What is a Lease Option?
One of the biggest headaches as a landlord is the maintenance of your properties. Selling the home through a lease option is a great way to lease the home without having responsibility for maintaining it. A lease option is the leasing of a home to a lessee that also maintains the right to purchase the home for a specific price at any time in the length of the agreement.
In a typical lease option the tenant will pay an option fee (or down payment) of 3-5% of the agreed upon sales price and then pays a slightly higher than average monthly rent of which a portion (10-15%) is credited toward the future purchase. The tenant also agrees to pay for all maintenance and repairs (beyond what insurance might cover). These tenants typically take very good care of the property because it is their intention to purchase the home at some point in the future.
The major disadvantages of a lease option for the homeowner is that, much like renting, the tenant may stop paying rent, they may damage the property, or they may not ever exercise their ‘option’ to buy the property. This happens about 70% of the time, by the way.
A lease option is a complicated transaction that is regulated strictly by state laws that restrict how these transactions can be put together. Because of these laws, many investors in states like Texas are no longer selling properties using this technique.
Common Questions About The Lease Option
Are lease-options legal in Texas?
Yes and no. Texas Senate Bill 629 regulates how these transactions must be structured. The regulations include requiring notifications and lender agreements that are probably not practical or possible.
Failing to structure these transactions legally has penalties so severe to the seller, that it is not likely to be worth attempting.
Are there alternatives to the lease option?
Yes, other strategies such as selling with owner financing, selling subject-to, or selling with a wrap-around mortgage are similar to lease options and offer many of the same benefits.