Why Selling on Lease Options is Glorified Landlording
I might upset some folks with this one, but thatīs okay as I think itīs important to get some of my experiences into the light of day. If you fully believe the hype that you wonīt 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.
Letīs review one of the common misconceptions that is thrown around by folks touting the wonders of selling properties on a lease option:
You wonīt have any repairs or maintenance.
True, you can certainly have your documents state that the tenant/buyer (TBer) is responsible for repairs. In fact, Iīve 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 thatīs 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 havenīt 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? Youīre either ponying up some money or you have one upset TBer. Yes, I know itīs wise to have them sign off on an inspection or an inspection waiver prior to move in, and if youīre not doing that, I recommend it. However, do you think thatīs going to matter if the TBer just gave you the majority of their life savings and theyīre 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 youīre fine and the TBer can just pay the deductible. Wait a minute, didnīt you shell out a few hundred for the warranty? True, it came from the TBerīs 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 Iīve gone that route Iīve not had to test it, but I wouldnīt 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 Iīve 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 Iīm breaking "company policy", but since "I want them to be happy in their new home", Iīm 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, theyīre on their own or insurance will take care of it.
Letīs not forget the TBer who doesnīt 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 donīt have the money to fix the water leak in the upstairs tub, they just let it continue. Now, weīve got some mold issues and much more serious repair numbers. Itīs critical in my opinion that the TBer call you if they have a significant repair, even if theyīre able to pick up the tab. I want to know whatīs 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 havenīt already done so.
1. Push the TBer to get an inspection done. If they donīt have the $200 or so to do this, ensure they sign off on an inspection waiver. Itīs 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 TBerīs 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. Itīs cheap insurance in my opinion.
3. Set up your standard operating procedure regarding repairs. Like all issues regarding properties with which you stay involved, itīs important to promote and maintain consistent, documented procedures. In other words, donīt 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 renterīs 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 wonīt be coming to you first for replacement.
Selling on lease options can be a profitable technique if done wisely. Just donīt go into it believing it doesnīt take any work and that the landlording headaches are completely removed. They arenīt.
Thanks for reading.
Sincerely,
Tim Randle
http://www.TexasRealEstateClub.com
mailto:Info@TexasRealEstateClub.com
(c) Copyright 2003, All Rights Reserved.
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