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Lease options can benefit both buyer and seller


Dear Steve,
We want to sell our house and have had several people inquire if we would do a lease-option agreement with them. How do they work, and would that benefit us? Thanks. -- Tyler

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Dear Tyler,
Under the right circumstances, lease options can work well for both the buyer and seller.

In your case, handing over your home to someone via the lease-option route -- meaning your "renter" will get an option to buy the place at a given point -- works particularly well if you're having a tough time selling the house and want to move without making dual house payments. Even in a buyer's market, there are plenty of potential tenant-owners who are willing to go the lease-option route to improve their lives.

Although you're not getting that big upfront cash sale you might like, there still are plenty of advantages in this for you. In most lease-option arrangements, the tenants agree to pay move-in "option" money that will be used for credit toward a down payment on the house. You'll also want them to demonstrate their commitment by paying above-market rent, the "above" portion of which (10 percent and up) will be credited toward a sale. If the tenants back out of the deal at the option point -- typically one to three years after move-in -- you'll get to keep those monies, which can amount to a nice little chunk of change. Another bonus is that lease-option folks are inclined to maintain a home better than conventional renters, because they have a vested interest in it. In other words, you're less apt to suffer the dreaded "renter trashing."

Also, you get to retain the income-tax benefits of the house during the lease period and won't have to pay taxes at all on the option money until it's formally credited toward the house.

A lease option, by the way, is not to be confused with a lease purchase, a very similar arrangement but one in which the tenant is obligated to buy the house at the end of a lease.

But there are a few potential drawbacks in a lease option for you, too. As the seller in this arrangement, you are committed to the buyer, but the buyer is not committed to you. Also, some real estate agents may balk at handling these types of transactions because they take so long to consummate. Most agents, however, prefer them to no sale at all.

It's important that you know what motivates most lease-option buyers. Because the option money is less than a down payment, lease-option homes are easier to get into for these folks and good credit isn't as much of a prerequisite. The arrangement also gives buyers time to knock around the house a little more, get a better feel for the neighborhood and local culture, and perhaps establish or repair credit. They're also happy to be building equity instead of just making a landlord happy, and glad to be able to lock in the purchase option at today's home prices.

But if homes in your neighborhood are moving slowly and you can find a solid lease-option tenant with good references and decent credit, it's still a good move.

Good luck.

-- Posted: July 17, 2004




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