Deconstructing the Lease Option Agreement By G. Brian Davis At Isnare.com Ezine Articles

Lease option agreements are an oft-ignored alternative method of selling real estate, and are just as often misunderstood. If you haven’t used them before, they can sometimes make an excellent addition to a landlord’s or real estate investor’s box of tricks.

To begin, a lease option agreement is different from a standard lease agreement only in that it offers the tenant/buyer the option to purchase the property, for a specified sum, within a specified time period or term. So far, so good.

You might be thinking that this offers the tenant an extra option, which is great for them, but it locks YOU into specific terms! Why would anyone sell this way?

In a quickly appreciating market (like, say, that last bubble), it makes no sense to sell properties this way, because the market is already tilted towards sellers, and hell, by the time the buyer exercises their option, the property might be worth a lot more. But in a buyer’s market, or a depressed market like we’re in right now, you might wait eight months to sell a property anyway. Why not collect some rent and make a cash flow in the meantime? And let’s not forget that you just saved yourself seven percent by selling directly to the buyer and cutting out the realtor.

Some real estate investors confuse lease option agreements with land installment contracts, which are used for similar reasons but are very different legally. A land installment contract technically transfers legal ownership to the buyer, but the seller refrains from recording the change in title until the buyer has paid a pre-agreed percentage of the purchase price. In other words, it’s seller financing, without recording the deed, and then typically the buyer will refinance to pay the remaining balance to the seller, at which time the deed is recorded.

Lease option agreements, on the other hand, are not a contract that binds both parties into transferring ownership of the property. They can sometimes be found at the office of your local municipality, or you can buy one from a realtor. Another option is to buy them online; there are plenty of websites that offer lease option agreements or lease agreements with addendums modifying the lease to include a purchase option.

A final piece of advice: many potential tenants would love to buy your property, but it doesn’t mean that they’ll be able to find a loan. If you’re thinking about trying out a lease option agreement, check their credit, employment stability, and income (all of which you should do ANYWAY when screening tenants), and don’t assume that the tenants will follow through and exercise their option, as they may not. Lease option agreements can be great as an extra option, but make sure you have the patience and capital to ride out your time as a landlord, as holding the property comes with some additional risk and expenses.

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