Pros and Cons of Lease-Option if Home Doesn’t Sell

Question: We own a condominium in south Scottsdale which we have been trying to sell. Our listing broker has said that we should consider a “lease-option,” e.g., we rent to a tenant who has the option to buy our condominium at the end of the lease. What are the advantages and disadvantages of a lease-option?

Answer: The advantage of a lease-option is that, if you are having trouble selling your condominium, a lease-option can “stop the bleeding.” In other words, you will receive rental income from the tenant that can be applied to the mortgage and other expenses of your condominium. The disadvantage of a lease-option is that, if the tenant does not exercise the option to purchase before the lease ends, your condominium will go back on the market for sale or rent. The market conditions at that time for the sale or rental of the condominium could be worse.

A key factor that can increase the probability that the option to purchase will be exercised by the tenant is a high monthly rent credit given to the tenant to apply to the purchase of the condominium. For example, if the rent for your condominium is $2,000 a month, and $500 a month of that rent can be used by the tenant as a credit on the purchase price. The rent credit on the purchase price after three years would be $18,000 (36 months times $500 a month).

Note: Only one out of four options to purchase is actually exercised by a tenant. You should also consider a vacation rental of the condominium because south Scottsdale is a booming market for vacation rentals, especially during the spring training baseball season.