You may have heard the term "rent-to-own" before.
What you may not have heard are the terms:
"Lease-purchase" and "Lease option."
All of these terms are interchangeable. We'll use the term lease purchase for the purpose of this article.
Although they may not be the traditional way of selling your house, lease purchases are potent tools that homeowners can use.
Lease purchases provide a lot of benefits, of which many homeowners are often unaware.
Let's take a deep dive into why lease purchases are a viable and often lucrative way to sell your house.
You Will Earn More Gross Proceeds Than A Cash Sale
To help demonstrate our first point, let's consider a hypothetical house worth $200,000 that would rent for $1,250.
The homeowner wants to sell it, but also wouldn't mind renting the property for a few years.
Our hypothetical homeowner could list the property for sale on the MLS with an agent for $200,000, and will probably get an acceptable offer.
But will the homeowner make $200,000?
Not even close!
The homeowner is likely to have to pay the below-estimated costs:
Realtor Commissions at 6%: $12,000
Buyer Requested Repairs: $5,000 - $10,000
Buyer Requested Closing Costs: $5,000 - $10,000
City/County Transfer Taxes: ~1% of the sales price at $2,000
Home Warranty: $500
Deep Cleaning Cost: $300
Recording Fees: $100
All these costs add up to $36,400, for gross proceeds of $163,600.
On the other hand, let's look at the numbers for a lease purchase.
For our example, we'll say the lease-purchase term will be for 36 months.
Our hypothetical homeowner will earn gross proceeds of:
Sales price: $200,000
Rent $1,250 * 36 months = $45,000
For a total of $245,000 in proceeds minus any associated expenses.
That's a big difference from the estimated gross proceeds from a cash sale.
Patience can undoubtedly pay off.
You'll Collect A Large, Non-Refundable Deposit
One of the most essential parts of a lease-purchase is the option deposit.
As the term implies, an option deposit is what gives the buyer the exclusive right/option to purchase the property.
The option deposit is non-refundable, so anyone willing to put up a sizable deposit will have some substantial skin in the game.
Option deposits are up to the buyer and seller to negotiate. They can be as little as a few thousand dollars or as much as $10,000.
You won't get that substantial a deposit for a regular rental.
You Will Open Up A Reliable, Positive Income Stream
What's one of the best parts of renting out your property?
The monthly income, of course!
Lease purchases by nature allow a property to generate more income than a regular rental.
Why exactly? There are a few reasons. Mostly because:
You do not have to worry about vacancy
There's no high turnover
The buyer is responsible for their own maintenance and repairs. Typically up to a predetermined amount per occurrence
All of these expenses add up, but with a lease purchase, they either don't exist, or they are very unlikely.
Your Tenants Will Feel More Like Owners
Unlike a traditional rental, your tenants will feel more like owners of the property.
We all know people take better care of things when they own them vs. when they rent them.
Putting up the large option deposit we spoke about before also helps your buyers feel much more responsibility towards the property than a traditional tenant.
Buyers May Make Improvements To The House
Due to the increased sense of ownership, your tenant/buyers are likely to make improvements to the property.
They might put up fresh coats of paint
They could install new lighting fixtures
Or, maybe they'll repave the driveway
Your contract should specify they need your express permission to make modifications/upgrades to the property, of course.
However, have you ever heard of a traditional tenant performing upgrades to a property at their expense?
It would never happen!
That's the difference between pride in "ownership," and renting.
Buyers Are Responsible For Their Own Maintenance And Repairs
In addition to possibly upgrading the property, your buyers will be responsible for their own maintenance and repairs.
Typically, lease purchases impose a limit of up to $500 per occurrence.
Meaning, your buyers are responsible for $500 worth of repairs for each individual instant of something needing to be repaired.
Should the cost exceed $500, it's the owner's responsibility.
Having the buyer be responsible for their own maintenance and repairs significantly reduces the amount of management necessary for the property.
While simultaneously increasing your net income due to decreased expenses.
You Can Choose The Length of The Lease
The lease term is 100% negotiable between you and the buyer.
However, there are some guidelines you should stick to.
First: You don't want to make the lease term too short. Remember, your buyer needs a reasonable amount of time to build their finances to a point where they can exercise their option to buy the property.
The shortest we've seen lease purchases go for is one year.
Second: You don't want to make the lease term too long, as it may reduce the sense of urgency for your buyer to tidy up their finances.
We typically offer up lease purchases for 36 months. Which we believe is plenty of time for someone to fix their finances to qualify for a loan.
You Don't Have to Pay A 6% Commission
What's the most expensive part of selling your house?
When you sell your house with a lease purchase, you don't have to cough up 6% of the purchase price worth of commissions.
Sure, you can utilize a realtor to help you lease-purchase your house, but you should be able to do it yourself with the help of an attorney for the paperwork.
You Won't Have To Worry About Vacancy And or Turnover
Vacancy can wreak havoc on the profitability of your rental property.
Marketing to find a new tenant
All of the above can significantly eat into your average monthly cash flow.
With a lease-purchase, these things are of little worry since the buyer is responsible for their own repairs, and they likely won't be moving out of the property.
A Lease Purchase May Be More Timely If You're In A Rush
Do you need to sell your house in a rush?
A lease purchase might be the right move for you.
Selling on the MLS can take months. You have to:
Find your agent
List the house
Wait for a buyer to come along
Hope the buyer doesn't back out using a contingency
Even if everything goes perfectly and you accept an offer the day you list the house, it'll take at least 30 days to close the deal if the buyer is using a loan.
Lease purchases can close faster because your buyer doesn't need to wait for slow bank underwriting processes.
All they need is the option deposit, and to sign the paperwork.
I'm not guaranteeing you a lease-purchase will always close faster than a traditional sale. But, signing a lease agreement and putting up a deposit is typically a faster process than waiting on a traditional buyer to close.
Have An Attorney Write Up The Paperwork
Don't try to do all the paperwork yourself. You may be thinking you'll save money on attorney prep fees, but it's a bad idea.
There may be laws in your state that need to be specifically addressed when dealing with a lease purchase.
And that's not a cue to search:
"Lease-purchase laws in my state." And put those terms into a standard lease agreement.
Find a local real estate attorney who can draft up the paperwork to protect yourself and your buyer.
Where To Advertise Your Lease Purchase
Now that you know all the benefits of lease purchases let's discuss where you can post up your listing.
Zillow For Sale By Owner
Zillow is going to be one of your best resources to post up your house for sale.
Today, most buyers start their search for a home online.
Craigslist For Sale By Owner
Craigslist is still a great website for buying and selling pretty much anything.
Like Zillow, Craigslist has a real estate for sale by owner section where you can post up your listing.
A word of caution: Craigslist can be a hotbed for scams. So be sure to vet your buyer.
Craigslist For Rent
In addition to posting your property in the FSBO section of Craigslist, you can also try posting it in the for rent section.
Maybe someone browsing the for rent section will have enough of an option deposit to get into a property they'd love to own!
Put A Sign With "Rent to own" in the Yard
Putting a sign in the yard may be old school, but it still works!
Go to your local hardware store and by a yard sign.
Write "Rent - to - Own" and your phone number on it, and stick it in the yard.
Facebook Marketplace may not be as popular as Zillow and Craigslist. Still, it's definitely worth your time to get additional exposure.
The more exposure your listing has, the better!
Word of Mouth
Last but not least, tell everyone you know that you're offering your house for sale with a lease purchase.
Whoever you tell directly may not be looking to buy a house, but maybe they know someone who is.
What Are Some of The Common Mistakes With Lease Purchases?
Lease purchases can be a great way to sell your house if it makes sense for your situation, but there are some pitfalls you need to be aware of.
Not Collecting A Large Enough Down Payment
First and foremost, one of the biggest mistakes you can make with a lease-purchase is not collecting a large enough option deposit.
The buyer's option deposit is what really helps separate them from a traditional renter.
A larger option deposit means more skin in the game. This will lead the buyer to do everything in their power to maintain their investment and make sure they qualify to purchase the house at the end of the term.
It's a lot easier to walk away from a $1,000 deposit than a $5,000 deposit.
Not Vetting Your Buyer
Next, you have to make sure you properly vet your buyer.
Check their income to make sure they can afford the payments
Ask for proof of funds to verify their deposit
Perform a criminal background check, so you know who you're dealing with
Make sure people at least meet your basic qualifications before signing any official paperwork.
Not Working With Your Buyer To Make Sure They Secure Financing to Qualify For A Future Loan
As we've discussed, lease-purchase buyers are not qualified for a traditional bank loan.
There are many reasons, such as:
High debt to income ratio
Or lack of employment history
Whatever the case may be, you should help get your buyer connected with a loan officer who can help them work towards qualifying for a loan.
The last thing you want is for the lease term to end, and your buyer still has the same issue that prevented them from buying a house earlier.
Not Getting The Proper Help You Need
Last but not least. Don't skimp out on getting the help you need.
Help can come in several forms:
A lawyer who will write up all the paperwork
A reputable company with experience with lease purchases
Work With A Company Familiar With Lease Purchases
If you made it this far, you're probably heavily considering selling your house with a lease purchase.
Consider working with Contenza Properties. We're familiar with and have experience working with lease purchases.
We'll even make sure all the legal stuff is handled for you.
The best part? We don't charge you any fees or commissions to have us help you sell your house with a lease-purchase.
We may be able to buy your house directly from you using a lease-purchase too.
Submit your information below today, and one of our friendly representatives will get back to you shortly.
About The Author
Jordan Reid founded Contenza Properties in April of 2018 to help homeowners solve their real estate problems quickly.
Since then, Jordan has helped multiple homeowners facing difficult situations such as divorce, property liens, and unwanted property inheritance.
Jordan believes in putting people first, and numbers second, which helps him reach the best possible solutions for the homeowners he works with.