I have rental unit that I have owned for several years. It was a great investment opportunity at the time I purchased. I was the first in line at a first release of a highly sought after development that many watched as it went up in a transitioning neighborhood. By the time the development sold out, I was happy to see similar units being sold on the resale market for almost 15 percent higher than what I had paid not too many months prior.
Today, that neighborhood has already experienced that transition. Many other developments soon followed, along with a nice shopping center complete with a Starbucks and a Safeway. Unfortunately, the reality of the global economy is also present in the neighborhood. Some of the stores in that nice shopping center have gone out of business, and the rising ‘days on market’ that really gauge what real estate is doing, has been painful to watch as it slides into triple digits.
At the height of the market I actually thought of selling the unit, but my renter at the time wanted to sign another 1 year lease. Now, with that renter long gone, and several other tenants since then, I now find myself wishing that I should have simply taken the money from a sale and have been content.
The last tenant was making rent, but usually between 10 and 15 days late. He usually called to let me know. Sure, legally I could have rattled his cage a bit to ensure rent would be on time the following month, but he always volunteered to do odd and end jobs around the unit to help maintain it aesthetically. In fact, when he left, I was a little disappointed to see him go.
These days, I can not really afford to have a rental unit stay empty for too long. After posting it for rent, a very nice couple became interested in renting it from me…but only for 6 months. Ideally, I wanted the one year lease, but these people checked out well so I went for the 6 month, hoping to entice them to stay at the end of their term. But six months came fast, and I was quickly notified that they wished for a month-to-month lease, as they had begun to research the possibility of purchasing their first home.
But here is where opportunity began to knock. They really liked the place, the complex and the neighborhood. I learned that they had wanted to purchase in the development several years ago, but prices were too high and available inventory very slim. I asked them if they had been working with a real estate agent and even suggested a friend of mine that works in that part of town, who they called the following day.
My agent friend called me after he made contact with my tenants and asked me if I would be interested in a ‘lease-option’. Apparently, the tenants, though in the market for a new home, did not have the down payment required these days to get a loan on a home that they really liked.
There are several benefits to a lease-option, both to the owner and potential purchaser. Though I had never previously been involved in a lease-option, here is what I learned:
In a lease-option, a purchase price is negotiated up front as part of the contract process. The agreement allows for the renter, aka potential purchaser, to live in the home while paying rent, a portion of which goes toward the down payment. At the end of the lease agreement, the renter has the option to purchase the property outright. Typically, the monthly rent is in excess of normal market rate rent, which acts as a sort of savings account for the down payment.
The definition of a lease-option, according to Wikipedia, includes the fact that lease options are often used by tenants with poor or limited credit history, who would not qualify for a typical mortgage or loan. Where a lease option is less of a risk to a landlord than a mortgage is to a lender, for in the event of a non-payment, the landlord may still use the legal methods available to him to regain possession of the unit, such as an eviction.
To the owner looking to sell in more difficult times, there are many added benefits to the lease option program as well. First, the owner will have a tenant that will be paying the carrying costs on the property, while the owner continues to reap the benefits of tax advantages for owning the property. Second, if the tenant does not exercise the option to purchase at the end of the lease, the owner does not need to reimburse the renter for the excess funds that were paid as part of the down payment.
I am currently in month 3 of the agreed upon six month term. I have not yet found the down side for either party in this transaction, but I plan to keep you posted. I guess if the market were to take off in the next few months, the possibility of leaving some money on the table exists since the purchase price has already been negotiated. In the meantime, though, the market remains the same, and I have some very happy tenants that are looking forward to owning their first home.