Option Benefits for the Landlord/Seller
number one benefit for property owners that will convince them
to Lease Option their house to you is your guarantee that their
monthly PITI (Principle, Interest, Taxes, and Insurance) payment
will be paid on time during the term of the Lease Option.
number one motivation there is for the property owner to allow
you to put a tenant buyer in their home is relief from or
mitigation of their monthly financial responsibility to their
need to get rid of debt far exceeds their apprehension about
having someone live in their home.
an investor you need to convince the property owner (guarantee
them) that you are the solution to their need for debt relief
problem; you will cover their PITI payments until your Tenant
Buyer exercises their option to purchase the property and pays
off their loan. If the Landlord Seller Lease Options their
property to you, their problem is solved. They will have
immediate relief from their monthly payments.
Guarantee them that their monthly payments will be paid if the
property is vacant or not You will make the payments until your
Tenant Buyer qualifies for a loan and pays the sellers loan off
even if it takes a year or two. It may take that long for the
Tenant Buyer to correct their minor credit blemishes in order to
qualify for a loan.
do Landlord Sellers get into this situation?
are making double mortgage payments.
Their property is vacant
Perhaps the real
estate market is slow and therefore it is taking a long time
to sell or rent their property.
Their tenants aren�t paying their rent.
They moved into their new home before selling
their present home.
They lost their job
They got a divorce
their credit is the number two reason why a Seller will Lease
Option their property to you rather than let you take over the
monthly payments on their loan and taking back a second mortgage
or wrap-a-round mortgage.
could sell you their property and take back a second mortgage if
they wanted to, but they are unlikely to do so because the loan
stays in their name and they want it out of their name before
they will turn loose of the deed.
in cases where the Seller has very little equity, they still
will not convey title to you because they want to make sure
their credit is preserved. They are not sure you will make the
payments on time or if you will walk away from the property if
it does not work out for you.
that is the case you have no choice but to go into the Lease
may also have saved the Sellers credit by covering the monthly
debt service on their property.
Minimal Property Management
Landlord Sellers do not like to deal with tenants and property
maintenance. If they are not convinced that you are capable of
taking care of the management of their property, they are in all
probability not going to Lease Option their property to you.
an Investor you need to convince the Landlord Seller that you
are capable of handling all the property management for them.
You need to show them how you are going to solve their problem.
how you will find a tenant, maintain the property, pay the
mortgage, taxes, insurance and send them a net check each month,
if any. You are in fact, better than a property manager. You are
not just collecting rent, you are guaranteeing it whether the
property is occupied or not.
will be relieved of the management problems associated with the
maintenance of property. They will not have to worry about their
lawn being mowed and they will never receive a 2 a.m. phone call
to fixing leaky faucets or unclog an overflowing toilet.
the Landlord Seller that you will pay for all minor repairs up
to $200 per incident or $1,500 per year. There will be no calls
about a broken sink disposal.
Seller Receives Full Asking Price
Sellers Lease Option their property on favorable terms they can
usually receive their full asking price.
a buyer pays cash s/he could reasonably assume that s/he would
be given a discount on the purchase price. However, if a buyer
purchases on credit or delayed payment terms they understand
that they will be paying full price
offering the Landlord Seller their full asking price on a Lease
Option the Tenant Buyer Investor should expect favorable terms
such as a long Lease Option period, the right to assign and/or
sublet, at or below fair market rent (or rent that may be below
the PITI when dealing with expensive homes) and rent credits..
A Lease Option Transaction Is Quick
are an abundant number of prospective Tenant Buyers even in a
�slow� real estate market wanting to buy a home. A Lease
Option can be consummated as quickly, or perhaps even faster
than it would take to lease a property.
57% of property owners who have listed their homes for sale have
a suitable offer within 90 days. It takes another 30 to 60 days
to close escrow due to the loan. (Statistics based on National
average of homes sold.)
Lease Option can be consummated within days or a few weeks not
if the seller is being transferred (s/he needs to know his home
is taken care of before he leaves), lost his job (s/he can not
afford to wait for his house to sell), divorced (with income cut
in half, they usually have to downsize) etc. Time is of essence
to these sellers, they need to sell their homes quickly.
to fact that a house can be Lease Optioned so quickly, the
property owner will save a lot of money on advertising their
home for sale.
Lease Option is a �fast� solution to the �nice� house in
a �slow� real estate market scenario.
Minimal Risk to Seller
is minimized since the Seller retains ownership to their
a Lease Option the deed stays in the name of the Landlord Seller
until the Tenant Buyer/Investor exercises their option to
Tenant Buyer/Investor who has Lease Optioned property from a
Landlord Seller is treated the same as an �ordinary� renter
if they do not fulfill their agreement. The Landlord Seller can
evict them just as if the Tenant Buyer/Investor had rented the
Lease Option is far less risky that the traditional �low
down� or �no down� owner-financing arrangement, where the
title to the property is transferred to the buyer who
subsequently defaults. The Seller would have to regain
possession of his property using expensive foreclosure
With a Lease Option the title to the property stays in the
sellers name and since the Lease is a separate agreement from
the Option the Landlord Seller can evict the Tenant Buyer using
the faster less expensive �Unlawful Detainer� procedure that
is designed especially for tenants that fail to make their rent
payments. Eviction is always easier and less expensive than
From the Sellers prospective it is better to keep the deed in
their name until the Tenant Buyer purchases the property and
pays off the seller�s loan.
Lease Option offers additional security to the Seller in the
form of �up front� Option Money that is non-refundable
unlike a rental security deposit which is refundable.
Landlord Sellers are more inclined to accept your Lease Option
offer if you propose to give them �non-refundable� option
money that they could keep if you did not purchase their
property rather than a security deposit that would have to be
refunded if you did not exercise your option to purchase.
Investor Gets Best Qualified Tenant Buyer to Lease Option
Investor wants the best qualified Tenant Buyer in the property
because the Investor (and therefore the Seller) gets paid when
the property is sold.
make their profit by buying a property wholesale (in the case of
a Lease Option wholesale can be the current fair market value
for the house) and selling retail (a price that is increased to
more than current fair market value due to the financing terms
provided to the Tenant Buyer).
want to find the best qualified Tenant Buyer to Lease Option the
Seller�s house as possible. They want someone that will take
care of the property and eventually secure the financing that
will pay off the seller�s loan.
Investor is highly motivated to make sure that the Tenant Buyer
will exercise their option to purchase as soon as possible in
view of the fact that most of the Investors profit comes when
the property is sold. For that reason Investors will be of
assistance to Tenant Buyers in the loan qualification process
and direct them to lenders that will show them what must be done
to get qualified so the transaction will close in a timely
Peace of Mind
Landlord Seller will have peace of mind knowing that someone
that has a vested interest in your property will be living on
site that will watch and guard your home as if it were their
own, against vandalism, fire etc.
is the equivalent of having a security guard living in your
house who pays you rather than you having to pay them.
a property is vacant for more than 30 days, the property owner
runs the risk that their insurance company will cancel their
insurance. Which properties are primarily at risk?
There may be a vacancy for
several months in a �slow� real estate market and especially
for �hard to sell� properties.
Rentals in a market that has
been over built with rental property may take more than a month
or so to rent.
Property owners that have
been transferred or have moved to a new home are afraid to leave
their property vacant and want to have someone that is reliable
live in their house as soon as possible.
No Real Estate Broker Commission
a Lease Option the property owner doesn�t need a Realtor�. It
is as quick and easy to use as a standard lease.
may want to hire a �transaction coordinator� to make sure
you are providing the buyer with all the property disclosures
that are required by Federal, State and local law. A transaction
coordinator charges about $300-$350 in San Diego (year 2004)
dealing with the Buyer directly the Seller will save 6% to 10%
of the sales price, which is the standard Real estate
As an Investor you would want to try to negotiate a 6% to 10%
discount on the purchase price of the house. Find out what the
standard real estate commission is for your area and what
percent difference there is between the asking price and the
sales price of property in the neighborhood. If you can find an
article in the newspaper or in the local Board of Realtors
magazine about the difference in asking price and sale price,
bring it with you when you are negotiating.
Seller Retains Tax Benefits
the Lease Option period the Seller remains on title (retains
ownership) of the property, and therefore all income tax
deductions continue on with the property owner until the Tenant
Buyers exercise their Option to Purchase and buy the property.
a landlord, the property owner can also depreciate the property
as well as retain the property tax and mortgage interest tax
deductions. As a result, not only is the Seller�s loan payment
sheltered from income tax, a �paper� loss is created that
can be used to shield ordinary income from income tax as
part of the monthly payment received from the Tenant Buyer is
called �Option Consideration� (the rent concession portion) the
Seller MAY be able to defer paying tax on that amount under
Section 1234 of the Internal Revenue Code. (The
amount paid that is more than fair market rent can be tax
deferred.) See index for said code section.
the property was the Sellers personal residence, as long as they
do not Lease Option the property for more than
three out of the
last five years, the Sellers can still qualify for the capital
gains tax exemption under the Taxpayer Relief Act of 1997 which
reads as follows:
for home sales after May 6, 1997, up to $250,000 of gains can be
excluded from gross income, provided you owned and lived in the
home for at least two of the previous five years. Married
couples filing jointly can exclude up to $500,000 of gain if
both spouses meet the two-year residency requirement.�
have ruled that as long as the lease was incidental to the sale,
the property will still qualify as a personal residence and not
a rental. See index for Bolaris v.
Commissioner, 776 F.2d 1428 (9th Cir 1985)
Easier to Sell �Hard to Sell� Properties.
to sell properties are easier to dispose of whether the
difficulty is due to the economy, the location of the property,
the marketplace (a buyers real estate market) or for whatever
reason. There are an abundant number of prospective Tenant
Buyers that desire home ownership
to sell properties may be houses that are over financed such as
in California where many are 100% to 110% financed. A Tenant
Buyer in a Lease Option scenario does not typically question the
price of the property they are more interested in how much they
have to put down as Option Consideration and the monthly
Lease Option expands the number of potential Tenant Buyers since
the typical up front payment is equal to the first and last
months rent and a security deposit.
an Investor, call the last month rent and the security deposit
non-refundable Option Consideration and the Seller will be more
likely to do a Lease Option since they can keep the Option money
if the Tenant Buyer does not perform, where as they would have
to refund the security deposit and credit the last months rent
if the Tenant Buyer does not exercise their Option to Purchase.
Lease Option is a way to successfully negotiate an ostensibly
A Tax Planning Device
Lease Option can be used to delay the actual sale of property
from a current high income year to a following year(s) giving
the Seller time to plan for and/or create a tax shelter for the
capital gain tax of the sale.
Property Owner can sell their home to an investor
but delay moving.
seller may want to build a new house. S/he can sell to an
Investor and remain in the house until the new home is built.
This would benefit the Seller in that s/he would not have to
move twice. Meanwhile the Investor has plenty of time to market
the home to a qualified Tenant Buyer so when the Seller moves
out the Tenant Buyer can move right in.
Helps Seller Qualify For Financing on a New Home.
Seller can provide the potential lender for their new home a
written Lease Option Agreement showing that they have a serious
Tenant Buyer who has already put down Option Money to buy their
home and also pays them a steady monthly rental income that
covers their present homes mortgage payment. With this
information the lender would be more inclined to provide
financing for the new home.
Seller Benefits by Giving Optionee (Tenant Buyer
or Investor) a Rent Credit
Induce the Landlord Seller to give a monthly rent concession, offer
Guarantee that the rent will
be paid on time by paying one month in advance.
Take care of all the routine
maintenance on the property and pay for all repairs up to $200
per incident or $1,500 per year.
Pay for all the sellers
closing costs (not real estate commissions) when the property
To give the Seller
Non-refundable Option Consideration (equal to whatever s/he
wants over and above the first months rent) that the Seller can
keep even if the Tenant Buyer/Investor does not exercise their
Option to Purchase rather than a security deposit and last
months rent that the Seller would have to credit the Tenant
Buyer if they did not exercise their Option to Purchase.