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Yesterday I got a phone call from a woman looking to find a lease option to buy property in the San Jose area.  “I’m tired of wasting money on the rent”, she explained.  Hoping to locate one, she was phoning the agents of San Jose houses for sale – maybe one of them would do a lease option?  Not likely.

Why are lease options hard to find in Silicon Valley?

It is a challenge to find a lease option in the greater San Jose area for a number of reasons, most of them related to the extra risks involved as opposed to simply renting or selling the real estate outright.

1 – Cash needed at close of escrow: An overwhelming majority of the home sellers here want their cash at close of escrow, so the buyers can be all cash or part cash and part loan (20% down, for instance).  Most real estate sellers want to take the cash from the property being sold and do something with it immediately – and the majority of the time that means putting it into another home in which to live.

2 – Don’t want to be a landlord: Doing a lease option means that not only will the owners of the property not get their cash right away, but they also have to become landlords in the meantime.  If they pay a professional property manager, that may cost 8% per month in overhead, too, so it cuts into any profit.

3 – Lease options are risky: With lease options, there is far more risk for the seller, of course, but also for the buyer!  (And by extension, real estate licensees who get involved with lease options.)

  • The seller risks a default by the buyer/tenant and then having to go through the trouble of evicting him/her/them.
  • Pricing risks for both seller and buyer:  the purchase price is decided upfront, but the sale isn’t finalized for a year or more.  During that time, the real estate market could appreciate like crazy (leaving the seller to feel that the house is sold for too little, less than market value) or the prices could fall (with the buyer unable to complete the sale since the property wouldn’t appraise – thus losing all of the downpayment in the process).  Either way, buyer or seller could feel unhappy and cheated.
  • Bad pricing could lead to a lawsuit:  Those who feel unfairly treated sometimes bring lawsuits – which are scary and expensive.

4 – Lease options are not very affordable for most consumers. Lease options cost more, per month, than a regular rental.  For those who want to rent, they need affordability!  Very few want to pay more than the rental market value for a home, especially knowing that the overage is going toward a down payment.

Who are the most likely property owners to offer a lease option?

The odds are better that a lease option will be available from a non-owner occupied home, that is, investment property.  The lease option is possibly a way for a seller to get a good return on the investment (rental property).  The seller must be willing to not get the cash immediately, though – and most won’t fall into that category.

Buying and renting homes in Santa Clara County are both pretty straight forward.  Rent-to-buy, or lease options, though, are a bit murky.  While they may work easily for some, that’s not always the case.  So real estate firms, which tend to be risk adverse, prefer to avoid them.  Most would suggest that home buyers interested in lease options consider the possibility of purchasing a home with the backing of FHA financing instead, which enables a fairly small cash down payment to be used.