Expert: Ray Beggs - 9/15/2006

Question

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Followup To

Question -
Ray,
I live in Northern CA.  I own a parcel with 3 homes on it.  Even though the market was changing I needed to attempt to sell last year.  After a
few months I took it off the market and re-rented the main house, need to do some work on the second house, and am in the process of renting
the third house to a gentleman who wants a lease/option on the whole parcel.  I had told him about having the house on the market so he knows I'm interested but I've never done this before.  He is an attorney who has had several rentals himself.  He's retiring in our area.  We meet today.  How does a lease option work and is there any advantage for me?  Any suggestions?

Jodie


Answer -
Hi Jodie,

Thanks for the question. What is a Lease-Option?
A lease-option is a combination real estate rental, sales and finance technique. It is a property lease for a fixed time period, such as 12 or 24 months, with an option for the tenant to buy the property at an agreed option price during the lease term.

Buyers like lease-options because little up-front cash is required. Sellers also like lease-options because they provide necessary cash flow to pay the mortgage and property taxes from a tenant who has a vested interest in treating the property well and who is likely to buy it.  

What is a Lease-Purchase?
A lease-purchase is different from a lease-option because it obligates the tenant to purchase the property at the end of the lease. With a lease-option the tenant has the right, but not the obligation, to purchase the property.

With both, however, the tenant usually pays an above-market rent and receives a monthly rent credit toward the down payment. Of course, both a lease-option and a lease-purchase obligate the seller to sell the property on the agreed terms.  

You just want to make sure that you are properly represented in this transaction. You might want to find your own attorney to handle your side of the transaction. I'm always a little leary of a buyer handling his own deal. Who is he going to be looking out for? If you get an outside set of eyes on the details, it will be best for all sides.

Best of luck to you today,

Ray

Here is another little facet.  Part of why I attempted to sell was because I had not lived there since the end of 2002.  I knew I was approaching a deadline and would have to sell with a 1031 exchange and reinvest the money or pay 3 1/3%(amount?) to the franchise tax board.  If this gentleman decides to buy now 2006 instead of the lease option then do I avoid the 1031/FTB situation or is it too late?  The home I moved out of became a rental in 2003.

Jodie  

Answer
Hi Jodie,

That's a very good question. It sounds like something that would bolt me out of bed at 3:00am when I thought of it.

You'll have to check with a CPA or an escrow company  because I just don't know the answer to that one. I believe the sale has to be closed within the time period  allowed by the tax code for primary residences. I doubt you could extend it by having a long escorw period, which in essence is what you're doing with a lease option.

Take care,

Ray