If you’re looking for a flexible way to sell your home in Washington, a lease option might be the perfect solution. This strategy allows you to lease your property to a tenant who has the option to purchase it at the end of the lease term. It’s a win-win for homeowners and potential buyers, offering unique advantages for both parties. Let’s explore how a lease option works and why it might be the right choice for you.
The exit strategy you use to sell your house can make all the difference in earning the highest possible returns on your real estate investment. An extremely lucrative alternative to selling your house outright, lease options offer a way for you to earn a higher return on the sale. At the end of the agreement, typically one to three years, they can exercise the option to buy the home or walk away, and you keep the initial option fee that you collect upfront as a down.
Much like having tenants, you’ll be renting out your property. However, these tenants have much more at stake than the average tenants, as they are, in essence, test-driving ownership of the property. These tenants are willing to pay extra for the chance at living the lifestyle of homeowners while correcting any missteps with their credit or building savings for their down payment on the property. With the right tenants and a thoughtfully constructed lease option agreement, many investors learn to appreciate this arrangement’s benefits and begin investing with a lease option strategy in mind. So read on as we explore using a lease option to sell your rental property in Washington.
What Is a Lease Option?
A lease option, also known as a rent-to-own agreement, is a hybrid between renting and selling a home. It allows a tenant to lease your property for a specified period, typically 1 to 3 years, with the option to buy it at the end of the lease. The tenant usually pays an upfront option fee (often 1-5% of the purchase price) for the right to purchase the home in the future. During the lease period, the tenant also pays monthly rent, which sometimes includes a portion that goes toward the eventual down payment or purchase price.
In a lease option agreement, you, the seller, and the tenant-buyer agree on a purchase price for the property upfront. The tenant pays an option fee—usually a percentage of the purchase price—which gives them the exclusive right to buy the house within a set timeframe, typically one to three years. During this period, the tenant pays you rent, and sometimes a portion of this rent is credited toward the down payment.
Benefits of Using a Lease Option to Sell Your House
- Attract a Wider Range of Buyers: Lease options appeal to buyers who may not currently qualify for a traditional mortgage due to credit issues or lack of a down payment. This expands your pool of potential buyers in Washington.
- Steady Income Stream: You receive regular rental payments throughout the lease term, providing consistent cash flow while you wait for the sale to finalize.
- Higher Sales Price Potential: Since you’re offering flexible terms, you might be able to command a higher purchase price than you would in a conventional sale.
- Non-Refundable Option Fee: The upfront option fee is non-refundable, providing you with immediate income regardless of whether the tenant ultimately buys the house.
- Reduced Holding Costs: Having a tenant in the property means you’re not solely responsible for utilities, maintenance, and other holding costs associated with vacant properties.
- Motivated Tenant-Buyers: Tenants with the option to buy are often more invested in maintaining the property, treating it as if it were already their own home.
- Tax Advantages: Spreading out the sale over multiple years may offer tax benefits. Consult a tax professional to understand how this applies in Washington.
- Flexibility in Negotiations: You can negotiate terms that are favorable to you, such as requiring the tenant to handle certain maintenance tasks or setting specific conditions for the purchase.
Considerations and Risks
Legal Complexities: Lease options involve intricate legal agreements. It’s crucial to work with a real estate attorney familiar with Washington laws to draft a solid contract.
Tenant Default: There’s a risk that the tenant may not exercise the option to buy, leaving you to start the selling process anew.
Maintenance Responsibilities: Clarify who is responsible for repairs and maintenance during the lease term to avoid disputes.
Market Fluctuations: Locking in a purchase price means you might miss out on higher offers if the market value increases significantly.
Asking Price
Because you’re in the driver’s seat, you can set the sales price for the property now when you use a lease option to sell your house in Washington. Often set above market to account for the appreciation estimated to occur over the contract term, while you take the risk there could be a sudden hike in values, the tenant takes the risk that values drop.
Option Fee
Using a lease option to sell your house in Washington means that you’ll collect an initial option fee ranging from one to five percent of the sales price, though option fees of up to twenty percent are not unheard of, and the fee is typically non-refundable. With the national median listing price for active listings being around $450,000 as of May 2022, 5 percent would be $22,500, which would apply towards the purchase if the tenant exercises the option.
Tenants Maintain Your Property
While you’ll still hold the title and be responsible for the taxes and insurance, everything else will fall on the shoulders of the tenant when you’re using a lease option to sell your house in Washington. So, for example, tenants typically carry the financial responsibilities of maintaining the home and even making repairs.
Above Market Rent
You’ll make above-average rental income using a lease option to sell your house in Washington; the portion of rent paid at above-average rental rates is called the rent premium. The buyers would then deduct the amount paid into the rental premium over the contract term from the sales price upon exercising the option. Of course, if there is no purchase, you’ll also keep these funds.
Steps to Implement a Lease Option
- Set Clear Terms: Determine the purchase price, lease duration, monthly rent, option fee, and how much of the rent (if any) will go toward the purchase price.
- Market Your Property: Advertise the lease option to attract interested tenant-buyers. Highlight the benefits of rent-to-own to draw in a larger audience.
- Screen Potential Tenants: Conduct thorough background and credit checks to ensure the tenant has the capability and intention to purchase the property.
- Draft a Comprehensive Agreement: Include all terms and conditions, responsibilities, and contingencies in the contract. Ensure it complies with all local regulations in Washington.
- Manage the Lease Period: Maintain open communication with the tenant, collect rent on time, and monitor compliance with the agreement.
- Prepare for Closing: As the lease term nears its end, assist the tenant in securing financing if necessary and prepare all necessary documents for the sale.
Is a Lease Option Right for You?
Using a lease option to sell your house in Washington can be an effective strategy if you’re looking for flexibility and are willing to wait for the final sale. It’s particularly useful in sluggish markets or when traditional selling methods haven’t yielded results.
However, it’s important to weigh the potential risks and consult with real estate professionals to determine if this approach aligns with your financial goals and timeline.
Talk to one of our highly seasoned professional home buyers at Wenatchee Home Buyers today about your property, with no obligation. At Wenatchee Home Buyers, we want you to know you made the best deal and feel good about working with us long after the closing. That is why at Wenatchee Home Buyers, we’ll compare the numbers of a traditional listing vs. the lease option method and even make you an offer to buy your property directly, as-is, for cash. At Wenatchee Home Buyers, we’re fully transparent, providing the detail of how each number in our calculations so you can make an educated decision about what works best to sell your Washington house.
Ready to learn more about the win-win advantages for sellers of using a lease option to sell your house in Washington? Call Wenatchee Home Buyers at (509) 906-3680.