Articles

Here is a great article about lease options from nationally syndicated real estate writer, attorney and real estate investor Robert Bruss:

REAL ESTATE MAILBAG

Q: Thank you for finding us our home, which we purchased in April 1997. Over two years ago, you wrote an article about the benefits of lease options for homebuyers and sellers.

Since we were "cash challenged" at the time, my husband and I tried it. First, we ran a classified newspaper ad for two weeks: "Executive and family want 3 BR, 2 BA house on two-year lease with option to buy.'

We received four calls, but the houses were dumps. Next, we followed your suggestion to read the "houses for rent" classified ads.

We inspected about 10 houses before finding one we wanted to buy on a lease with option to purchase. The sweet owner said he had tried unsuccessfully to sell the house, so he decided to rent it. We offered him $3,000 nonrefundable option money, instead of a security deposit, and he and his wife agreed to our lease option.

We paid $1,200 per month rent, and they gave us a $400 per month rent credit toward the purchase price. After two years, we used our rent credit, and borrowed on our credit cards, for a down payment. As you predicted, we had a little trouble finding a mortgage lender, but a sharp mortgage broker got us an adjustable mortgage.

Without a lease option, we wouldn't own our home today. -Marcie H., Hercules.

A: Thank you for sharing that lease-option success story. My similar experiences have shown that owners who advertise their houses and condos for rent would really prefer to sell.

A lease option, with a rent credit of at least 33 percent, is good for both buyer and seller. Lease-option tenants like you usually treat the home as if they already own it, often making substantial improvements, such as painting and installing new carpets, and causing no trouble for the owners.

I bought my current residence on a lease option, with a $10,000 nonrefundable deposit to the sellers. My biggest obstacle was the real estate agents who were worried about their commission. But after the agents saw the benefits, they became enthusiastic and earned their full commissions in about six months when I exercised my purchase option.

My buyer's agent also got the listing on my former residence, earning another commission. Although the seller-husband was a bit difficult, his wife saw the lease option benefits since they were unable to sell their former residence for six months.

Q: You were right. After several realty agents listed my home for sale and failed, my wife and I followed your suggestion of advertising a lease with option to buy. At our Sunday open house, we received two deposit checks and selected the best-qualified applicant.

What I need to know is when do I report the sale to the IRS? Do I report the sale now or when my buyer takes title? The option price is $285,000. - John N.

R: Congratulations. I often say a lease-option can sell virtually any property, as your experience proves. Until your buyer exercises his purchase option, report the rental income and your deductible expenses on Schedule E of your tax returns.

Presuming you and your wife qualify for up to $500,000 of tax-free, principal residence profits, by owning and living in the home at least two of the five years before sale, you don't even need to report the sale to the IRS since you have no taxable profit. Ask your tax advisor for further details.