Real estate markets across the world are suffering right now. Sellers can't sell their homes and buyers can't get mortgages. As real estate agents, it's a lot harder to earn a living now. Gone are the days of listing a home and expecting it to sell – it is time to get creative to not just survive but actually thrive in this economy.
What is a Lease Option?
Lease options are a way to buy and sell homes without an immediate conventional mortgage. It gives your buyers who can't qualify for a mortgage right now the opportunity to get into a home right away while they improve their credit and build up a down payment while living in the home. It gives your sellers the ability to beat their competition, which we know in these kinds of markets, competition is great. Sellers can reach a far greater pool of potential buyers. They will likely be able to sell their home quicker and for a better price. For some sellers it may be the ONLY way they can sell their home in this real estate market.
How Does a Lease Option Work?
A lease option works like this: The buyer and seller agree to an option which gives the buyer the right to purchase the home during a set period of time. During this option period the buyer leases the home from the seller. By the end of the option the buyer must either purchase the home or forfeit their option fee. While the option is valid the seller may not sell their home to anyone else.
Advantages for the Seller
Here are some of the advantages to your home sellers when selling on a lease option:
1. Allows them to beat their competition. How many listings have you lost because the home sat on the market and never sold?
2. The seller can collect rent on their home while it would otherwise sit vacant.
3. They can often receive a higher purchase price.
4. They can sell their home in a down market when they otherwise might not have been able to sell at all.
5. Allows the seller to actually sell their home instead of just renting it. Have you lost any full commissions because the home was just rented instead of sold?
Advantages for the Buyer
Here are some of the advantages to your buyers when buying on a lease option:
1. The buyer can get into a home now, even if they can't currently qualify for a mortgage. How many potential buyers have you turned away because they couldn't qualify for a mortgage? No longer!
2. They can improve their credit and build up a down payment while they are already living in their future home.
3. They are not obligated to purchase the home at the end of the option if they decide the home is not for them, that homeownership is not for them or if the real estate market changes significantly.
Advantages for You – the Realtor
Now as real estate agents we understand how lease options can help our buyers and sellers. We need to take a look at how lease options work to our benefit as well (in a nutshell-how do we get paid!). As much as we like to help our buyers and sellers we still need to get paid for our work.
Not only can you still get paid, you can actually get paid more! I'll get into that in just a minute. But first, let's look at how you get paid. When the seller and buyer agree to a lease option the buyer will pay an option fee. This reserves the right for the buyer to purchase the home at a later date for an agreed upon price. The option fee is paid to the seller, however, when you represent a buyer or seller in a lease option transaction you would have them sign additional addendums for the lease option, part of which state you will be paid part of your commission upfront out of the option fee. I typically get 2% of the sales price upfront, split between the buyer and seller agents. The remainder of the commission is paid when the buyer purchases the home at the end of the option period. This creates revenue for you in the beginning as well as at the end.
While this isn't as ideal as receiving all of your commission upfront the way you would in a conventional sale it's a whole lot better than:
1. Turning away a potential buyer that can't qualify for a mortgage
2. Having your seller just rent their home out because they can't sell it
3. Losing a listing because the seller blames you for their home not selling
Additionally, as a listing agent you are providing a premium level of service for your sellers. Very few agents know how to do this and this will put you head and shoulders above the pack. It is not unreasonable, therefore, to ask for additional commission as part of this premium service offering. If you would normally list for 6% commission, when you agree to list the home as a lease option you may want to ask the sellers for 7% commission if it sells as a lease option. Getting paid extra sure is nice when you would otherwise have lost the listing.
If you want to stay in this business this is the time to get creative. Ask yourself-do you want to be in the business for 5 months or 5 years? Conventional methods are nice when they work, but you need alternative “tools” too. Adapt to the demands of the market and you'll not only survive, you'll thrive.