Why Selling on Lease Options is Glorified Landlording

I might upset some folks with this one, but that's okay as

I think it's important to get some of my experiences into

the light of day. If you fully believe the hype that you won't

have any landlording responsibilities by selling on a lease

option, go ahead and stop here. Or perhaps you should

read on as this article is specifically written for you.



Let's review one of the common misconceptions that

is thrown around by folks touting the wonders of selling

properties on a lease option:



You won't have any repairs or maintenance.



True, you can certainly have your documents state that the

tenant/buyer (TBer) is responsible for repairs. In fact, I've

seen numerous variations of this ranging from the TBer is

responsible for all repairs to only those repairs falling within

a certain price range. Some investors ask the seller to be

responsible for repairs up to a certain amount and ask the

TBer to be responsible for those over that amount. Insurance

will theoretically cover major damages so that's not an issue.

And I know from several experiences that insurance will and

does cover many repair expenses less than $10,000. So far,

knock on wood, I haven't had to test going above that amount.



So, what happens when your TBer moves in, sends you back

your move-in condition form and two days later the A/C, heater,

or whatever goes out? You're either ponying up some money

or you have one upset TBer. Yes, I know it's wise to have them

sign off on an inspection or an inspection waiver prior to move

in, and if you're not doing that, I recommend it. However, do you

think that's going to matter if the TBer just gave you the majority

of their life savings and they're looking at a large repair bill?


Yes, you can use some of their funds to purchase a home warranty

and I also frequently do that. If the expense happens to be one that

is actually covered under the policy on such a short time frame and

not classified as a pre-existing condition, then you're fine and the

TBer can just pay the deductible. Wait a minute, didn't you shell out

a few hundred for the warranty? True, it came from the TBer's funds,

but that option consideration was supposed to be yours to keep, right?



Other recommendations on addressing the issue include asking the

seller to be responsible for repairs for a certain time period and then

passing that "guarantee" on to the TBer. Again, it may be one of those

"sounds good in theory" type arguments. The few times I've gone that

route I've not had to test it, but I wouldn't be surprised if the seller is a

bit upset if I had to call to ask for money after the fact. And what happens

if your repair period from the seller is only 30 or 60 days and it takes you

longer than that to find a decent TBer. Oops.



What I've found is that typicallly the TBer will agree, sometimes reluctantly,

to cover half the expense. I present that solution in such a way that it does

appear as if I'm breaking "company policy", but since "I want them to be

happy in their new home", I'm willing to bend the rules some. It is definitely

smart to push the TBer to get an inspection done prior to move-in as this

not only comforts them, it protects you. Make sure you get a copy of it and

have the TBer sign off on it. To be clear, I only make this offer for repairs

that occur in the first 30 days. After that, they're on their own or insurance

will take care of it.



Let's not forget the TBer who doesn't call to let you know that something

needs repair. You may have done such a convincing job explaining that

it was their responsibility that the TBer chooses not to call. Since they

don't have the money to fix the water leak in the upstairs tub, they just let

it continue. Now, we've got some mold issues and much more serious

repair numbers. It's critical in my opinion that the TBer call you if they have

a significant repair, even if they're able to pick up the tab. I want to know

what's going on in my properties.



So, to summarize, I think there are some important steps to take when you

sell your properties on a lease option. Take what you feel is important and

incorporate it into your business if you haven't already done so.



1. Push the TBer to get an inspection done. If they don't have the $200 or so

to do this, ensure they sign off on an inspection waiver. It's more difficult for

them to come back to you demanding their option consideration and rent back

due to needed repairs if they made this choice on paper and signed it.



2. Consider using part of the TBer's funds to purchase a home warranty. Not

only does it comfort their concern of potential repairs, it increases the likelihood

that needed repairs will get done. It's cheap insurance in my opinion.



3. Set up your standard operating procedure regarding repairs. Like all issues

regarding properties with which you stay involved, it's important to promote and

maintain consistent, documented procedures. In other words, don't have different

repair policies for different properties or TBers. Choose the repair responsibility

method or methods you think will work best and stick with them.



4. Another item not mentioned that is also company policy is that the TBer must

have and maintain renter's insurance. Policies can be purchased for very little

funds and it protects their personal property. Typically, these policies will also

have a liability component that provides an initial layer of protection before they

get to your policy. This way, if some accident happens, like the tub leak above,

that damages their property, they won't be coming to you first for replacement.



Selling on lease options can be a profitable technique if done wisely. Just don't

go into it believing it doesn't take any work and that the landlording headaches

are completely removed. They aren't.



Thanks for reading.



Sincerely,

Tim Randle