Do Lease Options Work?

I recently received the following email from a fellow investor

“I have been told by many different people that Lease/Option aka Rent To Own deals “just don’t work”. They are telling me that 99% of the time the people you put in the house never get a loan, especially in today’s market and then the sellers get mad because they “wasted” two years when they could have sold the house. What are your thoughts here?”

He asks a great question and one that I’m asked quite often. Here’s what I told him: In today’s market lease option deals are pretty tough to close. The reason being that many of them started years ago and now the option period is coming up. (In other words, people signed the lease in 2008 and their option period expired in 2010.)

This has happened to me several times. Obviously, if a person has a $250,000 option to buy a house, that’s now worth $200,000, they’re not going to exercise the option. However, back during the boom, tenants were exercising their options left and right.

After all, they’d get an option on a house for $200,000 and a year later the house would be worth $300,000, so they’d be fools not to exercise it. So the first point I want to make is that the current market has a lot to do with whether or not a tenant decides to buy the house.

Unfortunately, you can’t really control the market.

But you can control the second thing I want to talk about. And that’s the tenants who you put in the house. I’ve heard of some investors who will let anyone into their lease option properties just because they want to get an option fee. Personally, I think this is dishonest, and I doubt that 10% of people exercise their options.

However, if you screen the heck out of tenants, your chances of getting a tenant to buy a house go up significantly. If you have them talk with a mortgage broker to make sure they’ll qualify in a few months… if you check their paystubs… if you run their credit…

Then you’ve got a much better chance at having them buy the house. But even in the absolute best case scenario, where you thoroughly screen your tenants, you’ll be lucky if you get 50% of them to eventually buy the house.

But I certainly wouldn’t let this stop you from doing lease options. I love them. You get a large option fee upfront, you get monthly cash flow and occasionally you get a large payday of $30,000 or more.

So keep doing lease options, and as far as the owners of the houses go: Just be upfront with them. Tell them you can’t guarantee anything, but you’ll do everything you can to sell the house