What is a Lease Option?

What is a Lease Option

What is a Lease Option?

A creative way to lease a home without taking responsibility for maintaining it is to offer it for sale as a Lease Option. A Lease Option is done by essentially leasing a home and selling the tenant an ‘option’ to buy the home at a later date for an agreed upon price.

Typically the tenant pays an option fee (down payment) of 3-5% of the agreed upon sales price and then pays a slightly higher than average monthly rent of which a portion (10-15%) is credited toward the future purchase. The tenant also agrees to pay for all maintenance and repairs (beyond what insurance might cover).

The disadvantage to offering a home for lease-option is that, like leasing, the tenant may stop paying rent, damage the property, and/or never exercise their ‘option’ to buy the property. This happens about 70% of the time, by the way.

It is also important to understand that a lease option is a complicated transaction that is strictly regulated by state laws that restrict how these transactions can be structured. Because of these laws, most investors are no longer selling properties using this technique, and Hippie Hollow Homes recommends against selling this way in Texas. If, however, this strategy is ideal for a particular seller, Hippie Hollow Homes can structure a transaction that has the same benefits, but is done in accordance with Texas laws.

Questions About Lease Option?

Is a lease option legal in Texas?

Yes, but practically speaking, no. Texas Senate Bill 629 regulates how these transactions must be structured. The regulations include requiring notifications and lender agreements that are probably not practical or possible. Failing to structure these transactions legally has penalties so severe to the seller, that it is not likely to be worth attempting.

What are the alternatives to lease option?

Instead of doing a lease option, the owner may choose a different strategy such as selling with owner financing, selling subject-to, or selling with a wrap-around mortgage.

 

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