3 Magic Words (And Other Steps to Profiting with a Lease Option)
If you own a rental property and want higher quality tenants, or if you’re trying to sell a house that isn’t moving, consider selling with a lease option. It’s an excellent way to move a piece of property out of your inventory.
What is it?
According to realtor.com, a “Rent-to-own, also known as a lease option, is a contract that allows renters to lease a property and, at the end of the lease (usually one to three years), have the option to purchase the home at a predetermined price.”
This home-buying/home-selling strategy is also known ascent-option “Lease-to-buy option,” “Rent-to-buy option,” “Lease-with-option-to-buy,” “Lease with option to purchase,” or “Rent-to-own.”
In recent years, the terms and the opinions on the strategy have become messy. Without a renter-buyer researching what they’re getting into or a landlord-seller setting the deal up right, many have ended up burned. But it doesn’t have to be that way if done right!
It’s a great way to purchase a home, but also a viable tool to sell that shouldn’t scare you. Typically, you’ll attract renters who are homeowner-minded who may be facing challenges with their credit. Whether they had to file bankruptcy or can not yet qualify for a home, they still value home ownership. They want a place they can take care of since they are liable to purchase it at the end of the lease. They want to keep the filters changed and mow the lawn and are less likely to flood the basement while hosting a “foam party” in the living room (it’s happened).
Like everything, you can do it poorly, you can do it well, or you can do it BETTER. I have 8 steps to follow to move your inventory faster and with better results. Because I want to keep you coming back, you only get 4 of them today. Check back Friday, August 18th for the rest!
First 4 steps (of 8 steps):
- Advertise using the 3 magic words: “lease-to-own” or “rent-to-own.”
Attract the ownership mentality by creating your ads and property signs to include this simple, well-known words. Use your marketing channels to get the word out and stay consistent with your language to interest the right people.
- Collect a list of motivated renters.
You can do this several ways. First, you can list the property with an agent (need help finding one? CLICK HERE). They will typically make 1.5% of a 3% commission from the buyer’s earnest money or option money deposit. The remainder of their commission would come at the end of the lease term, but if the tenant doesn’t exercise that option, then you wouldn’t own the
You can also network with your real estate community. When good tenants with the homeowner-mentality are looking for a rent-to-own, they make it known!
- Set the Selling Price.
From the beginning, you’ll need to explicitly state that you, the landlord-seller grants the tenant-buyer the exclusive option and right to purchase the property at a pre-determined price.
But how do you determine the price, especially with a lease term that ends in several years?
First, ascertain the value of the house. Then, mark up the value by 2% to 5% per year, considering the current appreciation value.
If the property is worth $100,000 now and the house will appreciate annually at 5%, then in 12 months, it will be worth $105,000. If you’re going to mark it up 2-5%, then you’ll determine the price at or around $109,000-$112,000.
If your determined lease term is greater than 12 months, the formula becomes tricky. Try this: take the appraised value of the house plus a 7% annualized premium compounding over 36 months (if the lease is for 3 years) or add 10% to the appraised value in 3 years. You can even follow the formula for 1 year and multiply it by the length of the lease.
You’ll want to avoid being accused of breaching consumer protection laws by keeping the option price within 5% of market value.
However you slice it, you need to benefit both your client (the tenant) and yourself. Don’t set them up to fail with overly inflated prices they can’t pay and then will lose their earnest money/deposit because they can’t pay for the home at the end of the term.
- Protect yourself.
Screen your tenant. Because this transaction should be taken as seriously as if you were selling the house, qualify your tenant like you would for a mortgage. You want to avoid scrutiny for offering a lease-option to someone who couldn’t realistically purchase the home at the end of the lease term.
You may be excited to jump in and exercise this option–and who could blame you, it’s great stuff. But before you do, check back next week for the final 4 steps to a successful lease option transaction.
In the meantime, spend some time working your leads with this guide to COLD CALLING or learn more about attending an upcoming FUNDING TOUR in your area. COGO Capital will provide you with a $250,000 pre-approval letter to support your next transaction. For more information on what a FUNDING TOUR is and why I believe so strongly that you should attend that I’ll pay for your $497 seat, visit fundingtour.com or call 800-533-1622.
To Your Success;
Lee A. Arnold
The Lee Arnold System of Real Estate Investing