Should Your Seller Do a Lease/Option – Lease/Purchase?

Disclaimer:  I am not an attorney and the ideas expressed here are those of an educated layman (me).  Rules and law governing property transactions including those mentioned here are State specific and vary from location to location.  Please do not consider this post to be ‘advice;’  and before proceeding with any property transaction seek the counsel of a qualified, local, real estate attorney.

Situation:  Your Seller has very good, even excellent credit.  He/She has never been late on their mortgage or anything else.  This is very important to them:  they’ve worked very hard over the years to budget, live within their means and meet their financial obligations.  Unfortunately they are now upside down on their house:  current market value is $225,000 and the mortgage is $250,000.  They paid $300,000 seven years ago.

Even though Short Selling has become an acceptable option for most sellers, in fact a wise choice for many, this seller just can’t go there.  But he/she wants to take advantage of the great mortgage rates and excellent deals in the marketplace right now and upgrade to a bigger house in a nicer neighborhood.  This might be a good situation for a lease/option or lease/purchase.

A Lease/Option is two things:  an Option to purchase the property on or before some date in the future, and a Lease agreement giving the Option holder possession of the property during the interim period.  The Option is usually accompanied by non-refundable Option money, which can be substantial.  The eventual purchase price for the property is either locked in at the time the Option agreement is reached OR can be ‘Market Value’ at the time the sale is eventually consummated.  In the latter case, ‘Market Value’ must be carefully defined:  is it the opinion of one appraiser?  Two?  Do we average three? or take the middle figure of the three?  And, oh, by the way:  who’s going to pay for all of these appraisals?  During the Lease period, part of the rent paid can be credited against the eventual purchase price.  The Option money, however, is only there to secure the Option:  it would be rare for any of it to apply toward purchase price.  In a Lease/Option, the purchaser is not obligated to buy the property.  If, at the end of the Option period, the buyer does not want to complete the purchase, he can either renegotiate a lease (or new sale) with the seller or move.

A Lease/Purchase is similar:  there is an agreement to purchase at a later date that is secured with cash, there is a Lease agreement governing the interim period and part of the rent may be applied toward the eventual purchase price.  But there are some differences.  First, this is not an Option situation.  The buyer is paying the seller a non-refundable fee upfront for the privilege of purchasing the property at a later date.  The purchase is not optional:  the buyer is obligated to buy or face consequences like specific performance.  Usually, in this kind of transaction, the eventual purchase price is locked down at the time the purchase agreement is ratified.  Often, the price is current market value PLUS an increment over and above.

Back in the late 70s and early ’80s we experimented with these kinds of transactions.  Back then, interest rates were spiking well into double digits.  Often the lease periods were very long and it was clear what everyone was trying to accomplish was a way around the due-on-sale clause in most mortgages.  The courts were not pleased and some sellers, buyers and agents paid dearly.  That’s another reason to get competent legal advice before proceeding here.  It was that crazy interest rate period that gave birth the first adjustable mortgages any of us had seen.  We learned to think of them as temporary financing to bridge the gap until sanity returned to the market and a refi could be done.

So, back to our Seller – the one with excellent credit and an upside down home.  You just helped a family navigate a short sale.  They are good people, no doubt, but were WAY upside down:  the home was work about 50% of what they owed!  They aren’t able to get a mortgage today but unless financial disaster strikes, will probably be in good shape in a couple of years.  They love the seller’s house and offer an Option to purchase on or before this date three years hence, secured by $10,000 (non-refundable). The eventual purchase price will be $250,000.  They’ll pay monthly rent of $2,100 on the property during the lease period and $500 of each month’s rent will apply toward the eventual purchase price (If the rental period runs the full three years, that will be $18,000 in ‘credit’ from the Seller to the Buyer).

This is attractive to the Buyer because he gets to get back into a home he loves immediately.  The $250,000 purchase price is higher than the property is worth today but he is optimistic about the economy and thinks it’s likely the property will be worth that much or more at the end of three years.  The $10,000 cash for the Option in theory will be more than offset by the credit coming back at closing.  And, if it just doesn’t work out, he doesn’t have to purchase the property.

The Seller is intrigued but cautious.  This looks like a way to preserve their good credit and make a move as well.  The $10,000 Option money will help supplement the down payment they’ll need on the new home,  And the monthly rent is $500 more than their current mortgage payment.  The biggest concern is the Option:  what if the buyer rents for 3 years and decides NOT to buy the home.  What if the buyer gets into the home and stops making rent payments?  And so on.

The first thing you would do – and you’d probably have done it long before this situation got this far – would be to put the parties in touch with a good real estate attorney.  But having said that:  what do you think the Seller should do?  What would YOU do (as James Quinones might ask)??  Do you think this kind of strategy would appeal to some of your sellers?

Oh, by the way – there is something that I forgot t mention.  It has to do with the real estate fee.  Sometimes it is due and paid at the time the Option is agreed upon and funded.  Sometimes it is not payable until the property eventually closes. It’s a negotiation.   In our hypothetical example, the Broker’s fee will be paid by the seller at Closing.  Now:  what do you think?

Short Sale Prospecting

I know, I know:  you hate Short Sales.  They are unpredictable and frustrating to say the least.  But, the reality is almost every REALTOR hates Short Sales . . . and that’s what makes them such a great opportunity. 

Mike Ferry, the great real estate trainer and motivator, used to talk about the 180 degree theory of real estate sales success:  find out what everyone else is doing and do the opposite.  He’d probably agree that in a world where agents hate Short Sales, the smart thing to do is to specialize in them. 

It’s a good fit for Help-U-Sell, too.  After all, our whole program is built around helping people solve their real estate problems in a way that saves them money.  Who better to help today than the homeowner who, through no fault of his or her own, is upside down and desperate for an answer? 

It’s that kind of thinking that’s led Dan Desmond, Robin Rowland, Marty Castro and so many other sharp Help-U-Sell Brokers to take courses, revise marketing materials and gear up to go after this growing niche in their local real estate market.  If market trends and history mean anything, that’s a smart strategy most of us should adopt.

A couple of weeks ago, on the Tuesday Broker Roundtable call, Ken Kopcho shared a flyer a competitor was using in his marketplace to solicit Short Sale listings.  This Broker created the flyer in English on one side, Spanish on the other, put them into plastic door knob hangers and had them delivered in target neighborhoods around town.  Ken reported a noticeable spike in the competitor’s listing inventory. 

Ken Faxed me the flyer and I wordsmithed it a little and have reproduced it below.  If Short Sales are a significant part of your market, why not use this bit of verbiage to begin a prospecting campaign for these special listings?  You could use this to create door hangers as originally done or convert it to postcards or even telephone dialogue.  Whatever you do, I’d love to hear how it works for you. 

Dear Neighbor,

Many homeowners in today’s market have little or no equity; that is, they owe more in mortgage debt than their property is worth.  In these situations, lenders may accept less than the full amount due when the property is sold – a practice that is commonly known as a Short Sale.   Today, more than ever before, you may be able to take advantage of this option.

My company has been negotiating between 10 and 20 Short Sales a month.  We will negotiate with your lender to accept less than the amount owed and forgive the difference.

I am convinced that, with our approach, we can help you sell your home.  With a Short Sale, you can basically list your home for FREE, since my fee is paid by the lender – all the while protecting your credit rating!

If you find yourself behind on your payments or owing more than your home is worth, complete the following questionnaire and call me TODAY at XXX-XXX-XXXX.  You may also email me at or Fax the form to XXX-XXX-XXXX. 



Quick Short Sale Survey Form

Property Address _____________________________________

Are you behind or struggling to make your mortgage payments? Yes     No

Do you NEED to sell this home?     Yes     No

Do you owe more on your home than it is worth?     Yes     No

Are you living in the property now?     Yes     No

Additional Information  _____________________________________

Call XXX-XXX-XXXX or email this survey to or fax to XXX-XXX-XXXX

For more information, call me today.


J. Sellingman

Listing and Foreclosure Specialist



Quieridos Duenos de Casa

Muchos propiedades in el mercado de hoy tienen poca o ninguna equidad; es decir el vendedor debe cerca de o más que la propiedad merece.  En estas situaciones, los bancos pueden aceptar menos que la cantidad llena debida, comúnmente conocido como “una Venta Corta.”  Ahora más que alguna vez, usted puede aprovechar esta opción.

Nuestra oficina hace ventas cortas con un promedio de 10-20 mensuales.  Negociaremos con su prestamista para aceptar menos que la cantidad debida y perdonar la diferencia.

Soy convencido que, con nuestro programa, podemos ayudarle a vender su casa.  Con una Venta Cort, usted puede poner básicamente su casa en la marketa gratis, ya los costos son pagados por el prstamista Y mentras co proteccion de su credito!

Si usted se encuentra detras en sus pagos o debido más que su casa merece llene el cuestionario abajo y me llman HOY al XXX-XXX-XXXX or correo electronico, XXX@XXX.comor numero de fax al XXX-XXX-XXXX.


Cuestionario de Venta Corta

Dirección de propiedad:______________________________

Esta Retrasado o batallando para complir con su pago de casa?    Si     No

NECESITA vender su casa?     Si     No

Se debe mas que el valor de su casa?     Si     No

Vive usted en esta propiedad?     Si      No

Informacion Adictional: _____________________________

Para mas informacion llame al XXX-XXX-XXXX




Especialista de Venta Corta


New Short Sale Guidelines

The Treasury Department announced new Short Sale guidelines a few days ago.  The new rules go into effect on April 10,2010 and are set to ‘sunset’ on Dec. 31, 2010.  There is lots of confusion about the new program, so here is my short, bulleted list of its provisions:

  • Borrowers must be HAMP (Home Affordable Modification Program) eligible*
  • Lenders must provide a short sale pre-approval, including minimum acceptable net proceeds, prior to listing
  • Lenders have 10 days to approve or disapprove  a short sale
  • Borrowers are fully released of liability:  no cash contribution, promissory note or deficiency judgment
  • Servicers are prohibited from reducing real estate commissions specified in the Listing Agreement (up to 6%)
  • Secondary lien holders may receive a maximum of $3,000 of short sale proceeds to satisfy  their liens
  • Borrowers receive $1,500 in relocation assistance
  • Servicers receive $1,000 to cover administrative costs
  • Primary lien holders receive $1,000 for releasing some short sale proceeds to secondary lein holders (up to $3,000)
  • The guidelines standardize processes, paperwork, time lines and deadlines in the short sale process

*To be HAMP eligible, the following conditions must be met:

  • The property is the borrower’s principal residence; 
  • The mortgage loan is a first lien mortgage originated on or before January 1, 2009;
  • The mortgage is delinquent or default is reasonably foreseeable;
  • The current unpaid principal balance is equal to or less than $729,7501; and
  • The borrower’s total monthly mortgage payment exceeds 31% of the borrower’s gross income

So, I gather that Joe Schmoe who has a stable job and good income, who wants to sell but finds himself upside down may not qualify for the new program.  And I guess that’s the problem:  this is a program for distressed homeowners, not a new set of regulations and procedures for the industry.  However, that part is still unclear to me and I expect clarity to come as we get closer to April 10.  As I learn more I’ll pass it on to you.

If you’d like to read the full document from the Treasury Department, you can access it here.  It’s actually a pretty good piece and includes some of the paperwork that would be required in this program.

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