11/23/2010

When Is "Diving" into Lease Option a Good Idea in Southern California?

Sometimes I'm asked about the possibility of a lease-option as a way to buy a single family home.
Lease-options were used extensively with commercial properties in the past and have also become a method for purchasing a single family home in the residential market.

They work best when: 1) the owner wants to sell but does not have to transfer title right away; 2) or the seller may need continuing cash to pay fthe mortgage, 3) the house may be vacant or will soon be because the seller has already moved on, 4) the money from the sale is not needed immediately by the seller, 5) and, very important, the seller has equity in the property or has other income. When a seller's market is slow and a house with equity in it is not selling, a seller might consider this scenario from a renter/buyer.

There are advantages for both the buyer and the seller in this arrangement.  It's also important to use a good lease-option agreement which covers, among other things, the percentage of rent credit towards the down payment, the date by which the sale will close, and other clarifications concerning who is paying the taxes, who is maintaining the property (usually the seller), agreement on the final sales price. Tenants in this situation are more likely to treat the property very well since they see themselves as the future owners.
An advantage for the seller includes retaining the income tax deductions and having good tenants. The advantages for the buyer are getting into a house for little money up front (the amount is negotiable of course),  building up a rent credit towards a down payment, trying out the neighborhood, still having time to shop for the best mortgage or interest rate, and the possible benefit of the price being locked in if the value goes up.

The buyer must first find out what the seller's circumstances are, which a Realtor can definitely help out with, before spending time on making lease-option offers. In many neighborhoods, short sales are about 50% or more of the local market and many if not most of those properties will not have a seller who will be able to rent out the house at local market rent because their mortgage payment may be much much higher, and they do not have either the desire or the ability to carry a negative cash flow.

However, if an equity seller can wait 6 months or even a year for the buyer, it might be worth the wait.

For some additional explanation, see this general article about lease-options.
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