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Lease Options have a bad rap. But they can actually be a great source of income...and steady income (explained later). The story every agent passes along, is the story about an agent that worked for weeks to set up a lease option that would be exercised in a year. At the end of the year, the buyer didn't buy the home, and the agent didn't get paid. But that story is only for agents that don't know what they are doing when it comes to lease options. Luckily you do.
One alternative to this has been to try and negotiate a portion of the commission up front. This can be challenging yet rewarding. In this scenario you get paid something now for your work, and something when the buyer buys. However it becomes muddied (especially if you are a sellers agent) if the buyer doesn't buy. The agent(s) and/or seller(s) may feel like they paid a commission for a buyer that didn't buy. It may make working with any of these parties in the future more difficult (especially if asking for an extension or new option).
However there is a great and simple solution. GET PAID ON THE LEASE AND THE OPTION.
During the negotiations of a lease option make it 100% clear that:
- (a) You will be expecting a full 3% commission upon the buyer exercising the option.
- (b) If the buyer doesn't exercise the option then there is no commission due
- (c) You will be paid a full commission on the lease value at lease signing. (including option payment).
How does this work? Let's look at two case scenarios. In both scenario's, we will work with this information:
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(a) Security Deposit on Rental = $2,200
(b) Monthly Lease Payment = $2,200
(c) Option Amount (Down Payment) = $10,000
(d) Lease Term = 24 Months
(e) Eventual Purchase Price = $375,000
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Note that item (a) is not used in any calculations. It is part of the LO REPC so I included it. But it is not calculated in any commissions.
CASE SCENARIO #1
Agent asks for .5% of their commission up front, and the other 2.5% at the end.
Commission Today: (e) x 0.5% = $1,875 (Guaranteed)
Commission at the End: (e) x 2.5% = $9,375 (Contingent upon closing)
Total Possible Income Earned for sale: $11,250
CASE SCENARIO #2
Lease Payment Value: (d) x (b) = (f)$52,800
Total Lease Value: (f) + (c) = (g)$62,800
Commission Today: (g) x 3% = $1,884 (Guaranteed)
Commission at the End: (e) - (c) = $365,000 x 3% = $10,950 (contingent upon closing)
Total Possible Income Earned for sale: $12,834
Scenario #2 is a win/win because you get paid today for the work you do today. Then you get paid a full commission when the home sales. If the home doesn't sale the sellers and their agents won't be scorn about paying a commission because the commission was paid for the lease not the buy. Also, if you are diligent and work with the buyer to ensure they exercise the lease then you will end up with more total commission overall.
Negotiating a lease option only takes a few hours. Finding a lease option for your buyer only takes a few hours. Even if you spent 10 hours total with this buyer (including negotiations), you are still making $188 per hour for the up front work. That number sky rockets when the option is exercised.
The Moral of the story is that there can be great income (especially per hour) if you work with lease options.
DON'T FORGET THE STEADY SOURCE OF INCOME
I mentioned earlier that Lease Options can also be a source of steady income. That is because they are planned transactions. Especially if you can keep on top of the buyers. Let's look at another scenario.
Let's say you are able to successfully negotiate 1 lease option each month similar to the contract mentioned earlier. Let's say that for 24 months, you were able to do 1 per month just like that. That would mean you would get a commission of $1,884 each month. However, in 24 months, you would have a closing. You would also have a closing each month for the next 24 months. If you were able to keep doing 1 lease option a month (as well as your regular business), you can plan for years of closings, plus income each month.
Don't discount lease options because of their bad rap. If done properly they can be not only a good source of income but also a steady source of income. If you would like more information about lease options, feel free to contact the sales manager or broker. |
