Is 2020 The Year That Lease Option Comes Roaring Back?
With uncertainty comes indecisiveness. For some, it’s as positive as any outlook can get. Making any life-altering decision during the pandemic can be difficult and often unwise. Putting any idea “in stone” when driven by emotions can have some unwanted repercussions. If you or someone you know is considering or in the process of relocating in 2020, a lease option could be top of mind. Here’s why.
A Little Commitment Carries A Lot of Weight
Timing may be everything but if you’re not ultimately in control (and who is), showing good faith helps to overcome unforeseen obstacles. And with the current pandemic, and those that will undoubtedly follow in our future, a dash of uncertainty is something to count on.
So how do we navigate through making good real estate choices when our economic foundation is shaken for the foreseeable future (one-to-two years)?
Hedge your bets and revisit the Market Conditions Advisory.
After the real estate reset (okay, crash) in 2008, the industry took a long, hard look at market trends. Our cycles go up and then there’s the down. Many buyers and sellers easily forget that there is a downcycle, especially when their focus on property acquisitions is in the equity gains that come, just by owning during an upward trend.
To help remind buyers and sellers of the reality in our market, Arizona Realtors use a form that has been included in contract documents since 2009. It’s called the Market Conditions Advisory, providing a brief yet necessary reminder of fluctuations to come.
For 2020, entertaining a lease option for both and buyers and sellers could be the definitive answer between the uneasiness of real estate cycles and the successful transfer of property.
Let’s look at a case in point. I am working with a buyer from California who is feeling a little skittish about the market. Completely understandable. On one hand, he needs to move his family to Arizona for a job relocation, sooner than later. And while his associates have begrudgingly signed up for overpriced lease terms that benefit their landlords, my client is thinking his residential decision a little further.
“With this virus, a lot of people are going to need to sell their homes…” he said hopefully, believing that timing was on his side.
He has a point. However, discerning which homeowners are willing to let a property go for the cheap when the existing supply isn’t enough for the demand helps Sellers remain in the driver’s seat.
The wiggle room, at least at this moment, is in the luxury market.
Lease Option 2020 Serves Short- and Long-Term Goals
Million-dollar properties are infiltrating the Phoenix and Scottsdale area listing markets. While some Sellers are looking to cash out now to avoid the potential of a continuous value drop down the road, others may merely be seeking someone else to foot the monthly financial obligations that come with home ownership. Herein lies the sweet spot.
Income for Sellers
There’s a saying in sales: A little bit of something is better than a whole lot of nothing. The adage could apply to real estate sales today. With a lease option on the table for 2020, a Seller can negotiate for something now and over the course of the lease term, and something later…the transfer of their property to a ready, willing and able tenant-turned-buyer within a 12-to-18 month period
For example, if a luxury home in Scottsdale would normally generate $6000 in monthly rent, with a lease option, you could offer $4500 instead. But there’s a caveat.
Down Payment Layaway for Buyers
By entering into a lease option to purchase, the monthly rent is one thing. The addition of other monies (either paid monthly or in one lump sum) is another. A seller needs the buyer to show some skin in the game and earnest money funds on top of the monthly rent is how it is demonstrated.
If the buyer wants to use the lease option as the means to a forced savings account towards having the down payment needed to purchase, adding an additional $4500 each month will help reach that goal, while giving the seller an added assurance. These funds can be deposited into an account, managed and monitored by a third-party escrow company.
2020 Lease Option Challenges
Trust is hard to come by, especially in uncertain times. A traditional purchase contract will typically include a 30-to-45-day window of opportunity to get financing and inspection matters in order to reach a successful close of escrow. Trust is more easily granted when the desired coup de grace is surely within reach. A quick close. But sellers don’t want to leave any net proceeds on the table and buyers don’t want to let go of more cash than necessary.
One Monthly Payment Away from Losing It All
Utilizing a lease option allows a buyer the extra time needed to save and qualify for a home. But what happens if they cannot honor their commitment to the deal? A job loss. An unexpected financial downfall. A family emergency.
The buyer is S.O.L (so-outta-luck) sort of. Whatever the reason, if a buyer cannot exercise the option to purchase, all earnest monies gathered will be released to the seller. However, if the buyer cannot qualify for a loan, due to a job loss, the earnest money can be fought for by the buyer.
Stuck with A Low Purchase Price
If a buyer is paying monthly rent and earnest money funds, the give and take will likely come from the seller taking a hit on the purchase price. Even though we are currently in a Seller’s market, the pendulum can easily shift the other way as the economy can could feel more of a backlash due to lessened consumer demand and growing unemployment.
Although a seller may not get the purchase offer price they want, having a bird in the hand, so to speak, is invaluable.
Fast forward…as a buyer and seller approach the end of the term for a lease option, the purchase process begins. This will include obtaining an appraisal.
As much as any Realtor would love to tout an ability to see into the future, we can’t. The reasons are obvious. In the event that a property is worth less than the lease option contract stipulates, the same steps are engaged as if there was no lease attached to the agreement at all.
Lower than contract price appraisal can lead to:
Seller agrees to appraised value
Buyer and seller renegotiate contract price
Buyer elects to cancel contract
Seller elects to cancel contract*
*If the seller cancels the contract due to a low appraised value, this is where it can get sticky. With the buyer’s earnest money up for grabs, it may be worth it to the seller to take the lower value as they may not be entitled to the earnest monies. Moreover, if the seller doesn’t execute, a buyer can go after them for specific performance and more.
Common Thread in 2020 Lease Option: Mitigating Risk
As we all try our best to weave through the daily knowns and unknowns in 2020, minimizing our risks is paramount to gain some semblance of peace of mind. A 12- or 18-month lease option is one way to help level the playing field between buyers, sellers, and what the future holds—whatever that is.
If Real Estate Change Is In Your Future, Know Your Options Now