Lease Option: The Seller Expects the Buyer to Fail
I have been reading lots of real estate blog entries lately and I ran across a set of posts that surprised me. Some investors who sell properties on lease options were discussing the rate at which the option is exercised. I was surprised to find out that for some investors only one out of every ten people who sign up for a lease option actually exercises the option and buys the property. Another investor said she has a 40% conversion rate, and the other investors on the blog seemed impressed.
Here is why the investors don’t mind if they don’t sell the property:
1. They receive around 3% of the purchase price up front as the option payment.
2. The property is rented for the length of the option period, often higher than the market rental rate.
3. The tenant is more likely to take care of the property because he expects to buy it.
4. If the buyer does not exercise the option, the seller can kick him out and start all over again with a new buyer.
One investor said that he really tried to help his buyers get qualified for a mortgage so that they could purchase the property. However, people who had bad fiscal habits before he met them still had bad habits when they lived in the property. At the end of the lease portion, those people would still have damaged credit and no down payment saved.
This does not mean that the seller wants the buyer to fail in purchasing the property. Most would like to take the profits and go on to another project. But, if the deal falls through, they can make more money by creating another Lease Option with a new buyer.
