Marin County Lease-Option Agreements (Rent-to-Own)
October 9, 2007 by kylefrazier
Marin County, when it comes to real estate prices and trends, is said to “march to its own drummer.” This is because Marin County home prices are remarkably resilient even when other real estate markets are suffering. Nonetheless, there are neighborhoods where prices are down and/or sales are slow. Owners of homes and condos in such areas are becoming more and more receptive and lease-options (a.k.a. “rent to own”)–a viable alternative to the traditional purchase agreement transactions most people and Realtors are familiar with.
Over the past ten years we saw very few lease-options because prices were on the rise, so sellers were reluctant to enter into such an arrangement for fear of losing out on substantial appreciation. In addition, lease-options are not considered a “high percentage” move for sellers because often the buyers were simply unable to obtain financing, had no money for a deposit or closing costs, and often had sub-par credit scores (referred to as “The Renter’s Trifecta”). Of course, there is an ever-present population of buyers seeking out lease-options.
And anecdotal evidence suggests that there are many people in Marin who sold over the past 2 years (at the height of the market) who are now renting, waiting to pounce on the right property. Many of these folks are more than willing to enter into a lease-option arrangement as it gives them a purchase price established by today’s market, along with other substantial benefits discussed below. These are not cash-strapped buyers with poor credit facing The Renter?s Trifecta, but rather they are strong buyers with cash, savvy, and a very real desire to buy (and take part in the tax benefits of home ownership).
Lease-options have 3 basic parts: a lease, an option, and a purchase offer. There are substantial benefits to buyers, including: 1) they lock in a price (and if prices go up, they benefit from the equity); 2) relatively low up-front cash requirement; 3) some portion of rent is credited toward purchase price; 4) they can live in the home (and experience its benefits and drawbacks) before exercising their option; and 5) it allows buyers to inspect a property before ever committing to a lease, let alone committing to the option.
While lease-options are not always a good fit for sellers, they are often a perfect fit. Sellers benefit because: 1) there are always buyers looking for lease-options; 2) it is a sensible method of getting out of the landlording business; 3) lease-option buyers tend to take better care of the home or condo as they may exercise their option one day; 4) lease-options permit many sellers to cover expenses relating to home ownership when the market is slow; and 5) option money is non-refundable and not taxable until the buyer exercises (or not) the option (there are also benefits relating to depreciation and deferred gain via 1031 exchange). Of course, the above does not constitute legal or tax advice and you are encouraged to consult with the appropriate professional regarding legal and tax implications under your unique circumstances.
If you are curious how a lease-option may work in your circumstances, call Kyle Frazier, CRS (Broker Associate, Frank Howard Allen Realtors — Marin) at (415) 350-9440. Let Kyle’s lease-option (rent-to-own) and marketing experience work for you.