Why Would Anyone Sell On A Lease Option In An Appreciating Market

Read Transcript for “Why Would Anyone Sell On A Lease Option In An Appreciating Market?”

“I got this note from a seller I contacted about a rent to own. How would you respond? I read the FAQ on your site to understand how it works. The business seems to be more interesting for the buyer than the seller. Let me explain: imagine there’s a property that is worth $100,000 today. The trend is to increase the value by 8 to 10% a year, so while the buyer is paying $12,000 a year, it will take over 8 years to reach 2014 market value and in 2022, the property might cost $188,000. The seller doesn’t have cash to buy another property. The buyer is likely to change the property according to his or her tastes and it might be really difficult to have an eviction since nobody wants to lose five years rent to buy in case of losing a job. Am I wrong? If you have more information about it, feel free to express your views.” – Jack Olsen

 
Joe: Just to reiterate what he said here: he’s concerned that he’s in an upswing market. He thinks that the values are going up 8 to 10% in the market that he’s in and he’s concerned that the seller will feel that it doesn’t make sense to do a lease option because the values might go up over the three year lease. He’s talking about an eight year lease. The seller might be concerned that the values might go up over that time and then lose some of his equity when that buyer eventually exercises that option.
 
Joe: The thing to remember is that even though there’s nobody that knows where the market’s going, people still have a feeling about it, so if somebody says to you, ‘I’m in _x_ market and this market is going up 10 to 25% per year,’ your question to them would be, ‘How much do you think it’s going to be worth in three years when people have the right to exercise that option within that period of time?’ And if they say, ‘Let’s say it goes up 10% a year, and it’s a $200,000 property, then it’s going to be up to $260,000 at that time.’ You say, ‘So if it’s going to go up to $260,000 in three years, what if we price it close to that? What if we raise that price?’
 
Joe: Buyers will purchase a property on a lease option for more than it’s worth, thinking that it might go up in value as well, and if it doesn’t, they don’t have to buy it, and if it does, then the seller gets his equity out of the property. Now, you might want to give them a little bit longer and you might only want to give them three years. That’s okay – either way works.
 
Joe: What’s most important to the buyer is the monthly payment. What’s most important to the seller is having somebody in there making the payments for him. Most sellers have a property that they haven’t sold yet or they don’t want to sell and they want to hold onto because, for example in this case, maybe it’ll go up in value. So, just sell it for what he thinks he’s going to be able to get it for in there years.
 
Joe: The likelihood is that the buyer is never going to buy this property – less than 30% of lease option buyers are ever going to exercise the option, so the likelihood of that happening is pretty low. It would have to dramatically go up beyond even that for the people to buy this property normally.
 
Joe: That doesn’t mean that it’s a bad thing for the buyer. The buyer still gets a place that they can call their home. Just like if you have a mortgage on your property, you have a place that you can call your home, even though it’s not yours and you’re still making payments on that mortgage but the bank owns that property. It’s the same in this situation – the seller owns that property but of course, the bank actually owns it because he’s making payment s to the bank in most cases.
 
Joe: So, those things aren’t really a big worry. You have to look at the seller’s situation and the buyer’s situation – Look at their options – and rather than looking at directly on paper saying, ‘If you’re in hog heaven and you’ve got lots of money and you’re not worrying about losing this money, maybe it makes sense to sell it with a real estate agent.’
 
Joe: And maybe that’s true – maybe you just want to get rid of it with a real estate, but, if you have a difficult time selling it with an agent, or, if you just want to try to make a little bit more money on the property (which is a big thing for me – I like to continue to hold onto properties forever if I can) then selling it for more money like this on a lease option makes a lot of sense because you’re probably going to hold onto it.
 
Joe: And if you do sell it, that’s okay – you can do a 1031 exchange and you don’t have to pay any taxes on it and you can buy another property perhaps under market value and make money on that one. So, there are real benefits to both the buyer and the seller in this situation. Alright, I hope that answers it. Thanks.