The Lease Option – A Realtor Perspective
What is a Lease Option?
I have spoken at length about lease options covering the benefits and risks that are involved with each party. There is the Seller’s Perspective and there is the Buyer’s Perspective. There are advantages for both parties.
This raises the question about how does the Realtor benefit from a lease option?
The Realtor’s Reaction
When I speak to most Realtors about doing a lease option their first reaction usually is about having to wait two years to get paid. The reason they say this is mainly due to the fact that most lease options are two years in length and they are thinking about having to wait until the client exercises their option before receiving any form of payment.
This can be true but it depends on how the Realtor approaches their client, namely the Seller.
Yet by having a different approach can make the Realtor happy and still have him represent his buyer or seller appropriately.
Using a Different Approach
A Brief Introduction
Let’s begin by reviewing the basic parts of a lease option. We need to know this in order to make things work.
A lease option has four main parts. More details are covered in my previous article for a lease option from a buyer’s perspective.
- Purchase price. This is the price of the home that the tenant/buyer will be buying the home at some time in the future.
- Option payment. This is the payment the tenant/buyer will be paying in order to have the right to buy the home in the future. This will be given back to the buyer from the seller as a seller’s concession. Typically this is 3 – 5% of the purchase price of the home.
- Rental amount including rent credit. This is the amount the tenant/buyer is paying in rent to the landlord/seller. This usually includes a small rental credit that will be given back to the tenant/buyer as a seller’s concession.
- Duration of contract. This is the timeframe the tenant/buyer has in order to exercise her option and purchase the home. Typically this is two years.
This option payment is where a Realtor can become creative.
In many areas, the agent may receive 2 – 3% of the purchase price as a commission for the sale/purchase of a piece of real estate. This can go up or down depending on the area and what the agent can negotiate with the seller for both the listing agent and the buyer’s agent. For the sake of argument let’s say each party’s broker will receive 3% of the purchase price. (The amount the agent receives is dependent on the brokerage payout structure but let’s assume that the agent receives most to all of the commission.)
For an agent to do a rental is also dependent on the area and what the owner is willing to pay. Let’s assume the typical rental is $500 to each party.
The Option Payment
The option payment is key here. This is where the creativity lies.
When I talk to buyers I usually say, due to my experience, that the typical option payment is 3 – 5% of the purchase price. To Realtors I normally may say 3 or 4.5% of the purchase price.
There is a little bit of discrepancy and I will explain that in a moment. I will use Las Vegas, NV prices but you can adjust for your area as needed.
I like using the 3% or 4.5% because I like using round numbers. Here is why. If we assume that the listing agent can talk with the seller and say if the option payment can be split into three ways. One-third to the owner, one-third to the listing agent, and one-third to the buyer’s agent. Thus a 3% commission divided three ways would net 1% to each party. At 4.5% for an option payment would be 1.5% to each party.
Any option payments that are higher than 4.5% would all go to the seller. Thus 5% would be 1.5% to the listing agent, 1.5% to the buyer’s agent, and 2% to the seller.
Doing the Math
Let us see how this works out mathematically. I will assume a tenant/buyer is interested in a home at 123 Main St. The home is selling at $300,000 and would normally rent for $1,500.
Let’s look at a few different scenarios.
- Just renting the home. The tenant would most likely pay $1,500 security deposit and $1,500 in rent. The owner gets to hold the refundable $1,500 security deposit. He does keep the home in this scenario.
- Selling the home. The buyer would come in and the seller would sell the home for $300,000. If he pays 3% in closing cost plus 3% to each Realtor then he netted $273,000 at the closing table.
- Lease option the home at 3% down and buyer buys the home in two years. We will assume the rent would now be $1,700 per month where there is a $200 rent credit. Since the buyer buys the home the owner does not keep the option money nor the rent credits. Thus, he will get the same as scenario 2 plus 24 months of rent at $1,500. He did pay out part of the commission (1% to each Realtor or $3,000 on the front end and then $6,000 at the closing table).
- Lease option the home at 3% down and the buyer does not end up buying. To keep the math simple I will say the tenant/buyer after 20 months decided to not buy and moved out. The seller received the option payment of $9,000 (and kept $3,000 and paid $3,000 to each agent). The owner got the 20 months of $1,700 per month, too. He also got to keep the home. Thus, he has the home plus $1,700 * 20, plus $3,000. This totals $37,000 plus the home.
- Lease option the home at 5%. Scenarios 2 and 3 would be repeated with the exception that at 5% the seller gets 2% (i.e., $6,000) and each agent received half of their commission on the front end and the other half at the back end assuming the buyer buys.
Thinking Outside of the Box
In order for the Realtor to benefit that person needs to be open to viewing things from a different perspective instead of the delayed gratification way.
There are other ways a Realtor can benefit by thinking about things in a slightly different way.
I have seen deals where the seller did not want to pay the commission at all. There is a very simple solution to this as well, especially when a lease option (or even seller financing) is an option. That is simply to add the commission to the asking price and that becomes the price the tenant/buyer will pay.
This means that by using the same $300,000 purchase price example is to simply add the 3% each party is getting (6% total) and the new price is $318,000.
By showing how each party can benefit and to start looking at things from a more creative way any agent can benefit from doing a lease option. This does assume that the buyer is paying enough of an option payment to where all parties are happy. Numbers and percentages can be adjusted to make sure all parties are happy.
The end of it all is the actual clients. The last thing an agent should be doing is putting their needs before the needs of a client. This article was written to open your mind, as an agent, to the other solutions out there rather than the black and white ones we see every day.