Wednesday, July 2, 2008

A Lease/Option … Should We Take It?

As markets change so does the nature of real estate transactions. One type of transaction that comes and goes with market changes is the lease/option, a lease tied to an option to purchase. The lease/option tool can be a good one for Buyers and Sellers if their circumstances warrant it.

Optionor (Seller) and Optionee (Buyer) can both benefit if the agreement is structured correctly for their respective objectives. A Seller with a vacant property that wants to generate cash or a cash flow with the rent monies and option consideration might consider a lease/option. A Buyer that hasn’t sold his property but wants to move once and in to a home he is buying so he can establish it as his own until his property closes escrow might consider a lease/option. These, and many other scenarios, are bona fide lease/option situations that could result in a mutually beneficial lease/option arrangement.

Beware, however, that we are seeing more lease/option agreements being written for speculation these days. We caution you to have your agent clearly help you with perspective in evaluating such a proposed contract and its effect on you. If someone proposes to give you $5,000 and tie your property up for three years, the warning bells should go off as their respective flags raise. No matter how frustrated you might be in today’s market facing your continuing payments, in this situation you must project forward three years and consider what the market might be. Also be advised, these offers are coming in way below today’s market value.

The option agreement gives the Buyer the option of buying tomorrow at a price agreed on today. Let’s say your property is worth $300,000 today. It has probably gone down 30% in the past year. If it comes back 20% in three years, the appreciation would be $60,000. In this case, the Buyer/Optionee would make $60,000 on an investment of $5,000 over three years. That is the speculator’s motivation. The speculator’s motivation is further enhanced if he can contract to buy your home for $250,000 in 3 years.

To minimize your risk exposure to such a speculative investor’s offer, in addition to adjusting the price, consider shortening the time, i.e.- one year instead of three. Try increasing the option consideration. If you go beyond a one year time frame consider annual option consideration payments for extending the option incrementally. Higher monthly payments can give you a cash flow and bind the Optionee tighter. If the person has a bona fide reason to stay in the transaction you will likely put it together with some massaging of the transaction components as discussed above. If not, you will flush out the unscrupulous predator investor that is trying to capitalize on your situation and thereby save yourself extreme future frustration.

Our Advice: Be sure to understand the objectives of the other party if you are considering a lease/option agreement. If you are a Seller and you sense a lease/option offer is speculation driven, make sure you have sufficient cash induced into the transaction to make it worth your while. If a speculating Buyer, make sure you find the right Seller or you are wasting your time. The right agreement between reasonable Optionors and Optionees can be a win/win transaction for both parties, and it will be readily apparent that it is a logical way to put them together.

The keys to a healthy lease/option agreement are the right circumstances of the principals, Optionee and Optionor, and savvy real estate agents that can properly construct the transaction and successfully negotiate it for the benefit of all. This is a powerful tool – use it right and righteously and you will be rewarded and happy.

Experience is Priceless! Lisa Wetzel & Jim Valentine, RE/MAX Realty Affiliates, , 775-781-5472.


Jim Johnson said...

Great Blog! I have been selling real estate in Bend Oregon since 1981 and find it refreshing to find a helpful blog like yours! Keep up the good work!

Lisa Wetzel and Jim Valentine said...

Jim - Thanks for the comment. We Love Bend! You live in a wonderful spot!! We'll keep you in mind if we have folks going that way. Lisa and Jim