You Need to Watch This Before Taking a Rent-to-Own Option

Betsy Heller:                       Hey there, Betsy Heller, Achievers Realty. Today I’m going to talk to you about whether you should take a lease option. Now, you might be saying, what is the lease option? And maybe you’ve heard it differently, maybe you’ve heard it called a rent-to-own. And so I’m going to talk to you about what that is and why you would or wouldn’t want to do it. So typically, there’s one of two ways that that works. First is a lump sum option, typically, for land or for something that would be developed. So if you wanted to buy a piece of property, you might give somebody a lump sum of $5,000 or $10,000 or more so that you could have the option to check out developing that land before you actually consummate the purchase on it.
Betsy Heller:                       Second is doing a lease option with a few $100 to maybe up to $500 or so on your rent being added to that rent amount that you would normally pay. And that additional amounts, some of it would be an option, and some of it would maybe be used potentially as a down payment for the option to buy at a fixed price at a later time. So you said, “Well, what does that look like?” So if you were going to buy, say, a $500,000 house, instead of paying $3,500 a month, maybe you would pay $3,800 a month. And $300 a month would go towards a down payment if you consummate that purchase, if you go ahead and exercise that option.
Betsy Heller:                       So let’s talk about the reasons why people do or don’t do that. So first, from the seller’s viewpoint, what are two reasons why sellers do a lease option? And one reason why they don’t? So what reason why they don’t do it is because they need the money immediately, or maybe not the money from the house they’re selling or the land they’re selling, but maybe they need the cashflow from it. So they had a rental property, and now they’re putting up for sale. They can’t do a rent-to-own because they want a 1031 their money. They want to exchange it into another property. So that would stop someone as a seller from doing a rent-to-own or a lease option.
Betsy Heller:                       But what are two reasons why they would do it? Well, the first is they would get top dollar. So when you at lease option something as a seller, you’re going to get top dollar for it. So maybe on the open market it would get $470,000, but on this lease option you’re going to get $500,000 because you’re taking a chance, you’re going to sell it in the future. And then second, it may be to get around a problem with the property or problem with the buyer. You may already be in escrow for a lesser amount and decide that you’re going to go ahead and stretch it out and extend that amount out.
Betsy Heller:                       So maybe you were in escrow for the $470,000, but you realize that the buyer has a problem, they still want the property and so now you’re going to sell it for $500,000 two years from now or three years from now. Or conversely, it can be something with the property. You realize that there is an encroachment from the neighbor’s fence or something even bigger, their pool or something that’s on the property, or maybe there’s a sewer issue or something that has to get handled before there can be financing in place. So it problem with the property or problem with the buyer. So from the buyer’s viewpoint, there’s two reasons why you would do a lease option. The first has to do with your own ability to get financing, either bad credit or no down payment money. And the second is because this is a property that has some problem that you want to go solve because then it will be worth even more.
Betsy Heller:                       So, in my opinion, the only reason why you would want to do the lease option is because of a problem with the property. Most times buyers will enter into the lease option because the problem with themselves, the bad credit or no down payment. What happens is, when they solve their own problem in the next two or three years after paying that higher amount, they realize that they don’t want that property when they have the option to look at so many others, that as time goes by, they realize that they’ve limited themselves to one when they could have many to choose from.
Betsy Heller:                       So we can give you a couple of quick examples of times when the lease option did work. So my husband and I did a minor subdivision. We sold one plot of land three times. So from the seller’s viewpoint, that was great. So each time we sold it for around $140,000, we collected a down payment money and those people paid interest on it only to decide that they did not want to go through with building on it. And we would end up taking it back again and selling it again. So by the time we sold this $140,000 piece of property, we’d actually made closer to $180,000 on it. So from the seller viewpoint, it was a great deal. From the buyer’s viewpoint, maybe there were some better ways to go about that. So as always, you can always ask me questions. You can contact me. You see my number below, call or text me. Look forward to talking with you.