Pros and Cons of Lease Options for Sellers

(My Original Blog Post: http://ping.fm/yanPj)
Pros of Lease Options for sellers- The pros of a lease option for a seller is that they typically sell a house for a reasonable price and with flexible terms. The seller can sometimes sell hard to sell houses on a lease option.  Because they are selling to someone with owner financing that can't get financing today the seller is usually getting a decent sales price on the property.  The seller would still get the property tax and interest write-offs on the property as they still own the property.  The seller doesn't have to pay taxes on the option money until the option is exercised or expires.  The seller still owns the property and some say on what's done with the property and most of it is controlled if they are also a landlord on the property.  The seller can more easily evict a tenant through the terms of a lease in Minnesota than if the seller sold the house on a contract for deed.  If a seller sold on a contract for deed it takes much longer to get the buyer out through a cancellation and notice, possibly 60-90 days minimum, whereas with a rent to own it could be a few weeks.  This is typically the reason a seller/landlord will allow for less money down for option money than on a contract for deed. Either way the seller is going to make that money non refundable, which is a great advantage for the seller. Typically a house available with owner financing because of it's flexibility in terms, landlords often get above market rent.  Landlord sellers often find that rent to owns are a great way to rent or sell large expense properties that are nice.  Most people will agree that a rent to own tenant will take far better care of a property than a renter will.  A seller could put together a lease option in 1 hour, where a contract for deed may take more time and an official closing with more paperwork and recording of a contract for deed.  A lease option may not need to be recorded.

Cons of Lease Options for Sellers- Cons of a lease option for a seller is when they don't receive a very big option payment from the tenant, there is a tendency for the tenant to never excersise the option as they don't feel they are walking away from anything or any real money.  Another disadvantage for a seller on a lease option is if the tenant never takes care of the property or takes the transaction serious.  If the tenant never feels like they got equity they may not follow through at all, they may try to reappraise the house years later.  The tenant may not work that hard on their credit repair or may not be able to get financing later on.  One of the biggest mistakes a seller can make on a lease option is lease out their own homestead for over 3 years, the reason is that with the universal exclusion law concerning taxes at the time of this writing, the principle residents allows for $250,000 write-off on taxes for a single person and up to $500,000 for a married couple on their principle residence, with the stipulation that you had to own the property 2 of the past 5 years. If you as the seller lived in the property for 2 years+, which is likely, but then rented out the property over 3 years and then some tenant buyer cashed you out, you have no longer owned the property 2 of the last 5 years, this could be an extremely expensive mistake, and few people talk about it on websites or in books.  If the seller/landlord structured the lease and option wrong so they were tied together, and referenced each other, it could be costly, and very time consuming to go through court and be forced to foreclose off any equitable interest in the property from a tenant buyer.  Keep the lease and option separate.  Sellers may want to talk to an attorney, it may be worth it in the end.  The seller should keep copies of cancelled checks that were paid for rent over the years, so when the buyer needs that for new financing some day, the rental payment history helps on getting financing, this takes some time and discipline but a seller should do this.  Sellers may not like to take the time to figure out the monthly rental credits.  Sellers will need to figure out a way to get paid at the closing in the cases where they are in the middle as investors on sandwich lease options.