Why Selling on Lease Options is Glorified Landlording

By: Tim Randle

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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.

Tim Randle


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