Advantage of Lease-Option vs Outright Sale
Advantage of Lease-Option vs Outright Sale
When selling a house, finding a buyer to cash a seller out is just about everyone's first choice. If a seller can find a buyer who has adequate cash or can get a new mortgage, a seller will usually net about 90% of the home's fair market value, after paying broker's commissions, closing costs, and some negotiating on price and stuff. This is disregarding all monthly payments due between now and the date of closing, which would typically be at least two months from the day the seller accepts an offer, and it might be a long time before that happens. Without finding that buyer, however, a seller may have a very difficult time buying or making payments on a new home. For many sellers, there isn't 10% of the equity to spare or they'd rather not wait several months to find a buyer and several more months for the buyer's mortgage to get approved.
Another problem is that around a third of the "pre-qualified buyers" never actually get approved. Pre-qualifying only takes about 15 minutes, but it covers much less than the complete loan approval process, which takes about 6-10 weeks these days. So three months after accepting an offer, many sellers go right back on the market.
If a seller rents out a median 3 or 4 bedroom house in a moderately-priced location, the seller will likely get about $1,000 to $1,200 rent per month. In that same typical location, the mortgage payment on the house is likely to be $1,200 to $1,400 per month. If a seller allows 30% for repairs, management fees, sewer, garbage, vacancies, utilities while vacant, and miscellaneous expenses --- which is the minimum that a professional ("smart") landlord plans on --- a seller will net $700 to $840 per month towards the seller's monthly mortgage payments. That leaves a seller with a negative cash-flow of $500 to $560 per month. NOTE: Most first-time landlords ignore the warning to allow 30% for expenses, and get themselves into trouble down the road. That's why most of them decide they'll never be a landlord again.
If our company leases the house, with an option to buy, we handle all repairs & expenses, we pay all rents (no vacancies), and a seller pays no management fees. We will be responsible for making rent payments. We have been in business since 1997, so a seller is much safer than counting on the average tenant for their rent. Also, we guarantee that if a seller ever gets the house back from us --- that is, if we fail buy the house --- the house will be in at least as good a condition as it is at the start of our agreement. Another advantage is that we are ready to act now; a seller doesn't have to wait an undetermined amount of time to find an elusive buyer.
If a seller wants, they can get their equity out immediately by refinancing or taking a second mortgage. We often agree to pay the whole amount, depending on the interest rate, payments, and such.
When the person we rent to is ready to buy & refinance the property, the respective Escrow Company, Title Company, or Closing Attorney will send the seller closing instructions. This can happen any time during the period we have agreed with a seller.
If a seller needs to qualify for a new home, with the Lease-Option agreement in hand, a mortgage lender will normally credit a seller 75% of the monthly lease payment we have agreed to make. This will usually make qualifying for a new loan fast and easy for a seller.
What if something happens to the house? If it's a fire or other insured event, the insurance will handle it as usual. If it's damage or wear & tear by our tenant, we'll bring the house back up to the same or better condition as when we got it from the seller. The seller still gets all the rent payments and we mange everything, including finding a new tenant. The seller usually doesn't even notice that the tenant has changed, because it's all taken care of.
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