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Use Buy Options To Presell Your Property To Tenants
When a market is anything but exploding, you could face a very tough time to sell your property at a price you perceive is fair. And your perception of fairness is usually higher than market value. If you have ever been in the sales industry, you would know that sometimes the craziest simplified ideas can increase closing percentages by many times. These is why the best sales people are the highest paid professionals in the world. And the wealthiest people in the world are salesmen to a certain extent.
So how do you sell a property at a good price when you have not received a genuine offer for last year? You need a prime target for a prospect, get him emotionally involved, and make him lose money by not buying your property. It is amazing how people can be willing to buy an overpriced item just so that they will not lose in insignificant amount of money. A good way to see this is a $5 coupon to buy groceries at a particular store. Even though it could be an expensive store and the final price after the $5 discount is still more expensive that the usual stores that you go to, you will feel emotionally compelled to use the coupon so as not to let that $5 go to waste. Isn’t the human decision process fascinating.
Amazingly enough this fear of “loss” is just one really effective gimmick you can employ. The rental lease with buy-option incorporates so make sales tactics into play that if you can get as far as getting such an agreement accepted, you can start calling your bank to upsize your bank account in view of the money that will come in.
This is how it works. If for example, you are renting out a house for $1,000. You can grant the tenant a buy option to go along with it to buy your house at $500,000 within a year. To grant this option, you will charge an additional $200 per month on top of the rental. At the end of the year or at any point in time where is option is active, the tenant can exercise the option to buy. Doing which, the accumulated option fees will be rebated from the down payment he has to pay for the property purchase. All parties will end up happy. Whereas, if the tenant decides to let the option expire, you will keep the additional option fees paid as extra pocket money.
A marketing gimmick like this works at many angles. Let’s just talk about 3 of them. Firstly, the tenants will have a chance to live in the house and neighbourhood to get a feel of how it would be like living in it. If he likes it, he will not have an issue with making a purchase. He has already tried it and will have no more ambiguity of not knowing what to expect. It removes the risks of buying a home that turns out to be unsuitable. Secondly, after spending so much time in the house, he might have built an emotional attachment to it. This increases the perceived value of the property as it is no longer just a house. It has become a home. Thirdly, the thought of letting the option money go to waste can be digging at him. Buying the property from you will allow him the simple pleasure to getting back the extra option fee he paid throughout the year. That is like a bonus salary.
To put it in a more formal way, the option to buy is just an extra term inserted into the lease agreement. It will clearly indicate the price and terms of purchase. With this term, the owner, which is you, offers the tenant the right to exercise the buy-option within a stipulated period of time at a specific price.
More advanced investors might even insert an element of seller financing into such a deal to make it even more mouth-watering to the prospect. But let’s not even talk about that. Because the basics of this strategy is good enough to achieve the goals of the average investor-landlord.
Buy-option opportunities can really appeal to those who are cash tight. Thus the concept of making instalment payments on a down payment via the use of monthly option fees can look attractive to certain profiles of buyers.
The most important factor of making such strategies work for you is to be as clear as you can with the terms written on the contract. Any amount of ambiguity can cause disputes to arise. When closing is imminent, people have a tendency to pull out all the tricks in the bag to arrive as a more favourable position. The terms should also be as simple as possible. Some owners might want to insert a price depending on factors that reflect how the market is doing. For example, by multiplying property value at a certain date by a public index like inflation or consumer price index. You could do that, but just take note that they can really complicate matters. It is much more simple to just agree on a specific transaction price.
Use this opportunity to also define the arrangements for security deposits or any pre-paid deposits should the buy-option be enforced by the tenant. And also the contents in the house that will be included in a purchase. Leaving these details out can be convenient. But when disputes arise regarding them, they can put the seemingly finalised deal into jeopardy.