maintenance, some Optionors (sellers) try to unload all of the responsibility of maintenance on the tenant/optionee. I have not been successful in accomplishing this feat.
Most people I deal with balk at agreeing to pay for ALL maintenance that occurs during the option period. I can’t say as I blame them.
As mentioned in my previous article, with a meaningful option deposit and the prospects of monthly rent credits accumulating, you attract a higher caliber of resident.
I do find though that many of our tenant/optionees have some kind of a credit problem. This is why the lease option is such a powerful tool. It gives them time to clean up their credit problems while living in the house that they will ultimately own.
It also saves us real estate commissions and vacant periods (during typical marketing times), which all adds up to thousands of dollars of savings!