Sell Your House Using a Lease Option

Are you trying to sell your house in a buyer's market? A lease option may be the perfect solution to ensure you get top dollar for your home. It may even generate some extra income off the sale. With a lease option, you rent your property to a potential buyer and give them an option to buy at the end of the lease term. Using a lease option lets you tap into a huge pool of people who want to buy a home but who aren't quite ready to make the purchase yet.

Steps

Finding a Potential Buyer

  1. Fix up your home. You’ll get the largest number of offers if you fix up your home as much as possible before advertising. Correct major problems first, such as rickety stairs, broken windows, and leaks in the roof.[1]
    • At a minimum, the home needs to be habitable (livable). This means that you must provide sufficient heat and hot water to your tenant.[2] The home should also be sufficiently safe, by having a deadbolt lock and locks on the windows.
    • States and municipalities create livable standards for rental property. Stop into your local housing authority or town office and ask for requirements.
  2. Consult an attorney. Not every state allows rent-to-own agreements, so you should consult with a real estate attorney before putting your home on the market.[3] You can find a real estate attorney by contacting your local or state bar association and asking for a referral.[4]
    • Also have the lawyer walk you through the process, even if you don’t want to hire them.
    • Of course, hiring the lawyer can make things easier on you. They can draft the lease option contract and negotiate on your behalf. They will also review required closing documents.
  3. Advertise. Lease options are not that common. Perhaps for this reason, they typically receive an overwhelming response, so you will likely have plenty of potential buyers to choose from. You can advertise the home using the following methods:
    • Put up a sign on the property. Make sure to mention that your home is “rent to own.” Also state the monthly rent (if you’ve settled on a sum).
    • Place ads in the local newspaper or circular.
    • Advertise online. You can put an ad on Craigslist. Make sure that you have pictures of the inside and outside of your home to show.
  4. Create an application. You’ll need to thoroughly vet any applicant. Accordingly, you should create an application that all interested buyers complete. Make sure your application requests the following:[5]
    • name
    • date of birth
    • Social Security Number
    • ID number (driver’s license, passport, etc.)
    • current address
    • previous addresses
    • employment history (name, contact information, dates employed)
    • gross pay at each job
    • bank accounts (name of the bank and current balance)
    • credit card debt
    • whether the applicant has ever been late with rent
    • criminal history
    • applicant’s signature authorizing a background check
  5. Perform background checks. You need to look at potential buyers as potential tenants, and you don’t want to do a lease option with someone you wouldn’t rent to. Accordingly, you should do a background check on each applicant.
    • As far as the applicant’s credit history, you probably don’t want someone with serious credit trouble, but at the same time you may want to be lenient. Many buyers who choose lease options do so because they have some blemishes on their credit and want to improve their profile before applying for a loan.
  6. Clean up your own credit. Any renter is taking a risk by entering a lease option contract. For example, you might lose your house during the rental period. In this situation, the renter loses out on the option to buy the home and will have to move. Accordingly, you can expect potential buyers to do their own due diligence on your credit history.[3]
    • Get a copy of your credit report and look for mistakes. Dispute any errors with the national credit reporting bureaus.
    • Pay off debts as best as you can. If you are selling your house because you’re in financial trouble, you can expect buyers to be leery of entering a contract with you. Accordingly, improve your credit profile by paying down debt.
    • Pay off all unpaid taxes and liens.
  7. Pre-qualify your tenant. It’s a good idea to contact a loan officer or mortgage broker to at least discuss the potential buyer’s prospects for obtaining a mortgage at the end of the lease. The longer the lease term, the more uncertainty there will be. However, you’ll want at least some idea whether or not your tenant can qualify for a mortgage when the option comes due.
    • You can also ask the potential tenant to contact a mortgage broker.[6] Have the broker send you a letter explaining whether the tenant will qualify.
    • It’s also important not to enter a lease option agreement with someone who can never possibly qualify for a mortgage. Renting to this person borders on a scam.

Negotiating a Contract

  1. Set the lease period. Your tenant will lease your house for a certain amount of time. Generally, most contracts last one to three years.[5] You want to give your tenant sufficient time to save a down payment or clean up their credit so that they can secure financing.
  2. Determine the amount of rent. Find out the market rent for a home of your size. Look for comparable properties in terms of size, location, and amenities (pool, garage). In your lease agreement, might sure to identify the date rent is due, as well as what methods of payment you will accept.
    • Also decide how much of the monthly rent you want to apply to the purchase price. This is called the “rent credit.” For example, you can decide that 25% of the rent will be applied as a down payment.[3] If the tenant pays $1,000 in rent for three years, then $250 a month for 36 months ($9,000) will be applied.
    • If you choose to apply a portion of the rent to the down payment, then you should charge above-market rent.
  3. State the security deposit. Identify how much you want from the tenant as a security deposit. Also explain what you can use the security deposit for, such as to repair any damage to the property. Additionally, you should explain that the tenant will forfeit any deposit if they break some provision in the lease.[7]
  4. Choose the type of option. There are two options you can give the buyer. Choose which one works for you:
    • Lease-option agreement: this means the renter has the option (but not the obligation) to buy at the end of the rental period. This choice gives your tenant more control.
    • Lease-purchase agreement. This means your tenant is obligated to buy at the end of the rental period. If they don’t, then you can sue.[3] Most tenants will resist this option, though it gives you protection.
  5. Decide on the lease option fee. The option is the amount of money your tenant will give you to secure their option (i.e., their right to buy the home). There is no standard rate, and you and your tenant can negotiate the amount. Generally, options are around 3% of the purchase price, though you can go higher or lower.[3] For example, if the purchase price is $150,000, then you might want your option to be $4,500.
    • Also decide whether the option fee is refundable. Typically, it isn’t.[5] Accordingly, if the tenant decides not to exercise their option, you pocket the money.
    • Make sure to agree whether the option paid will be applied to the price of the home. Generally, it does.
  6. Set the deadline for exercising the option. The option usually begins when the lease agreement is signed and ends when the lease agreement expires.[5] Also tell them how they can exercise the option, e.g., through a letter mailed to your home address.
    • You can also grant an extension. For example, the tenant might not be creditworthy by the expiration of the option. However, if they are working diligently to qualify for a mortgage, you might want to extend the option.
  7. Choose the purchase price. Your contract will explain how you will determine the purchase price of the home. For example, you and your tenant can agree on the purchase price when you sign the contract. In this situation, you might want to set the price a little higher than the home’s market value to account for rising property values.[3]
    • You can also agree that you’ll set the price when the lease expires.
    • Choose the option that works best for you. In a real estate market with rising prices, you might want to choose the second option.
  8. Assign responsibility for maintenance. During the lease, your house might need repairs. If you want the tenants to pay for them, then include language in the contract to this effect. Typically, home owners make tenants responsible for minor things like mowing the lawn and basic interior or exterior maintenance. However, the tenant typically doesn’t do major repairs, such as replacing the roof or foundation. You can also set a dollar amount per year in maintenance.[5]
    • As the home owner, you can also require the buyer to pay property taxes, insurance, and homeowners association fees. However, you might want to continue to pay them since you are ultimately responsible for them until the sale goes through.[3]
    • As the landlord, make sure you get landlord’s insurance.[8] Talk to an insurance agent.
  9. Agree not to take any loans against the house. Your tenant will want a promise that you won’t do a reverse mortgage or get a home equity line of credit. If you did, then you might lose your home if you default on the loans. In that situation, the buyer will lose out on the chance to buy the house.
  10. Draft your agreement. Since this is a legal contract, it’s best to use a lawyer or at least have a lawyer review your draft to identify anything missing. If you didn’t hire a lawyer, then you’ll need to draft your agreement. You can find sample contracts online.[5]
    • A lease option agreement is, at base, a typical rental agreement, so make sure you include all of the terms you would normally have in a lease agreement, such as reasons to evict someone.[5]
  11. Sign the contract. Your contract won’t be legally binding until you and the buyer both sign it. Once signed, distribute a copy to the buyer and either give the original to your lawyer or store it in a safe place, such as a safety deposit box.

Selling Your Home

  1. Keep excellent records. As you collect your tenant’s monthly rent payments, you need to accurately record the amount paid and the date. Accurate records are particularly important if you are applying a portion of the rent to the purchase price. Keep a spreadsheet and enter the information in a timely manner.
  2. Stay in contact with the tenant. As the expiration date for the option approaches, you should be in contact with your tenant. Ask them whether they are considering purchasing your home. If they are, then they should begin investigating mortgages, since they will need to finance the purchase. Some tenants might need to be gently nudged to assess their credit score.
  3. Sell the house. If the tenant exercises the option, you can go ahead with the sale. Contact your real estate lawyer to draw up the paperwork. Your tenant will need to secure a mortgage, so account for the time that typically takes. To sell the house, the buyer should undertake all of the regular due diligence:[9]
    • home inspection (even if you had one before signing the lease)
    • other inspections (pest inspection, roof inspection, etc.)
    • appraisal
    • title search
    • mandated disclosures about the house
  4. Put the house back on the market, if necessary. Of course, your tenant might choose not to exercise their option.[3] If so, you can decide whether to rent the home, enter another lease option, or try to sell it outright. If you liked renting, you might enter another lease option.
    • Review your contract to see if you need to refund any of the rent credit to the tenant. You should have drafted the agreement so that you don’t.

Tips

  • Lease options aren’t for everyone. For example, if you need money upfront, then you should try to sell your home instead of leasing it. Also, you must prepare yourself for the possibility that the tenant might choose not to buy the home.

Related Articles

Sources and Citations

  1. ↑ http://www.nolo.com/legal-encyclopedia/selling-your-house-faq.html
  2. ↑ http://www.nolo.com/legal-encyclopedia/free-books/renters-rights-book/chapter7-2.html
  3. ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 http://www.investopedia.com/updates/rent-to-own-homes/
  4. ↑ https://shop.americanbar.org/ebus/abagroups/divisionforbarservices/barassociationdirectories/statelocalbarassociations.aspx
  5. ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 http://www.mrlandlord.com/rentalapplication/app1.pdf
  6. ↑ http://www.doughroller.net/mortgages/lease-option-guide/
  7. ↑ https://www.hudexchange.info/resources/documents/exampleresleasewithpurchaseoption.pdf
  8. ↑ http://www.bankrate.com/finance/real-estate/lease-option-to-buy-questions.aspx
  9. ↑ https://www.thebalance.com/lease-options-and-lease-purchase-sales-1798417
Retrieved from "https://kipkis.com/index.php?title=Sell_Your_House_Using_a_Lease_Option&oldid=289973"