Why Selling on Lease Options
is Glorified Landlording
by: Tim Randle
I might upset some folks with this one, but that's okay as I think it's
important to get some of my experiences into the light of day. If you fully
believe the hype that you won't have any landlording responsibilities by
selling on a lease option, go ahead and stop here. Or perhaps you should
read on as this article is specifically written for you. |
Let's review one of the common misconceptions that is thrown around by folks
touting the wonders of selling properties on a lease option:
You won't have any repairs or maintenance.
True, you can certainly have your documents state that the tenant/buyer (TBer)
is responsible for repairs. In fact, I've seen numerous variations of this
ranging from the TBer is responsible for all repairs to only those repairs
falling within a certain price range. Some investors ask the seller to be
responsible for repairs up to a certain amount and ask the TBer to be
responsible for those over that amount. Insurance will theoretically cover
major damages so that's not an issue. And I know from several experiences
that insurance will and does cover many repair expenses less than $10,000.
So far, knock on wood, I haven't had to test going above that amount.
So, what happens when your TBer moves in, sends you back your move-in
condition form and two days later the A/C, heater, or whatever goes out?
You're either ponying up some money or you have one upset TBer. Yes, I know
it's wise to have them sign off on an inspection or an inspection waiver
prior to move in, and if you're not doing that, I recommend it. However, do
you think that's going to matter if the TBer just gave you the majority of
their life savings and they're looking at a large repair bill?
Yes, you can use some of their funds to purchase a home warranty and I also
frequently do that. If the expense happens to be one that is actually
covered under the policy on such a short time frame and not classified as a
pre-existing condition, then you're fine and the TBer can just pay the
deductible. Wait a minute, didn't you shell out a few hundred for the
warranty? True, it came from the TBer's funds, but that option consideration
was supposed to be yours to keep, right?
Other recommendations on addressing the issue include asking the seller to
be responsible for repairs for a certain time period and then passing that
"guarantee" on to the TBer. Again, it may be one of those "sounds good in
theory" type arguments. The few times I've gone that route I've not had to
test it, but I wouldn't be surprised if the seller is a bit upset if I had
to call to ask for money after the fact. And what happens if your repair
period from the seller is only 30 or 60 days and it takes you longer than
that to find a decent TBer. Oops.
What I've found is that typically the TBer will agree, sometimes
reluctantly, to cover half the expense. I present that solution in such a
way that it does appear as if I'm breaking "company policy", but since "I
want them to be happy in their new home", I'm willing to bend the rules
some. It is definitely smart to push the TBer to get an inspection done
prior to move-in as this not only comforts them, it protects you. Make sure
you get a copy of it and have the TBer sign off on it. To be clear, I only
make this offer for repairs that occur in the first 30 days. After that,
they're on their own or insurance will take care of it.
Let's not forget the TBer who doesn't call to let you know that something
needs repair. You may have done such a convincing job explaining that it was
their responsibility that the TBer chooses not to call. Since they don't
have the money to fix the water leak in the upstairs tub, they just let it
continue. Now, we've got some mold issues and much more serious repair
numbers. It's critical in my opinion that the TBer call you if they have a
significant repair, even if they're able to pick up the tab. I want to know
what's going on in my properties.
So, to summarize, I think there are some important steps to take when you
sell your properties on a lease option. Take what you feel is important and
incorporate it into your business if you haven't already done so.
1. Push the TBer to get an inspection done. If they don't have the $200 or
so to do this, ensure they sign off on an inspection waiver. It's more
difficult for them to come back to you demanding their option consideration
and rent back due to needed repairs if they made this choice on paper and
2. Consider using part of the TBer's funds to purchase a home warranty. Not
only does it comfort their concern of potential repairs, it increases the
likelihood that needed repairs will get done. It's cheap insurance in my
3. Set up your standard operating procedure regarding repairs. Like all
issues regarding properties with which you stay involved, it's important to
promote and maintain consistent, documented procedures. In other words,
don't have different repair policies for different properties or TBers.
Choose the repair responsibility method or methods you think will work best
and stick with them.
4. Another item not mentioned that is also company policy is that the TBer
must have and maintain renter's insurance. Policies can be purchased for
very little funds and it protects their personal property. Typically, these
policies will also have a liability component that provides an initial layer
of protection before they get to your policy. This way, if some accident
happens, like the tub leak above, that damages their property, they won't be
coming to you first for replacement.
Selling on lease options can be a profitable technique if done wisely. Just
don't go into it believing it doesn't take any work and that the landlording
headaches are completely removed. They aren't.
Thanks for reading.
(c) Copyright 2003, All Rights Reserved.
About The Author
Tim Randle can be contacted through his web site at
|Gar C. May, Real Estate Broker
||1357 Hornblend St. San Diego, Ca 92109
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