How Lease Options Benefit Sellers, Buyers...and Their Realtors?

by Wendy Patton

Real estate markets across the world are suffering right now. Sellers can't sell their homes, and buyers can't get mortgages. For real estate agents, it's a lot harder to earn a living now. Gone are the days of listing a home and expecting it to sell; it's time to get creative to not just survive, but actually thrive in this economy.

What Is a Lease Option?

Lease options are a way to buy and sell homes without an immediate conventional mortgage. It gives 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 sellers the ability to beat their competition--we know in this kinds of market, competition is huge. 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 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 when selling on a lease option:

1. It allows you to beat the competition.

2. You can collect rent while the home would otherwise sit vacant.

3. You often receive a higher purchase price.

4. You can sell the home in a down market when otherwise it might not have been able to sell at all.

5. And it allows you to actually sell the home, instead of just renting it.

Advantages for the Buyer

Here are some of the advantages when buying on a lease option:

1. The buyers can get into a home now, even if they can't currently qualify for a mortgage. (How many potential buyers have you turned away because they couldn't qualify for a mortgage?)

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: this home is not right for them, that home ownership is not for them, or if the real estate market changes significantly.

Advantages for the Realtor

Now, real estate agents understand how lease options can help buyers and sellers, but let's take a look at how lease options work to benefit agents, as well (in a nutshell, how they get paid for their work!).

Not only will they still get paid, they can actually get paid more! I'll get into that in just a minute. But first, let's look at how agents get paid. When the seller and buyer agree to a lease option 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 an agent represents a buyer or seller in a lease option transaction, they sign additional addenda, part of which states the agent will be paid part of his commission up front from the option fee, typically 2% of the sales price up front, 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 in the beginning as well as at the end.

While this isn't as ideal as receiving the entire commission up front as 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 the seller just rent the home out because they can't sell it;

3. Losing a listing because the seller blames you for their home not selling.

Very few agents know how to do this, and it puts them head and shoulders above the pack. The listing agent is providing a premium level of service to the sellers. It is not unreasonable, therefore, to ask for additional commission (say, 7%, if you normally receive 6%) as part of this premium service offering if it sells as a lease option.

Getting paid extra sure is nice when they otherwise would 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.