The approach you choose to sell your house that can significantly impact how much profit you can make from your real estate investment in Seattle, WA, one option is lease option. One highly profitable option, rather than to sell your house directly to a buyer the traditional way with a real estate agent, is to consider lease option, which can help you achieve a better return on the sale. This technique is especially useful in a slower real estate market like in Seattle, WA as a way to sell your house for top dollar. But even in a fast-moving market, many marginal-credit buyers may be interested in paying a premium for the chance to purchase a home of their own.
I began my real estate investing career both buying and selling property using lease purchase methods and it can work out very well. However, there are some “gotcha’s” to look out for. Since I’m not selling a course teaching you how to do this technique, I feel well-positioned to advise you on what’s-what without creating a biased sense of what’s going on.
How Does A Lease Purchase Work?
When you are selling your property Lease-Purchase (also known as rent-to-own), you are letting a tenant live in your property as a tenant (that’s the “lease” part), and they have the option to buy the home down the road at a fixed purchase price.
At the end of the lease contract, usually lasting between one to three years, the buyer has the option to purchase the property or simply walk away. If the buyer does not perform, and instead decides to move out of the home, you would retain the initial option fee you collected as a down payment at the start of the lease term.
Similar to having renters, when you sell your house with a purchase option, you will be a landlord leasing out your property prior to the residents’ purchase of the home.
However, these renters have significantly more invested than typical tenants, as they are essentially trying out property ownership. These individuals are prepared to pay a premium for the opportunity to experience the lifestyle of homeowners, while working on improving their credit or saving for a down payment on the property. With the right renters and a carefully crafted lease option agreement, many investors come to appreciate the advantages of this setup and start to consider investing with a lease option strategy in mind for their exit strategy.
Tenant-buyers are less likely to damage the home because they have a desire and a right to buy the property for themselves. Also, they plan to stay in the property long-term so you have less tenant turnover. In addition, you can build automatic rent increases into your lease agreement. So, as long as you are willing to let go and sell your house or property at the end of the lease option contract, this can be a low-hassles way of owning and selling rental property. With the right warning from your tenants, you can even plan to 1031 Exchange your profits into another property at the end of the term.
Continue reading as we delve into the process of using a lease option to sell your rental property in Seattle.
Charge a Premium Asking Price When You Sell Your House With A Lease Purchase Agreement
Since you’re in control of the property, you have the ability to determine the selling price of your property when utilizing a lease option to sell your house in Seattle, WA.
When I am setting up a lease purchase, I look at the anticipated appreciation rate for properties in the area, and show the tenant how the property is likely to go up in value over time. For example, nationwide, the average appreciation rate is 6% a year. I illustrate this on a chart, for the tenant, and then show them how we can split the proceeds. I will sell them the home at a price that is 3% per year annually appreciated from today’s value. So I don’t sell it to them on today’s price. I sell it to them on the future expected price.
While you bear the risk of a potential sharp increase in values, which would mean you’d be leaving money on the table, the tenant assumes the risk of a possible decline in values, too. This way of doing it is fair to both parties. Note that if values go DOWN, it’s likely that the tenant may choose not to buy, or will want to buy but have trouble with financing if the property won’t appraise.
It’s a great idea to talk to a local Washington real estate attorney, or a real estate agent like me, who can help you understand how to structure this using the proper forms that will protect you and your tenant – if things go right or wrong…
Collect A Non-Refundable Option Fee From Your Tenant/Buyer Before They Move In
Utilizing a lease option to sell your home in Seattle, WA allows you to receive an upfront option fee – size determined by you – before the tenant moves in.
This option consideration fee is them buying the “right to purchase” the property. This means you can’t sell the property to anyone else while their option is still in place. It limits your flexibility if you needed to sell the house before the end of the lease period.
An expected “price range” for the option fee would be between one to five percent of the selling price, although fees reaching up to twenty percent can occur. This fee is usually non-refundable. Note that in Washington State, in a real estate contract, only 5% of the Earnest Money Deposit can be considered non-refundable if the buyer does not perform. Although option consideration is different than a simple 30-day Earnest Money Deposit, if the tenant was unable to buy the home, was upset about losing his deposit and took you to court, it’s possible that a judge would use this law as a reason to NOT let you keep the option payment, if the judge considered it an “excessively high” amount.
Note that here in Seattle, WA as of September 2024, the national median sales price for properties is above $750,000. A 5% option deposit would amount to $37,500, which would be credited towards the purchase if the renter decides buy the house at the end of the lease term.
Your Lease Purchase Tenants Will Maintain Your Property Like A Buyer Would
As the property owner, it is your prerogative to decide what home maintenance activities will fall to the tenant. Although you will retain the title and be accountable for taxes and insurance, it’s ideal, from a maintenance perspective, if you can let the tenant feel like you are “just the bank” and they are responsible for all the routine maintenance of the house.
Usually, I would recommend that rather than let all home maintenance responsibilities rest with the tenant, you give them some sort of financial backstop. You don’t want the property falling into disrepair because they don’t know how to maintain the home, or don’t have the funds to do so.
When utilizing a lease option to sell your house in Seattle, WA, I think $500 per month is a good amount of maintenance to expect the tenant to be responsible for. This will let them pay for the plumber or electrician to get called out if they break something. However, you have property owner insurance and if something really major is happening at the house, your insurance will likely cover it. Set expectations clearly upfront (like what happens if an appliance breaks?) and then if they’re worried about the cost, you could consider encouraging them to get a Home Warranty to help minimize the financial risk. These cost about $500 per year.
Remember To Ask For Above Market Rent In Your Lease Purchase Agreement
You can achieve above-average rental income for your rental property through having escalating rents, and offering rent credits through your lease purchase contract on your rental home you’re selling here in Seattle, WA.
The additional premium rent amount charged on top of standard rental rates is there as an incentive for buyers to pay you more each month. I usually offer them a “rent credit” if they pay extra. For example, if they pay $100 per month more than “market rent,” I will give them $150 per month in “credits” toward the purchase of the home. This will be taken off the closing costs if they buy, but remember not everyone buys, so sometimes, you’ll just get to keep the extra rent.
You can decide if you want to give 150% or 200% (or another amount) of rent credit – it depends on how much you want the extra cashflow, how much equity you have in the house, and how committed the tenants are to the purchase at the end of the lease term.
This is something you can negotiate, but it’s a great idea to increase your cash flow on an expensive property.
When buyers decide to exercise their option at the time of the final purchase, they will subtract the total “rent credits” they paid during the contract period from the sale price. If they ultimately choose not to purchase, you’ll retain those funds.
Consider Emily Cressey’s Team, HomePro Associates, To Assist You If You Would Like To Sell Your House in Seattle, WA Using The Lease Option (Or Other Owner-Financing) Method
So, I hope this article gave you some great ideas on how to handle this if you’re thinking about selling your rental property and need a little creativity on how to structure things.
It’s also a great way to sell a property over time or in the future, while reducing the day-to-day maintenance. I wrote another article about selling rent-to-own which you may want to look at, too. This is a technique I have used a lot and I think can be very helpful in the right situation.
So, How Can I Help You With This?
First, I am a realtor in Seattle, WA, so if you would like to have a realtor assist with finding a tenant-buyer and selecting someone who is really serious about buying a home, we can help you with that. Typically we would get compensated at the time the lease/option were in place – as a portion of the funds collected then, and we would also be compensated 3 years down the road if and when the tenants exercise their option to buy.
Another way I can help is as an investor. If you have a property that you really want to operate hands off, you can lease it to me and my company. We will set a contract in place – usually I have to get a lower price and a longer term in order to make it work right… but I can then go out and use this technique to find a tenant for the property. I may have to ‘rinse and repeat’ a few times if the first tenant doesn’t buy. When we finally get one who completes the purchase, then you and I will both get paid at that point.
What If Selling Your Rental Property With A Lease-Purchase Option Is Not For You?
Or, if after reading this, it’s not for you, but you want to find out how to sell your house or your rental property with tenants currently in it, I can help you with that, too.
If you reach out to me, we can talk strategy and decide what the best plan is for your property.
Reach out Emily Cressey, (me) here at HomePro Associates today to discuss your property, with no obligation on your part.
On my team HomePro Associates, here at Keller Williams Greater Seattle, we aim to ensure that you feel confident about the deal you made and have a positive experience working with us, and are happy all the way through – including after the closing process.
That’s why we will evaluate the figures of a conventional listing compared to the lease option approach, and we can even provide you with a direct cash offer to buy your property as-is. There are many things to discuss, so reach out today so we can discuss your particular situation.
Ready to learn more about the win-win advantages for sellers of using a lease option to sell your house in Seattle, WA?