As the owner of real estate assets that have been used and abused by the current market, I have had the opportunity to evaluate my long term goals.  I have always used the business mindset with the belief that my rentals can pave the path to retirement down the road.

 Have you evaluated your own real estate holdings?  Are you the owner of a house you would rather see “sold?” Are you a landlord by default?  Here is a thought – try renting the assets with a concurrent lease option.  Who is it best for? This fits an existing investor looking for income, and anyone with a “due on sale” clause that has considered selling on contract.

 There are many benefits to concurrent lease options, but they are not for the faint hearted.  If you have a business mindset about owning a rental, this option could be for you.  The positive aspects:           

Ø       Increased cash flow

Ø       Does not trigger the due on sale clause

Ø       Tenant may better maintain the property, expecting to own it one day

Ø       Makes sense in a slow market where cash is hard to obtain

Ø       Up front fee for the right to the option

Ø       Find your future buyer in this slower market

Ø       Potentially lock in at a higher price than you could obtain today

Ø       Defer tax on option portion until option is exercised or term expires.

 All of that good comes with some required due diligence, the business aspect.

                  Ø       Not drafting the contract properly

Ø       Failure to have attorney review

Ø       Disclosure liability

Case scenario:  Tom Carpenter has owned a few rental houses since 1997.  Although he is happy at how well the equity has done, he is tired of paying for expenses, out of pocket, and dealing with turn over, so he looks at lease option as a way to reduce burdens of time and expense.  Typically Tom could rent his home out for $925 a month, a net profit of $160 a month, after a small maintenance budget.  With a rental agreement and concurrent lease option, Tom can gross $1125 a month, a profit of $260, after banking $100 to benefit the optionee, as the “option,” held in trust, for the optionee’s future down payment.  He also has less expense and time expended by becoming an optionor if the tenant takes better care of the home in anticipation of buying it.

 Here is what I would include if it were my concurrent option:

                  Ø       Agreement not assignable

Ø       Termination date

Ø       Exercise of option in writing

Ø       Price offered agreed upon at beginning of option term

Ø       Determine cost of option

Ø       Cross default – termination of rental agreement terminates option

Ø       Costs – identify who pays closing fees, how proration’s are handled, what title insurance is included and at who’s cost

Ø       Owner should carry expense to maintain the property and pay taxes or risk triggering a taxable sale in the eyes of the IRS

Ø       Type of deed to be delivered

Ø       Definition of access during rental term

Ø       Expect that you may have to begin your option process or sale process again in the future

Ø       Lender review – insure the chance of success by having the Optionee seek a pre-approval appointment.  All cards on table, win – win

Ø       Provide a disclosure form – protect yourself from liability

Ø       Require a home inspection – further protection for yourself as Optionor

In addition to your own terms, you should seek legal advice to review your wording and:

Ø       Risk of loss – who takes a loss if property is damaged?

Ø       Attorney fees – prevailing party?

Ø       Amendments and modifications – who can make them and under what conditions?

Ø       Length of agreement – and potential tax or legal consequences

Ø       Expertise on termination dates

Ø       Expertise on foreclosure vs. eviction and scenarios that could create either

For more information and a private consultation on how to use your own real estate assets to your benefit, please contact me.  We can discuss value, reasonable rents, concessions, capital improvements, and the prospect of increased cash flow with a lease option.  The best business person does their due diligence and makes wise decisions based on facts.  Now is the time to evaluate your real estate holdings with a long view.

Information courtesy of Kathryn King, KJK Properties, P.C. Kathryn is a licensed Realtor in OR and WA serving buyers and sellers.  For a confidential asset review please call Kathryn at 503-772-8825 or email Kathryn@kjkproperties.com.