Why Selling on Lease Options is Glorified Landlording

I might upset some folks with this one, but that's okay as I think it's important to get some of my experiences into the light of day. If you fully believe the hype that you won't have any landlording responsibilities by selling on a lease option, go ahead and stop here. Or perhaps you should read on as this article is specifically written for you.

Let's review one of the common misconceptions that is thrown around by folks touting the wonders of selling properties on a lease option:

You won't have any repairs or maintenance.

True, you can certainly have your documents state that the tenant/buyer (TBer) is responsible for repairs. In fact, I've seen numerous variations of this ranging from the TBer is responsible for all repairs to only those repairs falling within a certain price range. Some investors ask the seller to be responsible for repairs up to a certain amount and ask the TBer to be responsible for those over that amount. Insurance will theoretically cover major damages so that's not an issue. And I know from several experiences that insurance will and does cover many repair expenses less than $10,000. So far, knock on wood, I haven't had to test going above that amount.

So, what happens when your TBer moves in, sends you back your move-in condition form and two days later the A/C, heater, or whatever goes out? You're either ponying up some money or you have one upset TBer. Yes, I know it's wise to have them sign off on an inspection or an inspection waiver prior to move in, and if you're not doing that, I recommend it. However, do you think that's going to matter if the TBer just gave you the majority of their life savings and they're looking at a large repair bill?

Yes, you can use some of their funds to purchase a home warranty and I also frequently do that. If the expense happens to be one that is actually covered under the policy on such a short time frame and not classified as a pre-existing condition, then you're fine and the TBer can just pay the deductible. Wait a minute, didn't you shell out a few hundred for the warranty? True, it came from the TBer's funds, but that option consideration was supposed to be yours to keep, right?

Other recommendations on addressing the issue include asking the seller to be responsible for repairs for a certain time period and then passing that "guarantee" on to the TBer. Again, it may be one of those "sounds good in theory" type arguments. The few times I've gone that route I've not had to test it, but I wouldn't be surprised if the seller is a bit upset if I had to call to ask for money after the fact. And what happens if your repair period from the seller is only 30 or 60 days and it takes you longer than that to find a decent TBer. Oops.

What I've found is that typicallly the TBer will agree, sometimes reluctantly, to cover half the expense. I present that solution in such a way that it does appear as if I'm breaking "company policy", but since "I want them to be happy in their new home", I'm willing to bend the rules some. It is definitely smart to push the TBer to get an inspection done prior to move-in as this not only comforts them, it protects you. Make sure you get a copy of it and have the TBer sign off on it. To be clear, I only make this offer for repairs that occur in the first 30 days. After that, they're on their own or insurance will take care of it.

Let's not forget the TBer who doesn't call to let you know that something needs repair. You may have done such a convincing job explaining that it was their responsibility that the TBer chooses not to call. Since they don't have the money to fix the water leak in the upstairs tub, they just let it continue. Now, we've got some mold issues and much more serious repair numbers. It's critical in my opinion that the TBer call you if they have a significant repair, even if they're able to pick up the tab. I want to know what's going on in my properties.

So, to summarize, I think there are some important steps to take when you sell your properties on a lease option. Take what you feel is important and incorporate it into your business if you haven't already done so.

1. Push the TBer to get an inspection done. If they don't have the $200 or so to do this, ensure they sign off on an inspection waiver. It's more difficult for them to come back to you demanding their option consideration and rent back due to needed repairs if they made this choice on paper and signed it.

2. Consider using part of the TBer's funds to purchase a home warranty. Not only does it comfort their concern of potential repairs, it increases the likelihood that needed repairs will get done. It's cheap insurance in my opinion.

3. Set up your standard operating procedure regarding repairs. Like all issues regarding properties with which you stay involved, it's important to promote and maintain consistent, documented procedures. In other words, don't have different repair policies for different properties or TBers. Choose the repair responsibility method or methods you think will work best and stick with them.

4. Another item not mentioned that is also company policy is that the TBer must have and maintain renter's insurance. Policies can be purchased for very little funds and it protects their personal property. Typically, these policies will also have a liability component that provides an initial layer of protection before they get to your policy. This way, if some accident happens, like the tub leak above, that damages their property, they won't be coming to you first for replacement.

Selling on lease options can be a profitable technique if done wisely. Just don't go into it believing it doesn't take any work and that the landlording headaches are completely removed. They aren't.

Thanks for reading.

(c) Copyright 2003, All Rights Reserved.

About The Author

Tim Randle can be contacted through his web site at www.TexasRealEstateClub.com; info@texasrealestateclub.com

---

Residential Property Abroad

It is increasingly common for individuals to own more than... Read More

The Listing Contract: Its All in the Details

Now that you've chosen a real estate professional to sell... Read More

Cashing Out of Preforeclosures - Exit Strategies for Maximum Profit

One of the quickest ways to real estate profits is... Read More

Buying Land For Development Requires Careful Planning and Execution

From the desk of Colm Dillon ... Author "Residential Development... Read More

Questions You Always Wanted To Ask A Master Builder But Never Had The Chance

Building a house (or lots of them) seems to be... Read More

High Tension for the Buyer and Seller of Real Estate Can Be Reduced

Tensions can run high in both the selling and buying... Read More

Why Are Mortgage Notes Discounted Anyway?

When real estate note brokers purchase partially paid notes, they... Read More

Should You Buy a House or a Condo?

A big debate these days is whether or not to... Read More

Let the Broker Show the House

Of course you're curious, and you'd like to see what... Read More

Selling Your Home: The Power of a Great Sales Flyer

Even though its importance is often overlooked, a great sales... Read More

Salt Lake City Real Estate

From the mountains to the valley, there are many types... Read More

Why Canadian Real Estate is Such Good Value

Real estate agents, Canadian citizens and foreign investors interested in... Read More

How to Achieve Financial Freedom with Your Home

The secret disclosed on how you too could achieve financial... Read More

What Is Home Staging And How Does It Help To Sell My House

Home staging is the concept of preparing a house for... Read More

The Secret To Marketing Your FSBO Home For Sale

You're ready to put your home or land (house, townhouse,... Read More

Equity

Equity is the value of your home minus what you... Read More

Buying Foreclosures - Knowing Why Helps You Buy

One big potential deal-killer in buying foreclosures is the homeowner.... Read More

Old House? New House? Weighing Your Options

Maybe it has something to do with a childhood home... Read More

Flipping or Fixing Houses for Profit

Many real estate investors make $5,000 to $10,000 or more... Read More

Do Bankers, Bubble, Discounters, & Justice Department Cloud Real Estate Industry?

Once relegated to the classified advertising section of the local... Read More

What to Look for in a Real Estate Agent

Real Estate Agents play an essential, critical role in the... Read More

Florida Real Estate Exploding For 15+ More Years?

YEEHAW!!!!!! The south will rise again!! Can't you just imagine... Read More

Is It Wise to Take My Home Off the Market for the Holidays?

Let's say you've had your home on the market for... Read More

What is a Home Inspection?

Any Sally and Sam Homebuyer can look at a home... Read More

Real Estate Growth: How Long Will It Last?

There has been speculation in the media recently about the... Read More

Should You Sell Your Home Yourself?

Are you thinking about selling your home? Would you like... Read More

Stopping Home Foreclosure with Bankruptcy

Bankruptcy Will Stop Your Sale - At Least For Now... Read More

Real Estate Investment - One Simple Formula

I saw the ads in our small-town newspaper for years... Read More

What is a Loft Apartment?

What is a loft apartment? At the most basic level... Read More

Personal Debt Can Disappear When You Set up a New Business

I teach students how to set up a new business... Read More

Property Investing Secrets 2

Property Investing Secrets:How You Can Turn A Below Average Deal... Read More

Real Estate Investing Myths That Steal Profits From Your Pocket

One of the things that distresses us about our industry... Read More

Getting Raw Land, Not a Raw Deal!

There is more to buying raw land than meets the... Read More