Selling Rental Property With a Lease Purchase
Just as there are a number of financing options you can use to purchase a rental property, there isn’t just one way to sell one. When we purchase we have some kind of plan as to how long we’re going to hold a property, as well as the expected profit on sale.
We’re not talking about flipping here. The property we might consider for sale via a lease purchase is one we’ve held for a while, with a good tenant in it paying market rent. Or, it is one that we would sell if the price is right, and we’re looking for a tenant at market rent or better. What advantages are there for the investor seller in using lease purchase?
It could help to retain or lure an excellent tenant at above average rental rates.
We can plan for sale, with a structure that fits our timeline.
Inflation can be factored into the purchase price for the option time length.
We collect an option payment up front that is non-refundable, increasing our ROI for the year.
If the renter/purchaser does not exercise the option to purchase in the time frame specified, we keep the option payment.
If not exercised, the option frequently expires at the expiration of a lease. We are then free to list the property for sale or look for another tenant and start the process over again.
When the lease purchase agreement is executed, we get an up-front option payment from the tenant/purchaser. It is optional if we allow it to apply to the down payment when they purchase. Either way, we keep it if the period runs out and they are unable or unwilling to purchase the home.
Basically, we are allowing the tenant the option to buy the home at the end of a specified period at a specified price. This need not be a number, but could be at a price indicated by an appraisal at the time of the exercise of the purchase option. Using the appraisal method, you do not risk leaving money on the table during a period of rapidly rising prices. Virtually any mutually agreed-upon method for valuing the home can be in the agreement.
The value that many investors place in the use of lease purchase arrangements is the ability to acquire a top-notch tenant who wants to own, but cannot afford it at the time. They are willing to pay top rents and a fair price for the home in return for the security of an agreement that they can purchase at some point.