I love doing lease options and subject-to’s. And with the properties that don’t go into my buy-and-hold portfolio, I sell almost all of them via lease option. However, the huge downturn in the real estate market has caused a problem for many landlords and their lease option tenants.
You see, since 2008 the market has dropped 30%-50% in many locations. If you gave a tenant/buyer an option to buy a house for $100,000 a few years ago, the house might now be worth only $70,000 and you’ve got a problem.
So what do you do?
Well… a lot of it depends on your tenants. Your tenants might decide they can buy a house down the street for a lot cheaper and they might move out when their lease is up. If a tenant can get a house for $70,000 and you can’t sell them your house for that price then there’s not much you can do.
In fact, this just happened to me on a property I have in Stafford, VA. I had an excellent tenant for the last several years that just moved out. She could buy a similar house in the area for $150,000 and the best price I could give her was around $200,000. I hated to lose her, but I certainly don’t blame her for moving out. In this case, I do have a good property so I’ll get it filled quickly.
However, if possible, I would encourage you to work with the tenant if you can. Let me give you another example from a property of mine.
I have a row house in Baltimore, MD. The tenants absolutely love the house and want to purchase it, but the appraisal came in a few thousand short below their option price. They didn’t want to move out so we extended the lease for another 6 months and will reevaluate things at that time.
Now, with the Baltimore property I could have dropped the price slightly, but it’s another good property and I am in no need or hurry to sell it. However, if it was a dump which I didn’t want any longer I would have dropped the price in a heartbeat to get rid of it.
What you have to remember is that every situation is different and everything is negotiable.
If you have quality tenants that truly want to buy the house and they’ve paid rent on time every month, I would definitely try and work with them. Much of the time this will be extending the lease every 6 months or so until the property is worth their option price. Or, if you have a ton of equity in the property you could always reduce the price if you wanted to.
On the other hand, if the tenants have been a pain in the butt and you’ve had to chase the rent every month then I would not extend the option and I would try and get new tenant/buyers in the property as soon as possible.
Just remember to remain flexible and take each property on a case by case basis.