% of tenants who exercise their option? - Posted by Marc

Posted by Jim Kennedy - Houston, TX on April 17, 2001 at 17:56:19:

Having come to Texas from California, I definitely think of Texas as a pro-landlord state. I guess it’s a matter of perspective.

Best of Success!!

Jim Kennedy,
Houston, TX

% of tenants who exercise their option? - Posted by Marc

Posted by Marc on April 17, 2001 at 02:04:45:

Any of you experienced lease-option investors care to make a guess about the % of optionees who exercise their option, vs. those who walk away?

But do we WANT them to exercise their options? - Posted by Marc

Posted by Marc on April 17, 2001 at 11:58:01:

Laure, TRandle and Jullio,

Thanks for your comments on the % who exercise their options. My followup question for you: do we WANT them to exercise? Seems to me that we want just the opposite…we want them to default, after having paid us the up-front option consideration and higher-than-normal monthly rent/option payments. Then we can just start the process over again with a new tenant, right?

My scenario is this: I just bought 2 new-construction homes. Market rents here won’t support a positive cash flow, so I thought I would sell them on L/O, charging about 1.5% up-front to open the option and $x per month, in addition to rent, to keep the option open. With these inflated payments, the property will cash flow. But I don’t see why I would want my tenant-buyers to exercise their option…then I’ll have to shop for another property, pay closing costs again, etc.


Re: % of tenants who exercise their option? - Posted by Laure

Posted by Laure on April 17, 2001 at 08:01:51:

I have had about 75% exercise. I stress up front that they are an owner. Soon after they take possession of the home, I start them out on improving their credit through a loan broker. I can get them re-fi’d as quickly as 6 months. I still have one who extended her option another year, but am confident she will purchase in the end.

Laure :slight_smile:

Re: % of tenants who exercise their option? - Posted by TRandle

Posted by TRandle on April 17, 2001 at 07:39:45:

I agree with Jullio, but I think that’s largely due to my upfront screening process and my latitude in allowing folks to qualify. I believe the investors who run their prospects by a mortgage broker beforehand have a higher conversion ratio.

Re: % of tenants who exercise their option? - Posted by Jullio

Posted by Jullio on April 17, 2001 at 06:48:06:

Ours have been about half.

Re: But do we WANT them to exercise their options? - Posted by Ronald * Starr

Posted by Ronald * Starr on April 17, 2001 at 19:09:36:


Well, if you were the tenant/optionee, what would you want for yourself? How would you like to be treated by the owner/optionor?

Have you read John T. Reed’s educational material on lease/options? He suggests that what you are proposing is unethical. You might want to see what he has to say and think about whether you want to hold on to your opinion. His website is johntreed.com.

Remember, too, that this as a public forum which can be read by people around the world, including renters, and those d— goofballs in Berkeley, CA, and, I believe, Austin, TX. You know the ones I mean, the “tenant activists.” Would you really like them parading around your house or your option house with big signs quoting your comments? Now, I’m not going to tell them what you said, but somebody else might.

I feel that there is plenty of money to be made in real estate being honest with people and helping people have a nice place to rent or to own. I certainly do not support your line of thinking here.

Good Investing=========Ron * Starr

Re: But do we WANT them to exercise their options? - Posted by Merle E Woolley

Posted by Merle E Woolley on April 17, 2001 at 17:07:09:

Don’t have much time …but have a question.

Do you tell your Tenant Buyers that you don’t expect them to exercise their option? Or, do you paint a rosy picture of their eventually becoming a home owner?

Guess I just have a little problem with the “hope they don’t exercise the option” thing. We call our people buyers … not tenant buyers (except in the contract). We assume all of them will exercise within 3 years. Not all of them do … but, we probably average about 75%.

Actually, we kind of get a charge out of seeing them “graduate” from renters prison to home ownership. If they can’t refi within 3 years, we extend their option … no fees, changes in price, etc. … all stays the same.

If they pay off early, we accelerate their rent credits. Last week, we handed a buyer a check for $1500 … after the closing was complete. Shocked them! They paid off in 6 months and we allowed $300 (6 times $50) off the price. The contract offered the $50 per month for 3 years. So, we gave them the additional $1500 in cash. Had 3 referral calls from them already.

There are many, many advantages to helping them become qualified rather than making it tough for them to do so.

Maybe more later, gotta go …


Re: But do we WANT them to exercise their options? - Posted by TRandle

Posted by TRandle on April 17, 2001 at 12:47:45:

(here’s a copy of the email I sent you in response to yours)

I can’t answer as to whether or not you want them to exercise because I don’t know your goals. I was a loan officer for a while and was not only going to help my residents get loans, but I was going to make a little off of it as well (it’s time consuming). I’ve since changed my strategies and will now assist as necessary, but my preference is to keep the houses.

If the resident does what’s necessary to get the deal done, then great for them and me. If they don’t, I’ll let them renew under new terms and go again as long as they pay on time and take care of the place. In my market the theory of get them out and get more money from someone else doesn’t work well, at least for me. By the time I factor in vacancy, make readies, and
time spent, it’s not worth it to me.

I used to do the promissory notes for additional option funds each month, but I’ve discontinued that as well - too much of a pain to collect. It’s now voluntary - if they want to pay extra toward the house, that’s fine by me.

Can you not purchase less expensive homes that will cashflow without the additional consideration? If you’re set up to receive option fees monthly, what happens when you have to evict? I became concerned about the appearance of continuuing to accept option fees as opposed to the one-timer up front. I don’t know the answer, but Texas is a pro-tenant state and I don’t want to find out. Also, I now have to 1099 the folks for debt relief.

Another view might be to increase your upfront and backend profit and let the monthly breakeven. You don’t have to have all 3 profit centers to make the deal worthwhile in my opinion. With that said, I personally am much more interested in the monthly than the upfront piece.

Texas is a pro-tenant state?! - Posted by Nate(DC)

Posted by Nate(DC) on April 17, 2001 at 17:19:03:


Just a funny observation/comment/question.

Your statement that Texas is a pro-tenant state shocked me a bit. I always thought of it as pro-landlord (easy and quick eviction process for example).

But then again, it seems EVERYONE thinks THEIR state is pro-tenant.

So my question is, to you or anyone else on the board:

Do you live somewhere where the laws are decidedly pro-landlord? If so, where?!

Always curious what the other side’s doing,

Would you buy hearsay? - Posted by TRandle

Posted by TRandle on April 17, 2001 at 17:58:40:

True, we have a fairly easy eviction process. We also have an extremely easy foreclosure process. I guess we just don’t want anybody to have a place to live. LOL!

I don’t have enough experience to personally judge our great state as weighing in on one side or the other. My comments (perhaps I needed a disclaimer earlier) stem from talking with numerous other folks and real estate attorneys as to how the judges ruled in their various cases. Invariably, any technicality or lack of even minor documentation was enough to rule in the tenant’s favor, or so I’m told.

Hopefully, some of the vets will chime in here and state their position. Good question…