Lease-options (also known as rent-to-own, and similar to lease-purchases or land contracts) are a good way to find properties to buy when you can’t buy traditionally. Perhaps you have poor credit, or no down payment. Or maybe you’re not sure about a new neighborhood, and want to rent before buying. The problem is: Lease-options can be difficult to find. Many aren’t listed as “lease-options” on the MLS (“Multiple Listing Service”–the real estate databases used by Realtors), and others are not on the MLS at all. Here are some little-known ways to find a lease-option when they are not listed on the MLS.
But, first, the fundamentals:
A lease option combines a lease for a piece of property and an option to buy the property at some point in the future. There’s no one “standard” lease. But the lease can be typical for your area. (The secret to this technique lies in the option.) The lease says that the tenant has the right to occupy the property for 12 (or 24, or whatever you choose) months, paying rent of $x a month. It contains the same basic provisions as any lease: keep the property clean, no illegal activities, pay rent on time, etc. There isn’t anything unusual about the lease.
The magic is in the option. The option gives the tenant-buyer (the renter who may become the owner) the right to purchase the property for a specific amount in a specific time frame so long as he obeys the terms of the lease.
So those are the fundamentals. The problem is: How do you find them? If you go to a Realtor, he/she isn’t going to find many–if any–on the MLS. But don’t let that stop you. There are many, many of them out there. You just need to know where to look.
Many rental properties-single-family homes, townhouses, and condos-are rented out directly by the property’s owner. Remember, as we pointed out above, that many owners are “reluctant landlords.” All the points made above apply to non-listed rent-als. In addition, these owners are facing the hassle of dealing with calls from many “tire kickers” and less-than-serious callers. So, many get frustrated pretty quickly.
And the person seeking a lease-option has another advantage: The ability to speak directly to the owner. Now, technically, even if a property is listed with an agent, you can speak directly to the owner. But the owner has decided to use a real estate agent, in part, to avoid all that hassle. It’s poor form, and usually not a good idea, to try negotiating directly with a seller when that seller is represented by a real estate agent. In the case of non-listed rentals, there is no such buffer. You can call and, in most cases, speak directly with the owner.
There can be another advantage, too: Not having to deal with a real estate agent who doesn’t understand lease-options, doesn’t “believe in them,” or thinks that he or she is protecting the owners’ interest by not accurately presenting your offer to the owners.
You can find these properties in the classified ad sections of newspapers. You can also find them on online services such as Craigslist. And you can find them by looking at bulletin boards at your local supermarket or other locations. And if you can’t find enough by looking, then place your own ads in the newspaper, on Craigslist, and on bulletin boards.
Here are some clues to properties that might work out as lease-options:
For Sale by Owner (FSBOs) Properties
These are properties that the owners are trying to sell themselves. People often try to sell properties themselves for two reasons: In a seller’s market–when there’s more demand than supply–FSBOs figure that the house will pretty much sell regardless of who the agent is, how much marketing is used, or even the price of the house. So why, FSBOs wonder, should they pay an agent 4%, 5%, 6%, or even more when all it’ll take is a “For Sale” sign. In a seller’s market, it’s very difficult to find lease-option properties, especially among FSBOs.
The picture changes sharply in a buyer’s market-when there’s more supply than demand. In a slow market, some sellers think they can’t afford to pay an agent’s commission. They think that they’ll end up with more money in their pockets if they sell the home themselves. They’re often wrong, but that’s their strategy.
One other thing to keep in mind about FSBOs: The asking price of their house is far more likely to be too high than too low, or even properly priced. In part, they don’t have access to all the tools a real estate agent does. In part, they’re emotionally attached to their homes.
Sometimes, they had an appraisal on their property for one purpose, such as a refinance or home equity line of credit (in which cases, the appraisals tend to be on the high side), and they think that the appraisal was an accurate reflection of the value upon resale. It isn’t. And sometimes they’ve used one of the many online services, such as Zillow, to price their homes. Those services sometimes are reasonably accurate. Often, they’re not.
So, in any market, hot or cold, FSBOs are likely to be overpriced. And in a slow market, that means most will sit there and just not sell. That’s why you, the buyer, should have a real estate agent on your “Dream Team” even if you’re planning on finding the property yourself. Your agent can quickly tell you whether the price being asked by the seller is reasonable.
When dealing with a FSBO, a lease-option buyer can offer closer to what the FSBO actually wants. The catch, of course, is that the sale will occur a year or more into the future, not today. If the FSBO needs all of his equity out of the property, this strategy won’t work. But if the FSBO can wait a year or two, there are golden opportunities for the lease-option buyer. The tenant-buyer explains to the FSBO that he can pay what the FSBO is asking (or close to what the FSBO is asking). Just not right away. It’s the same basic strategy that’s used above, for listed homes for sale. But now you can make your case directly to the seller.
Sometimes owners will advertise lease-options. They understand the benefits of lease options to them-immediate cash flow, often at higher-than-market rent, plus a good opportunity to sell their homes-and decide to try it themselves. You can find these anywhere owners advertise-local newspapers, bulletin boards, Craigslist, and so on. In structured formats, such as newspapers and Craigslist, look under both properties for rent and properties for sale.
Owner-Advertised: Other Delayed Purchases
Be sure your agent also searches using other terms that describe similar structures. These terms include “lease-purchase,” “rent-to-own,” “rent-to-buy,” “land contract,” and “contract for deed.” In each case, the owner is signaling that he or she wants to sell, but is willing to wait for the sale occurs. Some of these techniques, and some of these terms, are more often used in certain areas of the country than others. So search for them all.
Search for properties on which the owner is willing to hold financing. This means the owner is willing to act as the bank. He doesn’t need all the money at closing. He’s willing to take payments over time while the tenant is living in the home. And many owners don’t have the lending criteria as strict or inflexible as the big banks.
But don’t stop there. Remember: A lease-option couples a lease with an option to purchase. So look for owners who are trying to rent their properties but are open to selling, or for owners who are trying to sell, but are open to renting.
Properties for Rent and for Sale
The first step is to find properties both for rent and sale. Even if they’re not listed as “lease-options,” owners are willing to lease and sell. All you’re asking is that they lease now and sell later.
Former “For Sale” Properties Now Listed for Rent
These might be properties that had been listed with a real estate agent, or properties that the owner was trying to sell himself. It doesn’t matter. But the house didn’t sell, and now it’s up for rent. These are properties that the owners really would like to sell. But they weren’t able to, so they’re will-ing to rent. Again, you’re offering a solution to their problem. You’re willing to rent now, and may be willing to buy later.
Former Rentals Now for Sale
Along the same lines, look for properties that first were listed as rentals, but now are listed for sale. There probably will be fewer of these than those first for sale, now for rent, but it never hurts to look. These, too, are properties that the owner is both willing to rent and to sell.
Thus far, we’ve identified properties that we know the owners have been willing to both rent and sell. Now we’ll move on to owners who might be willing to both rent and to sell.
Vacant Houses for Sale
Start with owners who are trying to sell, and whose house is vacant. These owners may have bought a new home, but haven’t yet sold the old one. They’re paying two mortgages-usually an uncomfortable situation. You can help out by providing a quick revenue stream–your rent payments–while offering the possibility of a sale in the future. If you’re able to, target the properties that have been on the market the longest.
You’ll find more prospects among owners who are renting out their homes. It may be their former primary residence, and they’ve moved on to a new home. Or it may be a property they’ve held as an investment property for awhile. It’s important to remember that many owners are “reluctant landlords.” It wasn’t their original intent to rent out their property. They don’t particularly enjoy the whole rental process, and they don’t like the hassle of dealing with tenants. But somehow they’ve become landlords and they’re trying to make the best of it.
For these owners, the solution you’re offering is the immediate gratification of a rental, and the longer term possibility of a sale. It may help if the property is vacant, but even reluctant landlords whose tenants have given proper notice, and haven’t moved out, may be eager to end their landlording hassles.
Some investors put together lease-options, then market the lease-options to tenant-buyer with a markup. These are called “sandwich lease-options” because the structure resembles a sandwich: An owner on one side (one slice of bread in the “sandwich”) lease-optioning the property to an investor; the investor in the middle (the meat in the sandwich), and the tenant-buyer on the other side (the other slice of bread in the “sandwich”).
So those are many of the ways you can find a lease-option or rent-to-own home even when the property may not be listed on the multiple listing service. And the point worth repeating is: Some homes will be “advertised” as a lease-option. Many won’t be. You’ll reduce or eliminate your competition by looking where others aren’t looking.
by Don Tepper