A gentleman contacted me about leasing to own a Las Vegas industrial warehouse that is 4000-6000 square feet with about 1000 square foot of warehouse. The problem is that at this point it is not in his interest to do a lease to own contract at this time.
I have decided to blog about some of my customer’s inquiries in order to clear up some misconceptions and this inquiry is a good opportunity to do it.
Lease to own is offered by residential or commercial property owners in a slow market, a couple of years ago industrial builders who built a small sized warehouse would sell out before they broke ground.
Lease to own is called by other names; such as rent to own or lease with option to buy.
Lease to own a home, condominium or commercial property in Las Vegas is useful for those buyers that can’t get financing for a property due to bad credit or those who want to guarantee the purchase price at today’s prices when they would buy the property 1-5 years from now. Rent to own programs are suitable when the real estate market conditions are normal, like when prices appreciate by 1%-3%.
In a seller’s market the seller doesn’t need to offer a rent to own contract because he can sell his property for cash, no need for rent to own. In a down market like the one that we are experiencing for industrial properties in Las Vegas where the prices have and will keep going down, lease to own doesn’t make sense. Since the buyer/lessor can rent a commercial space until prices stabilize and then buy a property at much lower prices.
A typical lease option agreement for either Las Vegas residential real estate or commercial properties requires the buyer/lessor to put down some kind of down payment which is decided through negotiations and pay a higher monthly rent for the property. The seller is obligated to credit the excess money that is paid on top of the rent, along with the deposit toward the buyer’s down payment. For example, if the owner can lease his property for $1,500 per month, he/she might increase that to $2,000 per month and apply $500 per month to your down payment. After one year the buyer/lessor would have a down payment credit of $6,000 plus whatever deposit he had to put down.
Here is where things can go wrong. If a buyer/lessor signs a lease to own contract at today’s prices and the prices go down by time that the buyer/lessor has to exercise his option to buy the property, he may have a difficult time getting the desired financing in the future if the price of the property drops too rapidly. The buyer could still buy the property, but you may have to come up with even more cash to satisfy the eventual lender’s loan-to-value limits.
One of the advantages of lease option is that the buyer is guaranteed today’s prices when the deadline to exercise the purchase option arrives and as you can see, lower real estate valuation defeat this advantage. One can get around this problem by having the seller agree to set the purchase price by some kind of the valuation of the property; say a selling price is agreed to be based on the appraised value at the time of the purchase. The problem with this is that no one can predict the future and if we catch bad market conditions like we have now, paying appraised value for a property equals paying too much, because the discount for additional price declines is not factored in the purchase price.
Many homes, condominiums and commercial properties in Las Vegas are advertised today as below appraisal, including an office that I own at 3314 Oneida, and are priced far below appraisal and not selling.
In most cases failure to exercise a lease option results in forfeiting the deposit or additional rents paid toward a down payment.
In my customer’s case, he and his partner want to open a business for one year and then evaluate whether or not they want to go on with the business and then buy a warehouse. Although I could make a higher commission if he did a lease to own contract, I have advised him against it. My advice is to lease for one year and then if he is successful to buy an industrial warehouse at much lower prices than now.
I have never knowingly made money at a customer’s expense and that is why I did not do any kind of real estate deals in Las Vegas from December 2006 until two months ago. While I could have done many deals, I dedicated all my time to designing and implementing the web-site, blog and forum. Although saving my honor resulted in financial hardship, we are very busy with tens of millions of dollars in inquiries from all over the world on a monthly basis and try to answer all quickly and with the utmost dignity. The GOOD LORD is rewarding us for holding tight to our honor.