Opinions on Lease Options?

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Submitted by Horsepropertyneeded on September 12, 2006 - 3:04pm

I am considering proposing a lease with a purchase option. The owner purchased the property in May of 05 for $1,316,000. According to the listing realtor, the owner was transfered early this year. The house was originally placed on the market on June 13th for $1,588,800. Mid July the original lisiting was removed and then relisted the same day for $1,580,000. The house is vacant and not getting much traffic, approximately 1 visit a week.

My wife and I believe that the market will deflate over the next several years. We currently own a home that we purchased pre-bubble. Finding a suitable rental is difficult at best. We have horses and large dogs. Finding a rental in our area that will accept both is almost impossible.

To avoid purchasing before the drop, We are considering making an ofer to lease the property with an option to buy. I was thinking about a 2 - 3 lease at fair market plus $500 to $1000 per month to be applied to the purchase if we buy it at the end of the lease.

This will allow us to sell our existing house. We can move into the house we want without comitting to the current purchase price. If we are right the value will drop and we can purchase at or near the bottom. If we are wrong and the market holds we will still have put more in savings then we would have paid in principal.

The owners get enough income to pay their interest and tax payments and can wait with the hope that the market will hold or increase.

Current Listing

Thoughts?

Submitted by Chrispy on September 12, 2006 - 3:12pm.

Wow - nice house. My sister lives in Walnut. The one "hitch" I have heard about leases (and this is more of a detriment to the seller) is that the leasee could find flaws in the house while living there (more than a home inspection would come up with) and then expect the seller to include fixing these to sell the house.

Have you looked at what Zillow considers a fair sales price to be?

Submitted by Horsepropertyneeded on September 12, 2006 - 3:46pm.

3yrs of looking to find it

I was thinking about doing an inspection before leasing to reduce the risk of walking away from the option money.

I have looked at zillow. The initial value is low 1.1, but if you adjust the age (House originally built in 42, torn down to foundation in 2002 and rebuilt) The value is close to the lising price. Before reading all the housing bubble news I was thinking of offering 1.25, now I would feel nervous offering 1.1

Submitted by Chrispy on September 12, 2006 - 4:26pm.

Your nerves are doing you a favor. Keep listening to them and lease rather than buy - I would think the current owners would have a hard time getting a good leasee due to the size of the place, so that is a negotiating factor in your favor as well.

Zillow tends to run high - it tracks sales after they are finalized so the figures are usually several months old. Check the direction of the arrows on the chart for that house to see the general direction of pricing - most of the charts are heading south and looking like tech stocks in 2001 / 2002. Those charts always make me feel better about renting.

Submitted by anxvariety on September 12, 2006 - 4:44pm.

I just wrote and erased my post thinking you were partipating as the buyer.. as a seller I don't know!

Nice house though!

Submitted by Horsepropertyneeded on September 12, 2006 - 5:17pm.

Anxvariety, I am interested in buying - just not yet or at the going price.

I also plan to sell my existing house as soon as I can find a suitable rental

Submitted by Horsepropertyneeded on September 12, 2006 - 5:46pm.

14 years ago my partners and I made a similar agreement with our landlord for the two commercial properties our business occupies. 4 years ago we exercised the option. We got two appraisals, took the average and set the price. Owner financed at a great rate. The converted rent pays the mortgage and taxes and we will own the properties free and clear in another 8 years.

Submitted by sdcellar on September 12, 2006 - 6:28pm.

I have no idea what the market is like in Walnut, but if I saw a seller here pull the de-list/re-list trick *and* only dropped the price $8,800 on a $1.5 million dollar property, I'd say he's pretty attached to his price (and maybe just a bit delusional).

That said, it really comes down to what you can lease it for and if you think the added payment option is worth it to you. Tough to research "fair market" on a lease like that though. I'd do your best, make him an offer and see what he comes back with.

Submitted by Steve Beebo on September 12, 2006 - 6:47pm.

If you think prices are going to drop - why would you do a lease option instead of just a lease? It makes no sense to me. When a lease option is done, don't the parties typically agree on a purchase price upfront, that can later be exercised or not at the option of the buyer?

Submitted by Colombo on September 12, 2006 - 8:23pm.

Typically a lease-purchase agreement for residential property DOES anticipate a purchase price certain agreed upon at the time the lease-purchase agreement is entered in to.

However, there is no LEGAL requirement that your particular agreement be "typical".

You could agree to an independent appraisal or two or three to be conducted at a particular time in the future to set what is in effect a "strike price" on your real estate option.

You could have your agreement state that ALL of your lease monies apply to the purchase price, not just $500-$1000 as you suggest. 50% is typical, but see paragraph (2) above.

What I would recommend is having a real estate attorney with experience in purchase options help you draft an agreement. It is really imperative for your own protection that this option be recorded at the county against the deed so that there is no chance that it would be voided down the line.

You also want to make sure that there are no liens on the property, as your option would in all likelihood be expunged should the property be foreclosed upon.

Be careful out there! Lease options are not for the faint of heart or for the real estate novice.

Submitted by North County Jim on September 12, 2006 - 8:44pm.

I also plan to sell my existing house as soon as I can find a suitable rental

I would sell first and then find a suitable rental. Do you really want to sign a lease or lease/option before you've sold your existing home in this market?

Submitted by SD Realtor on September 12, 2006 - 11:03pm.

My experiences with lease options is that they are a good idea more often then not the person that is the buyer ends up on the shorter end of the stick in the long run. Everything is rosy and agreed to at the initial purchase. However if the market appreciates then the seller becomes reluctant to sell. If the market depreciates the buyer ends up not being able to finance because the property doesn't appraise. In a LARGE percentage of these transaction the seller ends up walking away with the option money. My advice to you would be, why lock up any money in a purchase agreement in a declining market? Rent from him, and save up so when the market does bottom out, then buy... Finally, one of the most common things as a Realtor I hear is how hard it is for someone to find the ideal property. I think you would be able to find something suitable if you were able to rent for awhile. This downturn will provide you with ample opportunity.

Submitted by powayseller on December 2, 2006 - 7:41am.

horsepropertyneeded, what happened with this house? Did you discuss the lease or lease option with the owner. I noticed it is now withdrawn. Beautiful house!

Submitted by 34f3f3f on December 3, 2006 - 1:02pm.

Some years ago I leased a large property in South Africa. The lease was for twenty years, with five year breaks, with one years notice on either side to terminate. The Lessee had agreed to spend "x" amount on improvements, and had right of first refusal to buy. He also had to leave the property in exactly the state he found it.

The lease contract was drawn up by solicitors and worked well for quite a time. It is a sensible way to go when there are many unstable factors in a housing market, as you are not risking capital and the house is more your home than a rental, offering better long term security.

However, there were problems! Although, the lessee knew I would eventually sell when the time was right, his family had become extremely attached to the property. Showing a house to potential buyers with an uncooperative lessee does present a problem. Giving a lessee right of first refusal can deter buyers. Evidence of the condition or state of (dis)repair of property is also fraught with difficulty.

Having said that, I am surprised that this kind of arrangement isn't more common, as it offers benefits to both parties. As long as a watertight agreement is drawn up, it would offer an alternative to buying or renting. I would certainly consider it, and would like to hear of any options available in soCal.

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