Selling on Lease Options will:
- Help you with taxation – if you hold a property for 12 months and one day, you will get better taxation, ie short-term capital gains.
- Usually you will get a better sales price
- Most probably you will get a better performing tenant that will take care of the property and give you less headaches
For these reasons, I believe showing on rent to own or lease purchase is a really good idea for middle-class houses. You can do it for very expensive homes too. For lower class homes I probably wouldn’t do it because the tenant buyer that’s in that property has a very difficult time getting financing. A long-term rental or a land contract might be a better idea for lower end houses.
There are a couple of pitfalls in selling on lease option:
The taxation needs to be adhered to strict guidelines so it’s not a disguised sale by the IRS tax Court. See the taxation on lease options.
A legal issue is if the tenant buyer brings you to court to try to get their option money back, you need to have your documents in order. Have a lease and a separate option and have a disclaimer from the tenant buyer about non-refundable option fee. There are some states that give difficult issues for investors with lease options, see the legal discussion about legal issues with lease options.
A little known solution for legal issue with troublesome tenant buyers is using what’s called a “lease and a separate contract for option to purchase”. The contract for option is not an option, but a way for them to get an option; the tenant buyer needs to complete the lease and also obey the CCRs of the contract. They’re also responsible for getting pre-qualified through a lender 90 days before the end of the contract for option time period.
If the tenant buyer is having trouble getting qualified through a lender, you have a choice of either getting them out and getting someone else in or you have a choice of extending the lease and extending the option period. You can increase the lease payment and increase a smaller fee for the contract for option contract.
Another possible way is to use a right of first refusal if your state does not allow favorable terms for rent to own or lease with option.
The bottom line is you want the tenant to feel secure that they will be able to buy the house.
