Struggling Home Sellers Should Consider Lease Options
Before I get into why you might want to consider a lease option, let me give you a little background on market statistics.The other day, the National Association of Realtors (NAR) released a troubling statistic. In July, home sales across the nation dipped 27% year over year from July 2009. This was due to many buyers purchasing before the home buyer tax credit expired, but it’s still an ugly statistic for home sellers.
Obviously, the tax credit had a major impact on home sales. Everyone who would have bought a home in July or August this year, that qualified for the credit, moved up their purchasing dates to get the credit.
What Is A Lease Option?
As home sales slow moving into the fall selling season, a lease option might be something that could work for you, especially if your home is vacant. What is a lease option you say?
A lease option allows someone to lease your home with the option to purchase it. It’s like a glorified rental, in that the renter of your home has the option to purchase the home at the end of their lease agreement; usually 12 months. Here are some basic principles to a lease option:
The lease option binds the seller to sell and not the buyer to buy. The option gives the buyer discretion to buy or not. This is why lease options usually come with a larger deposit than a months rent. This deposit usually ranges from 2-5% of the home price. Of course this is negotiable between buyer and seller.
How do you determine price? Price can be dealt with in two ways. The buyer and seller can agree to a price when the contract is signed, or they can agree to price by when the date the option is exercised. Either way, it’s usually still based on an appraisal. The monthly payment is determined by buyer and seller, and it can be applied to the cost of the home or not.
It all depends on the terms of the agreement. If the payments are applied to the purchase price of the home, if the buyer decides not to purchase the home, the seller will not have to pay that back. Basically, a lease option is the same as a lease, with the option at a determined time period for the buyer to purchase the property.
Advantages Of A Lease Option For Home Sellers
A lease option opens you up to more buyers. A lease option allows you to sell your home where you otherwise wouldn’t have been able to sell it.
For example, there are many people right now that don’t qualify for financing with the increased regulations in the lending industry.
Many of these potential buyers have been taken out of the market, and a lot of times all they need is more time to qualify. They may need to pay off some debt, raise their credit scores, or save up a larger down payment.
Many of these buyers are very close to purchasing, but can’t quite get over the hump. Especially when you consider Menlo Park, Palo Alto and Atherton real estate and how expensive it is. Coming up with the down payment is not in reach for many home buyers.
For you the seller, this gives you an advantage in an otherwise strong buyers market. The negotiating comes down to telling buyers that they can get price or terms, pick one. Meaning, they can either get a better price with terms that are more strict, or they can pay more and get more lenient terms. As a seller, both will work in your favor. You either get a better price on your home, or you will get some great terms with a nice non-refundable down payment.
If the buyer doesn’t exercise the option to buy your home at the end of the agreement, they forfeit all rent paid, and usually forfeit their down payment. And once this happens, you go into landlord-tenant relations, giving you the right to evict and retain your home. You may also work out another agreement, either way the ball is in your court.
Another advantage is; if you have to move fast or your home is sitting vacant, you get someone to pay your mortgage payment for you. They may also do some upgrades that could add value to the home, and you get people to in your home to maintain it. This is especially true in high priced areas such as Menlo Park, Atherton, Palo Alto and other cities along the peninsula. If renters are paying 5-10k per month, they are probably going to take care of the house.
