Creative Selling Techniques – Lease Options
Lease options became popular in the 1970’s and 1980’s and were created to circumvent “Alienation Clauses” found in mortgages. The definition of an Alienation Clause is Language in a mortgage or trust deed that allows the lender to call the loan immediately due and payable in the event the owner sells the property or transfers title to the property. Almost every loan today contains an alienation clause, which means title cannot transfer and a buyer cannot purchase subject to an existing loan without triggering a due on sale clause.
The basic premise of a lease option is the buyer pays the seller option money for the right to later purchase the property. The buyer and seller may agree to a purchase price now or the buyer may agree to pay market value at the time the option is exercised. The buyer typically leases the property and lives in the property paying monthly payments like any other lease to the seller. At the time the option is mature and the buyer can exercise their option to purchase they will seek third party financing for the agreed upon sale price. It is at the time of the option that the sale transaction takes place.
In most lease options the option money locks the buyer into the right to purchase the property at a later date for a predetermined price. If the buyer fails to exercise their right, in most cases they lose the option money. The option money is security for both the buyer and seller. It typically takes the property off the market for sale for a predetermined amount of time and gives the buyer first right of refusal.
The advantages for the seller include up front option money, income from the lease of that property and a potential future sale once the option is exercised. A lease option may be a good selling strategy for someone who has to relocate from the property or is able to obtain financing to upgrade to another property. In some cases once the lease option is secured, the monthly lease payments can be treated as income for the purpose of financing another home.
One benefit for the buyer is first right of refusal which means that they are the first in line to purchase that property. Another benefit for a potential buyer includes time. A buyer who does not qualify for loan today has the length of the option to get their finances and credit in order and apply for a mortgage. In some cases the seller will credit a small amount of the monthly lease payments to the purchase price. As an example, a $160,000 property on a two-year lease option with 10-percent option money and monthly payments of $1,000 with 20 percent going toward the purchase price would mean that at the end of the option, the purchase price would be $139,200. That is $16,000 for the option money and $4,800 from lease payments applied toward purchase price. In this example the option money is 10 percent, but any amount the parties involved agree upon can be written into the agreement.
The lease option can be a viable strategy and can be a win-win for everyone involved. It can get a seller a viable buyer and allow time for the buyer to obtain financing. The terms and option money is flexible. I have seen six month options with one-percent option money executed because the buyer had to sell another property in another state but had to also report for a new job. I have seen three-year options with 5-percent option money where the buyer did not exercise their option and the seller kept the 5-percent option money, and did another lease option for 8 percent with another buyer who did exercise the option in 18 months.
As with any Real Estate transaction it is highly recommended that you seek the advice of a Real Estate Attorney or licensed Real Estate Sales Associate or Realtor. State laws and Real Estate Law is different throughout the United States.
Jason M. Jakus is a licensed realtor for Leisure American Realty, a full service Real Estate and Property Management company serving the beaches and surrounding areas of Lee County. Their office is located at 2450 Estero Blvd., Fort Myers Beach FL 33931. For more information on this or any other real estate or property management subject contact Jason at 239.463.3178 or email RealtyInfo@LeisureAmerican.com.”