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Potential Advantages to Lease/Options rather than the
standard Purchase and Sale:
Why leases with an option to buy may
be a better way to go for sellers and buyers. Instead
of an outright purchase of a Mobile Home or RV Park, a
lease with the option to buy can make more deals
happen. Here are some benefits that often occur in
these type transactions:
Seller Benefits:
1. Instead of selling a property with seller financing,
when a seller does a lease option they still have the
title to the property. If the buyer does default for
whatever reason, then the seller can usually evict the
lessee in a much more timely manner than going through
the foreclosure process. The lessee is not the owner.
2. Instead of receiving a down payment on the sale, the
seller/lessor will receive an option deposit. Whether
this option deposit is $5,000 or $500,000 it is
typically treated just like a security deposit. It is
not reported on the sellers tax return until the option
either expires or is exercised. This can in effect
postpone the capital gain taxes on the sale for several
years depending on when the option expires or is
exercised.
3. The seller/lessor will still be allowed to
depreciate the mobile home park improvements until the
option is exercised. This depreciation can shield some
of the income that the seller/lessor receives from the
lessee during the option period.
4. The seller/lessor is relieved of the day to day
management duties and can be freed of that
responsibility. Instead of running the park themselves,
they step aside and collect a monthly rental payment
from the lessee until the option is exercised.
5. By using a lease/option an owner that may have only
owned the property for a few months may be able to
convert a short term capital gain into a long term
capital gain. This would happen as long as the option
is not exercised for at least 1 year from the date the
owner acquired the property.
6. By doing a lease/option instead of a
purchase/sale/owner finance, the current financing can
be left in place until the option is exercised without
triggering a due on sale clause. If the property is in
need of being turned around and it would be hard to get
a new loan this may be the best option for the buyer and
seller.
7. The seller/lessor can continue to make the mortgage
payments and not be in default. If the buyer does
default it should not be a difficult process to get rid
of the buyer.
Buyer Benefits:
1. For a buyer with less than perfect credit, this may
allow them to get into a property while their credit is
being built up and then complete the purchase when they
can qualify.
2. During the option period, the buyer can build equity
so long as the property increases in value. This is the
usual case.
3. If the property declines in value, then the lessee
is not required to exercise the option. As long as the
option deposit is not more than the decline in value, it
shifts some of the risk.
4. The seller/lessor is usually more readily available
to help in the case of problems with a lease option than
an outright sale. They don't usually want the property
back so they will be available to answer questions and
give other advice.
5. Instead of the depreciation deductions, the lessee
will be able to deduct the monthly rent payment to the
owner. While this is amount will probably be less than
the mortgage interest and depreciation, if the lease
payments are structured that a portion of them reduce
the option price, this can be a benefit as well.
6. The lessee is able to work the property as if it
were their own and if done right will be able to
increase the value of the property above the option
price. Then when the option is exercised it will be
much easier to obtain financing.
7. The lessee may be able to sell the option rights to
another purchaser which is often easier than buying a
property and selling a property. They are just selling
the right to buy the property at a predetermined price.
These are some of the benefits of the lease/option. I
am sure that there are a few more that I have not
thought about but this should get you started.
Dave Reynolds
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