I don’t like lease/Options for a lot of reasons. First of all, although a lease/Option can generate more rents, it conveys an equitable interest in your property that sometimes forces you to go through a foreclosure rather than a simple eviction. And, sometimes the tenant actually goes out and gets a loan and buys your house right out from under you. Even though you might have made a profit, you’re forced to go out and find another house to replace the one that was sold, or face the prospect of paying capital gains taxes and having your money earn far less than it might have earned with the rental house.
On the other hand, there is a time to offer an Option. That’s when you want to sell in a slow market where there either is no financing, or where your tenants have lousy credit scores but are motivated to pay top dollar for your house. When you do this, it is wise to create two separate instruments dated on two separate days. One would be the lease for a specified number of years, and one would be the Option contract which could only be exercised at the end of the full lease period, and only if the lease had been fulfilled in every aspect.
Another time to use the Lease/Option is when, in a slow rental market, you want to motivate a good prospect to lease your house for a long period that will extend into the next tight rental cycle. What I try to do is to keep the tenant, but motivate him NOT to buy my house by offering to give him back $1000 or so at the end of a lease period if he won’t exercise his Option; and offer to renew his Rental Contract at the end of that time at the same rents, but less the Option payment. This way, I keep houses filled when others are experiencing vacancies. It usually works quite well.
