Lease Options
A lease option gives you an opportunity to enter into a contract with the seller/lessor where you pay rent, but a portion of your rent payment will be credited towards the purchase price. A down payment, if required, is not necessary until the lease option ends. By then you should have had enough time to obtain the money for a down payment or decide against purchasing the property. If you decide against exercising your option, it could be sold to another purchaser for cash.
In its simplest form, a option is nothing more than a legal right given by a seller to a buyer for purchasing property at a predetermined price. An option must be in writing and consideration must be present to make it legal. Consideration refers to something of value (usually money) that serves to induce one to enter into a contract. It is only binding on the seller.
Benefits to the Seller
Price of property is at the top of market value range.
Option money received is tax deferred.
When the option is exercised, money from the buyers is taxed at ordinary income rates.
The tenant has “pride of ownership” and an incentive to take better care of the property.
If the rent is not paid on time, the option is forfeited (so the rent is always paid on time).
The rent, including option payments, is usually set at or above the fair market rent.
Benefits for the Purchaser/Optionee
Usually the option consideration paid by the purchaser is relatively small compared to the value of the property. Therefore, very little risk is involved in controlling a large property. The purchaser is betting that the property will increase in value beyond the agreed-upon option price. If the buyer is wrong, they can walk away from the contract with no obligation.
An option gives the purchaser control and in the case of a lease option, possession as well. The purchaser gets the benefits of occupying the property and perhaps even improving it to create more value. The purchaser could even generate profit from the property by leasing it to someone else.
March 15th, 2008 at 8:07 pm
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[…] Assume that you select one or two properties from the list that you think would make good investments. If the asking price is not shown on the list, then find out the price and terms from the banker. Remember, the banker’s first price and first offer of terms is not the final one. Most bankers are willing to negotiate, especially with R.E.O.s. Some bankers are even willing to sell the properties on a lease option. […]