As a direct result of the subprime mortgage crisis that started in 2008, 11% of American homes are currently empty.
Exacerbating this problem is the fact that mortgage lenders are handing out less and less of their money. Meaning that there are fewer Americans able to buy homes than there are homes available. If you need to sell your home in this real estate climate, what are your options?
Selling your home with a lease option might help you sell your home more easily to potential buyers as well as investors. This uncomplicated agreement can put more money in your pocket with very low risk.
In this definitive guide, we’ll explain what purchase options are, how a lease option can benefit you, and what you need to consider when you’re selling your home with a rent to buy option.
Purchase options include lease-purchase agreements and lease option agreements. These options became popular in the 1970’s and 1980’s. They offered a way to avoid alienation clauses in mortgages.
An alienation clause is also known as a due sale clause. If there is an outstanding loan on a property, the title cannot be transferred or bought by a buyer without triggering an alienation clause.
It gives the lender of a loan the ability to demand payment as soon as the owner sells their property or transfer the title. Most loans contain an alienation clause.
Entering into a purchase option agreement can help you pay back any outstanding loans before selling your home. This is accomplished by leasing your home, which provides you with rental income.
Lease-Purchase Versus Lease Option
There are two types of purchase options: lease options and lease purchase agreements. Although they are similar, they have important differences.
The specifications also vary from state to state. We discuss the basic principles of each in more detail below.
A lease-purchase agreement allows a seller to lease their home to a potential buyer. A contract stipulating the sale of the home is attached to the lease agreement. When the lease is up, the tenant agrees to purchase the home according to the details of the contract.
Instead of an option to purchase, a lease-purchase agreement stipulates that the home will be purchased. It ties the seller to sell to that tenant and it ties the buyer to buy the home.
These are most commonly used when a buyer has credit issues to resolve before buying a home. It gets them into their home while giving them time to save money for a down payment, sell their current property or clear up any credit issues.
A lease option is more complex than lease-purchase agreements. It often involves selling your house to an investor who will flip the home or take the property on as an investment, but it can also be an agreement with non-investors.
A lease option is a lease agreement that gives the tenant the option to buy the home at the end of the lease agreement. It’s a great move for people who are relocating. They can determine whether they like the area and the home and decide whether they’d like to stay and purchase the home.
A lease option gives the buyer an exclusive right to buy a property at the end of a contract. With this purchase option, a seller is committed to selling the property to the person they entered the contract with. They can’t sell the property to anybody else.
However, the buyer is not committed to buying the property when the contract ends. But, if the buyer does choose to buy, the seller must sell to that buyer based on the terms of the contract.
Benefits of a Lease Option
A lease option can be a benefit to a seller. Below are some of the reasons you may consider selling your home with a lease option.
- Hard to sell the property. When it’s difficult to find potential buyers for your home, a lease option can help attract investment. Let’s face it, if your home was easy to sell, you could simply sell it the traditional way.
- Buyer dealing with tax issues. If your potential buyer owes back taxes or has issues with their credit, a lease option gives them the time to fix those issues so they can buy your home. If they are on a credit program, the likelihood of selling your home to them is increased.
- Avoid losing your home. If you’re at risk of losing your home altogether, it may be difficult to sell your home outright. A lease option gives you greater access to potential buyers than selling your home in a conventional way. With rental or value consideration payments (which we’ll talk about later), you can take care of outstanding or overdue payments and late fees as well as any back taxes you may owe.
- Sell your home for market value. With a lease option, you will generally receive market value for your home.
- More money in your pocket. Instead of leaving your home vacant, which makes you no money, lease payments that exceed market value can put more money in your pocket.
- Low risk. If the buyer decides not to purchase at the end of the agreement, you don’t have to refund any money to them. You can also sue them if conditions are right.
How to Sell Your Home with a Lease Option
Attend to these important details when selling your home with a lease option.
Hire a Real Estate Lawyer
Even if you’re using a realtor, they can’t offer you the legal advice that you need.
A real estate lawyer will draft the documents you need, help you understand your rights and the rights of the buyer.
Consult with an Accountant
Selling your property with a lease option matters to the IRS. The IRS classifies your lease payments as instalment payments for a sale, so they apply special rules to them.
The total amount you receive from payments can be counted as capital gains or losses. An accountant can help you navigate these potential tax consequences of a lease option.
Although you’re not selling your house outright, you still need to do all the due diligence you would if you were selling your home.
Ensure that you get a home inspection, examine the title and make sure you don’t have a tax lien on your home, get an appraisal to determine the resale value of your home and obtain all the disclosures.
You may also consider getting a pest inspection, a certification on your roof and a warranty plan.
You can either decide to lock in the price of the home into the contract now, or you can sell the home for the future market value when the term has ended.
This a negotiable item. Some buyers want to know what they’ll be getting for their home in the future. This way, if the market value goes down, you get the market value you agreed to upon signing the contract.
If you decide to take the market price at the end of the term, you’re taking the risk that that market could go down. But, it could very well go up as well.
Considering it’s a seller’s market right now, this risk should be carefully weighed.
Choose Your Term
The term of the contract is another negotiable item. The term can be for any length of time that’s agreeable to both the buyer and the seller.
The most common term is 1 to 3 years.
Premium Rent or Value Consideration
You have the choice between asking for a premium rent or charging a one-time, non-refundable valuable consideration.
Premium rent is lease payments that are higher than the current market value. You’re able to charge a premium for providing the option to purchase the property. You can negotiate with the buyer whether the premium will go toward the purchase price or not.
Instead of premium rent, you can charge the buyer a one-time cash payment. This is known as a “valuable consideration” fee.
The valuable consideration fee is not a deposit. It’s a non-refundable payment that can range from $100 to 5% of the purchase price.
Make sure you cover these items in your agreement:
- Who is responsible for maintenance and repairs.
- Who is responsible for fees and utilities associated with the property.
- Whether the renter has to obtain rental insurance.
- Whether the seller will obtain landlord insurance.
- A clause that states whether or not the sale price is contingent on an appraisal.
- A clause that stipulates the buyer’s option at the end of the term. Especially in regard to what they can do if their credit isn’t fixed.
Are You Ready to Sell Your Home?
If you’re considering selling your home with a lease option, you may want to think about selling it to investors. Selling your home to an investor for cash is a quick and easy way to circumvent your tax liabilities or the risk of losing your home.
Contact us today to find out more about your options.