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A Different Method For Selling A Home In A Down Economy

Many times over the years I've been buying and selling homes as a real estate investor

I have used a lease option agreement as a useful alternative to an outright sale. When I meet prospective buyers who are very interested in a property I have for sale but they need more time to qualify for a mortgage or to rebuild their credit, and I'm considering how to sell my home to them so that it works for me, too, that's when I suggest a Lease Option Agreement. Most people are not familiar with lease option agreements, so I usually find myself explaining how it works and why it can be a good solution.

The other thing to know is that real estate agents don't usually have much information about lease option agreements because it can delay their commission or sometimes eliminate it entirely. So don't expect your real estate agent to give you advice or provide a form for you to use. You will need to have a lawyer draft a lease option agreement for you unless you're working with a seller who provides a form. It's still a good idea to have a lawyer look over any form you intend to sign.

So, how does a lease option agreement work? Well, it is basically a lease on the home with an added benefit for the tenant. An "option" is the right to purchase the home at a specified price on or before a certain date. A lease option agreement is a lease that includes an option as part of the lease. The agreement may require the tenant to pay an option fee up-front, at the time the lease is originally signed, or it may require an addition to the monthly lease payment, which additional amount serves as the option fee. When a landlord gives a tenant the right to purchase the home at a certain price by a certain date, the landlord is making a commitment to hold the property for the tenants regardless of what happens to the real estate market. The landlord is obligated to sell a home if the tenants choose to buy it. But the tenants are not obligated to buy it at all. That is why the tenants pay a fee for the privilege, for the right. An option is a legal right that has value over a certain period of time, usually one year or sometimes two years. All the money paid as an option fee goes toward the purchase price of the home, but it is not refundable if the tenants decide not to close the sale transaction.

Over the years I've sold quite a few houses this way, and even if it didn't work out for the buyer each time, it always worked out for me. Let me explain a Lease Option Agreement this way -- I collect an option fee in a lump sum or added onto the monthly rent payment when my tenants sign a one-year lease. For this option fee my tenants have the right to purchase their house at a certain price within a certain period of time, usually on or before the last day of the lease.


Basically, my tenants are people who want to buy the house they are leasing, but they need some time to build up their credit or to save up a down payment. During the year they are paying rent, sometimes I structure their lease payment so that a portion of it applies to the purchase price if they decide to buy the house. In addition, I often ask for the option fee at the time the lease is signed. Since I have collected an option fee in advance and possibly a little more each month, I have collected more money than I would have collected had I rented the house to tenants who had no interest in buying it. Plus, I have an agreement that, essentially, provides certain benefits, not the same but similar to those I get when I sell my house quickly.

It should be pretty clear by now that I am in a good position when I have people living in a house and considering it their home, people who, in fact, desire to buy the house as soon as possible. I am obligated to sell the house to them at the agreed-upon price on or before the last day of their lease, but I am not obligated to return their option fee. The option fee is the price they paid for the privilege of securing a certain price and keeping the house off the market for a year. Those two things are valuable. And, in addition, the tenants are not obligated to buy the house at all. They still have the right to move out if they decide not to buy the house by the end of the twelve month rental period.

A lease option agreement gives both the landlord/seller and the tenants/buyers a good deal. A couple things that can affect this mutually beneficial set-up are changes in housing prices and changes in circumstances. The seller is legally obligated to hold the price and the opportunity for a year, but the tenants do not ever have to buy the house. Changes in the housing market during the contract year may not benefit either of the parties, but the agreement is still in place. More often than not, a lease option agreement works to the benefit of the seller and the buyers.

by: Leo Kingston
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