An owner has three options: 1) hold, 2) rent-to-own or 3) sell. In the current market many investors have chosen to extend their lease to the tenant even though they may bleed (be cashflow negative). In some cases values have dropped so much it would require the owner/seller to bring money to the table to close the deal at a loss.
Rent-to-own or lease option can represent a better alternative to just a straight rental. In this scenario the seller and buyer enter into a contract that allows the tenant to purchase the property at a later date at a pre-agreed upon price. 1 – 1.5 year lease options are usually common. This is an option to purchase, NOT the obligation. Usually buyers are required put a substantial deposit serving as “earnest money.” If the buyer defaults and does not choose to purchase the property they forfeit the money.
In addition, the potential buyer pays market rent every month and in many cases an addional amount, say $300, which will be credited to the buyer when and if they exercise their option to purchase. If they don’t exercise their option, the earnest money and additional monthly payment is forfeited and goes to the seller.
Overall, lease options allow sellers and buyers options. Sellers get the huge benefit of saving on realtor commissions of 4-6%. However, if they use a realtor for the lease option, they will still need to pay a 1-1.5% commission. The downside- the buyer may not execute the option. They could change their mind or not qualify. The seller also holds the risk of real estate prices appreciating drastically while finding them obligated to sell at a fixed price which is why sellers may price appreciation into the deal.
With values dropping throughout the country from 15-20%, you may have to firesale your property. If at all possible, you should stick to the principal “buy when prices are low, and sell when they are dear.” If you must sell, use a good real estate agent that will educate you and give your property time and love. I strongly do NOT suggest for-sale-by-owners (FSBO) in this market. More on FSBO’s later.
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