The concept of the Lease Option is excellent in theory. A property owner leases a home to someone who cannot currently qualify for a mortgage loan. They do so with a specific and separately written agreement that tenant will acquire and purchase the home in a specific period of time. Normally the tenant gives a significant upfront deposit that is forfeited if he or she does not follow through with the purchase. If executed as agreed, both parties mutually benefit. The home owner / investor sells a house for a profit and gets an income stream immediately while waiting for the purchase to be complete instead of letting it languish on the market. The tenant does not have to rent while they recover from the economic event that left them unable to purchase and they get to lock in today’s price for a time period that may be several years.
Unfortunately in practice, lease options are often plagued with challenges.
Today I will share with you the top 5 reasons lease options fail and why working with professionals like a qualified credit repair organization and property management company can help all parties circumvent some of the pitfalls and increase the ratio of closed sales via lease options.
5. A bird in the hand is not necessarily better than 2 in the bush:
Many property owners become overeager to place someone in their property. With tax payments and overhead, it is understandable. It can be enticing to accept the potential tenant’s word that they can resolve their credit issues. Without a third party opinion, there is the belief that the problem can be resolved even if it is near impossible.
A property management company can work in tandem with a credit repair company to help choose the best candidate as well as bring in a lot of candidates through professional marketing so that home owners have more options. As a homeowner you will have a much better idea up front of how things will work out.
4. The hurry up and wait scenario:
I cannot count how many property managers have sent applicants to us for a pre-screen, and then never require them to enroll in our program. The owner may even say, they have to enroll, but I am giving them the keys on Monday. Monday comes and the tenant creates 1000 excuses as to why they have to wait to enroll. 90% of these applicants never enroll and usually fail at closing.
Whether it is credit repair, consumer credit counseling or bankruptcy, the rule should remain the same. If the applicant needs financial or credit assistance, you MUST have them enroll in that program prior to letting them take occupancy. Think of it as getting married to a gold digger without a prenuptial agreement. Just don’t take the chance.
3. No skin in the game:
Another misstep we often see is that the property owner says they want to pay for the credit repair for the tenant. As much as we like getting paid, we literally will not allow property owners or managers pay for the entire service.
Tenants that have their credit services fully paid for, almost never follow through. They have no cash commitment and already have the keys to the home. This is a recipe for disaster and almost always ends up in an unhappy relationship.
At Credit Repair Resources our lease option clients must pay their own initial enrollment fee. We are open to, and encourage, reimbursement for success in our program, but require our clients show the commitment to lasting success. Some owners create an incentive plan to encourage the tenant to become mortgage ready ahead of the deadline. If you work with Realty Trust Services, they charge a non refundable option deposit which really commits the tenant to the process. Depending on the negotiations money from this might be applied towards the cost of credit repair.
2. Unrealistic expectations:
Recovering from an economic event can be extremely challenging. Credit repair is one component of the process of regaining financial control. Life continues to happen and the best laid plans… well you know. Some property owners put tight time restrictions in place for their tenants. “You have 12 months to get yourself straightened out or you are out” is a common statement we have heard. The philosophy behind this is to motivate the tenant to take action.
The challenge with this ideology in regards to lease options is that many times the property owner is not being realistic of the resources and capabilities their tenants have. If you ask a tenant if they can save $3000.00 by this time next year, they most likely would say yes.
Even if this is realistic in the moment, the day they get their keys there are countless places they will allocate their funds before adding to the $3000.00 fund. Couple this with the cost of restoring their credit and you have a losing proposition.
Our suggestion: consult with your CRO partner to get a true picture of what it will take to turn their credit around based on the income and resources they have available. Create a timeline and plan that can be reached comfortably and you will be much happier in the end.
1. Communication and follow through:
That’s right, the single biggest reason we see lease options fail is the lack of follow through by the tenant and communication between the two parties about the progress. As much as the tenant wants to make good on their commitment, restoring credit takes time and consistent effort. In some cases it takes more than a year to fully recover from a major economic event. Staying focused can be difficult.
Although the property owner has a vested interest in their tenants’ success, they have their own life and responsibilities to attend to. Micromanaging their tenants should not be a priority.
A strong CRO partner will provide detailed updates on a scheduled basis. These updates should reflect the true status of the credit repair process, the execution of the tenant’s action plan and the affect it is having on their credit scores. This will provide transparency for all parties and hold the tenant accountable throughout the life of the agreement.
Lease options are an investment and every investment has its inherent risks. I hope the above information provides some insight on mitigating some of them.
Chad Kusner is President of Credit Repair Resources. He has more than a decade of mortgage lending experience and partnered with 20 year consumer litigator. Chad has spoken nationally on industry practices and serves as Executive Director for NACSO, the credit repair industry’s trade association. Credit Repair Resources was voted the Best Small Agency in America for 2012 by the largest ranking site on the internet and continues to prove itself as an industry leader. Feel free to contact Credit Repair Resources at CR760.com or (888)9-CRR760