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Lease Option: Landlording In Disguise!

Updated on November 5, 2010

You may not like what I am about to say, but I really want to tell you about my first hand experiences. Stop reading here if you think that offering a lease option will prevent you from having the responsibilities of a landlord. Or maybe you should think of this article as being written just for you.

Here is one misconception that lots of people believe about selling a property with a lease option: You will be free of the worries of maintenance and repair.

Of course, you can surely have your tenant/buyers (TBers) listed on the document as being responsible for all repairs. I have seen a lot of variations on this. In some, the TBer must pay for any and all repairs. In others, s/he must pay for repairs that fall within a specific cost range. Sometimes an investor will expect the seller to cover the repairs up to a set amount and the TBer to cover them thereafter. Insurance is designed to protect you when major damages are needed, so that's not a problem. I have had several experiences in which a person's renters insurance did pay for repair expenses under $10,000. At this moment, fingers crossed, I have not needed to test spending more than that amount.

What will you do if your TBer moves into the property and sends you the move-in condition form, then only a couple of days later, there is a major problem? You've got to plunk down some cash or make your TBer mad. Indeed, it is quite smart to get the TBer to sign an inspection or a waiver of inspection before moving in. If you are not in the habit of doing this, I encourage you to start. Nonetheless, this won't make any difference if your TBer has just given you all of his or her money and now has a big repair bill.

Yes, some of the money can be used to buy a home warranty and I often do this. The TBer will be able to simply pay the deductible if the expense is covered during this short period of time and if the problem is not pre-existing. Hang on a second - didn't you plunk down hundreds on a warranty? Yes, it did come from the TBer's fund; however, you are allowed to keep that, aren't you?

Another way to do it is to have the seller be responsible for the repairs for a certain period of time and then transfer this responsibility to the TBer. This, too, might be a case of something that appears to be smart - at least hypothetically. I have done that a few times, and I haven't had to test it; however, it would not surprise me if the seller was upset if I were to call him and ask for money after the deal is done. What will you do if you only have a 30-60 day repair period from the seller, but you can't find a good TBer that quickly? Oh no!

In my experience, the TBer usually agrees to cover fifty percent of the cost (albeit reluctantly). I offer that solution in a manner such that it looks like I'm going against company policy, because I want them to be happy, so I'm going to bend the rules a little bit. Be sure to encourage the TBer to have an inspection done before moving in. They will be reassured by this, and you will be covered. Don't forget to obtain a copy of it and have the TBer sign it. Let me clarify - I offer this solely on repairs required within the initial month. Thereafter, the responsibility belongs to them or to the insurer.

We can't overlook the TBer who neglects to keep you informed when something needs to be fixed. If you convince them too well, they may decide never to call you. But if they don't have the cash to repair the water leak in the upstairs bathroom, they just let it go. Therefore, we wind up with major mold problems as well as repair expenses. I believe that it's vital that the TBer contact you if they need a major repair, even when they are capable of paying. I wish to be informed of what's happening at my properties.

In summary, I would say that there are a number of very important steps you must be sure to follow if you are going to sell your property with a lease option. If you have not already, take the ideas that you think are most important and incorporate them into your business.

1. Make sure the TBer sets a date for the inspection. They should sign an inspection waiver if they do not have the $200 or so to do this. If they provided you with a signature on the form, it's much more difficult for them to request money back for repairs after the fact.

2. One idea is to allocate some of the TBer income toward buying a home warranty. This serves the purpose of reassuring them the repairs will be done as well as actually ensuring that it's followed through with. I feel like this is pretty affordable protection.

3. Arrange your standard operating guidelines for repairs. Anytime you are involved with a property, you should be sure to document all transactions and interactions in a consistent and ongoing manner. This is another way of saying that you should keep the same repair policies for all your properties and TBers. Selecting the repair responsibility technique or techniques you feel will be best for you and stay with them.

4. Another thing that may not be mentioned, but that is the company's policy, is the fact that the TBer is required to have renter's insurance. Policies don't have to be too costly and they provide protection for personal property. Usually, you will find that these policies contain a liability component that will give you a little more protection before it reaches your policy. In this way, if there is an accident (such as a leaky tub) and the TBer has property damage, s/he will not expect you to cover it. When done correctly, selling on lease options can make you money. Don't enter the agreement thinking it will not require any work on your part and you will have none of the responsibilities of a landlord. Unfortunately, this isn't the case.

To read other real estate investing articles, please visit real estate blog today!

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