Selling Your Investment Property Using A Lease Option Agreement Sun 07/26/09 10:38:35 pm by Gregory Davis
Real estate investors love to throw around esoteric terminology, like "irrevocable
land trust," and "lease-option agreement," but that doesn't mean they have a
clue how to actually use them. Like all methods of sale, lease-options are a
viable option for some situations, but should merely be one more wrench in your
real estate sales toolbox.
definition itself is basic enough: a lease-option agreement is a rental
agreement that provides the tenant an option to purchase the property, within a
specific term of time. Simple stuff, right?
However, consider this: lease-option agreements don't obligate
the tenant to buy the property (the way a contract of sale does), but does
obligate the landlord to sell. Why would this be a good idea for the
Well, in a seller's market that's rapidly
appreciating, it's not beneficial at all to the seller.
But in a slow market, where buyers rule, it can be an easy and
inexpensive way to sell a rental property without paying carrying costs for
months on end while the property sits vacant on the market. It also eliminates
the real estate agent as the middle-man, so you the landlord/seller don't have
to pay a commission.
Be careful not to
confuse a lease option agreement with an installment contract, which is
similar but differs in a few critical ways. Installment contracts legally
transfer the title of the property after the term is up, and are literally a
form of sales contract. That being said, the tenant/buyer generally has to
refinance to pay the balance owed to the landlord/seller and any lienholders, at
which time the change in title is recorded. Lease-option agreements, on the
other hand, do not count as a contract of sale, so a separate one must be signed
and a purchase settlement, not a refinance settlement, is what takes place.
As far as where to find a lease-option
agreement, some city/town governments offer them to the public for free on their
websites, and of course there are many private companies who also offer them
online. For an example, the EZ Landlord Forms website below offers a custom
lease option agreement for each state.
Before you sign or offer a lease-option agreement, it would be
prudent to make sure your tenant/buyer will qualify for a mortgage loanYou should review their credit, income, and
employment history (all of which you should be doing anyway in the
tenant-screening process). Most of all though, don't ever assume that a tenant
will actually succeed in buying the property from you, regardless of what they
tell you. Lease-options are one more way of selling real estate, but only for
sellers who have the time, capital and patience to assume the responsibilities
of a landlord.
Brian Davis is a landlord and real estate
investor in Baltimore, MD. He is a regular contributor to Nuwire Investor,
Amazines, Ezine Articles, and EZ Landlord Forms Real Estate
Investing ( http://www.ezlandlordforms.com/articles/ ).