I’ve trained real estate agents across the country in lease options, teaching them how to help their clients. But I still run into agents who don’t want to do them. That’s okay, but sometimes agents just need to learn a little more about lease options to open their minds.
Lease options can be great both for home buyers and home sellers. They aren’t the perfect solution for every situation, but there are many cases, especially in our current real estate market where an agent could significantly increase their commissions by putting together lease option transactions and help their clients. Let me give you some example situations where a lease option could be good for a Realtor and increase their commissions:
Have you ever had a potential buyer come to you who has not tried to qualify for a mortgage yet so you refer them to a mortgage broker and then never hear back from them? Let’s face it, a lot of would-be buyers out there can’t qualify for mortgages right now, but they still want to buy a home. These are perfect lease option buyers. Just because they can’t qualify right now doesn’t mean they won’t be able to qualify later. Why not tap into this pool of buyers and get paid instead of turning them away and watching another commission check walk out the door. And it’s only going to get worse. The new rules for credit scoring are being implemented that is making it harder for some people to qualify right now. Plus the credit card industry is tightening things up. I know of one buyer who could have qualified for a mortgage two months ago that can’t now because the credit card companies have changed so much. He had one account closed on him and two others where they reduced his available credit to just above his current balance. That had enough impact on his credit score that he could no longer qualify for a mortgage. And he never even so much as had a late payment with any of those credit cards! So instead of having to be stuck renting, this would make a great lease option buyer.
What about the sell side? Do you have any listings where your client has told you that if they can’t get their home sold soon they are going to have to rent it? This makes for a perfect lease option seller. You already know that they are considering renting their home plus you know that they really want to get their home sold. How much of a commission do you make if all you do is find a renter for someone? Squat! With lease options you can still get your full commission!
This is just 2 examples of why Realtors should consider lease options and two ways that any agent can increase their commissions right now. If you want to learn more about lease options take a look at my books Rent to Sell and Rent to Buy. They are a great resource for any real estate agent.
Whether your are a lease option investor, a real estate agent or a home seller or home buyer, anyone involved in a rent to own transaction has the same points to look out for in negotiation. I’m not going to cover all of the negotiation points here but I’ll focus on a few of them.
1. Monthly option credit – This wold be a portion (or all) of the monthly rent which is credit towards the purchase price ONLY if the tenant-buyer exercises the option to purchase. This credit is in no way mandatory, but can be very helpful to the buyer when it comes time to purchase. If a seller is granting option credits they need to have enough equity in the home to cover them
2. Monthly rent amount – Typically rents are priced at market rent or a little bit more on a rent to own transaction. However, this amount can always be negotiated to make it better for you.
3. End purchase price – the amount the buyer will actually pay for the home once they exercise the right to purchase. This final amount will determine the buyer’s new mortgage payments. It will also reflect the net proceeds for the seller. Most rent to own sales command a slightly higher purchase price, possibly as much as 5% to 10% more depending on the strength of the real estate market in your area.
Want to know more about key points to negotiate in rent to owns?
If you are a lease option investor you’ll want to read “Investing in Real Estate with Lease Options and Subject To Deals”
If you are a home seller or real estate agent you’ll want to read “Rent-to-Sell”
If you are a home buyer or real estate agent you’ll want to read “Rent-to-Buy” (coming soon)
All of these books are available on Wendy Patton‘s website
Any real estate investor, home owner or home buyer that does a rent to own deal needs to understand the process involving the appraisal of a lease option home when it comes time for the end buyer to purchase. The purchase price is agreed upon at the onset of the rent to own. Because the sale of a rent to own home takes place over time the home may go up or down in value by the time the end buyer is ready to purchase their lease option home. When it comes time to buy the rent to own home the buyer’s lender orders an appraisal. Three things can happen with that appraisal.
The lease option property appraises for the amount of the agreed upon purchase price. If this is the case everything can proceed forward without problem for the real estate investor, the home seller and the home buyer.
The rent to own home appraises for MORE than the amount of the agreed upon purchase price. In this case as long as the buyer has lived up to all of their obligations in the option contract, the home seller or the real estate investor MUST sell for the agreed upon purchase price. The buyer benefits from the extra equity.
The lease option home appraises for LESS than the amount of the agreed upon sales price. Of course we hate to see this happen, but sometimes if real estate markets are in decline it can. If this is the case, the home owner and the real estate investor are only obligated to sell for the original sales price. The buyer wouldn’t be able to qualify for a mortgage at that price so the deal would fall apart. While the home owner or the real estate investor are not required to sell the rent to own home for a lower price they may choose to. Let’s face it, the home has gone down in value, so they won’t be able to sell it to anyone else for more. The may want to drop the price to the appraised value so the buyer can complete the sale.
These terms are part of the lease option contracts that are so important when doing a rent to own sale. I explain them in great detail in my books, Rent to Buy, and Rent to Sell.
Also, take a look at this video where I talk about the appraisal versus sale price.
Looking for a new way to find a lease option or rent to own home? Either as a real estate investor or a home buyer a great solution for you can be to look at builders with excess inventory. A lot of builders overbuilt and are now stuck with homes they are desperate to sell. They could be a perfect candidate for a lease option home or rent to own home. This creates prime opportunities for home buyers or real estate investors. There are lots of builders out there, especially ones that build on a smaller scale, that would be willing to consider creative selling techniques like a lease with option to buy or rent with option to buy.
These are great lease option investment opportunities. New construction homes are very low maintenance, which means less headaches for you. Buyers love new homes. If you are looking for a lease option investment you’ll find it easier to find tenant-buyers to fill the home.
My new book Rent-to-Sell is doing great! If you are a home seller or a real estate agent you should definitely consider selling your home or listings as a rent-to-own in this real estate market. It can be a great solution if you are having trouble selling.
Take a look at this video where I go into some details about Rent-to-Sell and what it can offer you -
Remember, this book is now available and you can purchase your own autographed copy of Rent-to-Sell.
Cover picture of Rent-to-Sell, a step by step guide to selling your home as a rent-to-own
Advantages for the Realtor In part 1 we learned how lease options or rent-to-own can help home buyers and home sellers. Now we need to take a look at how lease options or rent-to-owns work to the benefit of real estate agents as well (in a nutshell—how do we get paid!). As much as we like to help our home buyers and home sellers we still need to get paid for our work.
Not only can you still get paid, you can actually get paid more! I’ll get into that in just a minute. But first, let’s look at how you get paid. When the seller and buyer agree to a lease option or rent-to-own the buyer will pay an option fee. This reserves the right for the buyer to purchase the home at a later date for an agreed upon price. The option fee is paid to the seller, however, when you represent a buyer or seller in a lease option or rent-to-own transaction you would have them sign additional addendums for the lease option, part of which states you will be paid part of your commission upfront out of the option fee. I typically get 1 to 2% of the sales price upfront, split between the buyer and seller agents. The remainder of the commission is paid when the buyer purchases the home at the end of the option period. This creates revenue for you in the beginning as well as at the end.
While this isn’t as ideal as receiving all of your commission upfront the way you would in a conventional sale it’s a whole lot better than:
1. Turning away a potential buyer that can’t qualify for a mortgage;
2. Having your seller just rent their home out because they can’t sell it;
3. Losing a listing because the seller blames you for their home not selling.
Those are all scenarios we as Realtors deal with regularly, particularly in down markets. Think about how much more you would make if you turned all of those into lease option or rent-to-own sales instead of turned away buyers and lost listings?
Additionally, as a listing agent you are providing a premium level of service for your sellers. Very few agents know how to do this and this will put you head and shoulders above the pack. It is not unreasonable, therefore, to ask for additional commission as part of this premium service offering. If you would normally list for 6% commission, when you agree to list the home as a lease option you may want to ask the sellers for 7% commission if it sells as a lease option.
Getting paid extra sure is nice when you would otherwise have lost the listing.
If you want to stay in this business this is the time to get creative. Ask yourself—do you want to be in the business for 5 months or 5 years? Conventional methods are nice when they work, but you need alternative “tools” too. Adapt to the demands of the market and you’ll not only survive, you’ll thrive.
Real estate markets across the world are suffering right now. Sellers can’t sell their homes and buyers can’t get mortgages. Real estate agents are having a lot harder time earning a living now. Home buyers, home sellers and the real estate agents that represent them need to get creative and look for alternative solutions than just conventional sales.
What is a Lease Option or Rent-to-Own? Lease options, also known as rent-to-owns, lease with option to buy, or rent with option to buy, are a way to buy and sell homes without an immediate conventional mortgage. It gives home buyers who can’t qualify for a mortgage right now the opportunity to get into a home right away while they improve their credit and build up a down payment while living in the home. It gives home sellers the ability to beat their competition, which we know in these kinds of markets competition is great. Sellers can reach a far greater pool of potential buyers. They will likely be able to sell their home quicker and for a better price. For some sellers it may be the ONLY way they can sell their home in this real estate market.
How Does a Lease Option or Rent-to-Own Work? A lease option works like this: The buyer and seller agree to an option which gives the buyer the right to purchase the home during a set period of time. During this option period the buyer leases the home from the seller. By the end of the option the buyer must either purchase the home or forfeit their option fee. While the option is valid the seller may not sell their home to anyone else.
Advantages for the Seller Here are some of the advantages home sellers when selling on a lease option:
1. Allows them to beat their competition. (Real esate agents, ask yourself how many listings have you lost because the home sat on the market and never sold?)
2. The seller can collect rent on their home while it would otherwise sit vacant.
3. They can often receive a higher purchase price.
4. They can sell their home in a down market when they otherwise might not have been able to sell at all.
Allows the seller to actually sell their home instead of just renting it. (Real estate agents, have you lost any full commissions because the home was just rented instead of sold?)
Advantages for the Buyer Here are some of the advantages to your buyers when buying on a lease option:
1. The buyer can get into a home now, even if they can’t currently qualify for a mortgage. (Real estate agents, how many potential buyers have you turned away because they couldn’t qualify for a mortgage? No longer!)
2. They can improve their credit and build up a down payment while they are already living in their future home.
3. They are not obligated to purchase the home at the end of the option if they decide the home is not for them, that homeownership is not for them or if the real estate market changes significantly.
Take a look at this short video of one of my lease option students. He is giving some killer information here for getting homes sold. If you are an investor, a real estate agent or a home seller this is a must watch.
My forum is also a great place to learn more tips and tricks about lease options or rent-to-owns.
If you are new to lease option investing or new to selling your home as a rent-to-own you might think that it doesn’t matter too much what real estate contracts you use. The reason experienced investors have such detailed leases and contracts is because they progressively have learned from their mistakes.Each time they learn a lesson they add a new clause to help prevent repeating that lesson.
Anything from paying road or sewer assessments, to making payments through an escrow account, to having the tenant pump a septic system once a year.They are all important for protecting you and protecting your profits when it comes time to close.That’s why using the right contracts is so important.
Some things you have to learn on your own, but in this case it’s a good idea to make use of those extra “lesson learned” clauses so you don’t have to repeat those experiences.Trust me, you aren’t missing much.
Take a look at this recent testimonial from lease option or rent-to-own investor Ken Edmonds. He is a student of mine and his phone is ringing off the hook with buyers wanting to do rent-to-buy. He got over 300 calls from just one ad! This market is about as good as it gets for doing rent-to-owns or lease options.
