Thursday, 14 December 2017

Advantages and Disadvantages of Using a Lease Option

Written by Posted On Tuesday, 21 November 2017 07:35

The world of real estate is a competitive industry where you have to be at the top of your game at all times or you never know when someone would swoop in and steal your opportunity. For a person who wants to enter real estate to make a living, they have to be a pretty good presenter, in order to ensure that they bag the client or at least, persuade them to make a commitment at the end of the walk through.

There are various options of investing in real estate. Choosing the right one depends on whether you are planning to sell it right away or forming a landlord and tenants relationship. This relationship keeps the landlord and tenants happy for a period of time, depending on the contract they have signed. This type of residential sales option is offered by companies such as Laing & Simmons Real Estate.Lease Options

What is a Lease Option?

Lease option is a strategy that has two aspects to it. The lease is the document that the tenants sign for a certain period of time and move into the house and the option allows them to pay the full amount set in the contract, if they want to buy the house. The option gives the tenants the legal right to buy the house in a pre-determined length of time at a pre-determined price.

Here’s an example to help you understand how the lease option actually works:

Morris and Sasha are planning to buy an apartment from Daniel, the investor. When the couple is unable to get a loan, they ask Daniel for seller financing. After checking the couple’s credit ratings, Daniel sees them as a good candidate. The contract is signed and the home is set to be bought at $100,500, within a two year period. The couple provides Daniel with $7000 and moves in. Within two years, they are able to get a loan and purchase the house from Daniel.

Advantages

    • Proves to Be a Profitable Short-Term Exit Strategy
    • The

lease option

    is more profitable than flipping a property, as it provides you with multiple options in a slow as well as a high market. Depending on the buyers, it’s possible that they might leave the option and look for a property somewhere else, which gives you the advantage to look for a new tenant but with a higher price range.
  • Less Property Damage
  • Since the tenants have no idea whether they will be purchasing the house or just leasing it, they take better care of the property. Damages that take place during the leasing option are to be repaired by the tenants.
  • No Commission
  • Since you are selling on your own, no commission is required to be given to the real estate agent. By effectively marketing the house and offering tenants some flexibility, you save more.

Disadvantages

  • "Due on Sale" Clause

If you’ve offered seller financing, there’s a possibility that the bank might demand the “due on sale”. In such a case, you’ll have to pay back the loan in 30 days.

  • No Selling Option

The tenants might buy the property or they might back out at the end, leaving you empty handed and looking for a tenant once again. If the market is down, it will be difficult for you to attract serious buyers.

  • Possibility of Low Profits

If the market rises, you cannot charge the tenants extra if they plan to buy the property before their lease is up. Therefore, you need to be careful when setting the sale amount in the contract.

If you believe that you are a pro in the real estate market and can handle the possibility of a loss, then the lease option can be great for you. You just have to wait patiently for the right buyer, so that when the lease is up, you’ll get the profit, whether or not the tenant buys the property.

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