So you think you might have found the perfect opportunity for a lease option agreement, but what next?
So how do you negotiate a lease option agreement? The key to how you negotiate a lease option agreement is to begin by building a rapport with the property owner. Once you’ve built a trusting relationship with them, your next job is to create a win-win scenario that works as well for you as it does for the property owner.
Without these two steps in your negotiations, you’ll struggle to negotiate the deal. Not every property transaction is suited to a lease option agreement, but if you approach each opportunity as if it might be, you may eventually find the perfect option deal.
Please read on to find out why I chose the image I used for this article. The reason is key to understanding the negotiation process of a lease option agreement.
Key steps to take when negotiating a lease option agreement
There are a number of steps you should take when you’re negotiating a lease option agreement. By following these steps, they will help to give you the best chance at succeeding in your negotiations.
The steps are as follows:
- Be presentable.
- Be on time.
- Introduce yourself.
- Stay relaxed.
- Maintain eye contact.
- Ask questions.
- Show genuine interest.
- Explain everything carefully to the property owner.
Let me explain each of these in a bit more detail.
1. Be presentable when you turn up to negotiate your lease option agreement
The least you can do is to look presentable to the property owner.
This shows respect and it shows the seller you mean business. I don’t necessarily mean to turn up in a suit and tie, this would be over the top. After all you don’t want to scare the seller away.
But think about the impression you would make if you turn up in shorts and a t-shirt vs if you wear trousers (or pants in America) and a buttoned shirt.
Always keep in mind, you can never made a second first impression!
2. Be on time for your meetings with the property owner
Always be on time as this shows respect for the other person’s time. This goes for any type of meeting or negotiation. If you are late, it not only means you don’t respect the other person’s time but it’s also rude.
Being late will start the meeting off on the wrong foot and will create an initial barrier for building trust and rapport. If for whatever reason you are running late, phone forward and always apologise.
3. Introduce yourself to the seller
Don’t forget to tell the seller who you are and what you can do for them. But in return ask about the seller too. Tell them something about yourself to begin building that know, like and trust bond.
Look for some common ground or interest. If you meet the seller in their house, look for a clue about them so you can ask questions of interest.
It might be a family portrait or an ornament from their travels. Use this to break the ice and to begin building the rapport.
4. Stay relaxed during the negotiations
Whilst you may find it more difficult to relax in the early days when you begin to negotiate lease options, this will come with practice. But it’s important to be as relaxed as you can, otherwise you may come across in the wrong way.
5. Maintain eye contact with the seller
Maintaining eye contact, but without staring which is plain weird, is a key indicator to the seller you can be trusted. Looking shifty and looking anywhere by at the seller will not build trust.
6. Ask questions of the home owner
This has always come easy to me, so I never have a problem with this aspect of lease option negotiation.
This is one of th e keys to finding the route cause of the property owner’s problem they need to have solved. You may think their problem is easy, i.e. they need to sell their house. But often this isn’t actually their main problem. There’s often an underlying problem too.
Find their ‘pain’ and you’ll be better able to help them as you begin to structure the lease option agreement.
7. Show genuine interest in the seller
If you always keep in mind that you are there to genuinely help the seller, this will help no end with the negotiation process.
But if on the other hand you go with the intension to just make money, this will become obvious to the seller. If you don’t have the right mindset with lease options I don’t think this is the right property investing strategy for you.
You need to be genuinely interested in the person with the problem you’re trying to solve. Option contracts and lease options are not just about property investing, they are about helping people.
Spend time getting to know the seller and delving into what their problem is, will pay dividends in many cases.
8. Explain things carefully to the property owner about how the option deal will work
Clarity is key when you’re negotiating a lease option. You’ll find that sellers will ask many questions. Always answer these truthfully and explain everything carefully and clearly. But without the jargon.
The more you can help people with problems in property, the more likely you are going to strike the deal.
But also be totally up front with the property owner and explain the risks with lease option contracts.
Key information required for lease options to be gathered during the negotiations
In order to crease your heads of terms and ultimately your lease option agreement, you need to gather certain information about the property concerned.
Information required for a lease option:
- How much they consider their property to be worth.
- The amount left on their mortgage.
- The term left on their mortgage.
- How much their mortgage payments are.
- Any other loans secured on the property.
As you can see this includes some quite personal financial information. If you don’t spend time creating rapport and trust, the seller is never going to feel comfortable parting with any of their personal financial information. This would make it impossible to create the lease option agreement.
Lease option agreement pitfalls to avoid
There are a number of common pitfalls to avoid when you are negotiating lease option agreements. The same applies to how you negotiate a lease option agreement too.
Lease option agreement pitfalls include the following:
- Don’t use jargon: When you’re talking to a home owner use simple terminology they are likely to understand, otherwise you’ll lose them during the negotiation process. You shouldn’t even need to mention the term ‘option agreement’ or option contract’ or ‘lease option’ during your negotiations. Also, terms like strike price, option fee and such like should only be used with caution. If at all possible don’t use these terms, as they are for the solicitors for drafting the agreements.
- Don’t blag it: This means you must not make up answers to questions as you go along. If you don’t know the answer to a question the property owner asks, tell them you don’t know. Explain to them you’ll find out and get back to them. Your aim to build trust and rapport. People will know if you’re being genuine.
- Do not rush the negotiations: Take your time to build the rapport and to understand the property owner’s problem.
- Don’t draft the option agreement yourself: It’s okay to draft the heads of terms yourself, which is the main negotiated terms of your agreement with the property owner. But when it comes to the option contract and the lease agreement, leave this to the professionals. This may feel expensive at this point, but get this step wrong and it could cost you a whole lot more. Mistakes in getting the legal agreements wrong can become very expensive mistakes.
- Do not try to hide anything: When you’re negotiating a lease option you need to be open and honest about everything. For example, the key part of a lease option contract is that you have the option to buy without the obligation. The seller needs to understand this. Most ask, what if you don’t buy their property. Be honest with your answer to this question.
- Dont do the deal if it doesn’t work for you: Lease options must be a win-win. Which means the deal has to work for you too.
What to keep in mind when negotiaing a lease option
There are some important things to always keep in the forefront of your mind when negotiating a lease option agreement. These include:
- There are usually four essential elements to every lease option agreement: These include: The option fee or consideration, which you can call a deposit to avoid using jargon, as sellers will understand this better; The strike price or the amount you will pay the owner at some point during the option contract period; The term of the the option contract; The amount of the monthly lease or rental payments.
- Always remember that every aspect of the agreement is negotiable: Which means for example, the option fee can be what ever it needs to be to create that win-win. The term can be agreed so that the seller is happy and the deal works for you too. But always try to include the option to extend the contract if terms dictate.
- The option agreement must not extend beyond the term of the owner’s mortgage term: It’s always important to understand that the option term cannot be longer than the tile left in the mortgage. This is because the option agreement needs to be exercised (I.e. you buy the property) before the end of the mortgage term.
The importance of the jigsaw pieces in the image at the beginning of the article on how do you negotiate a lease option agreement
The reason why I chose the jigsaw pieces for the image on this article on how you negotiate a lease option agreement is important.
In order to understand this, I’d like you to imagine the left-hand jigsaw piece is in your hand, whilst the right-hand piece is in the property owner’s hand.
Your aim is to direct the negotiations of the option agreement or the lease option to end up with a perfect fit of each jigsaw piece.
The property owner’s jigsaw piece represents the problem they need solving. Whereas your jigsaw piece is the solution to that problem.
If you match your solution to their problem, your jigsaw pieces will fit perfectly.
I hope you’ve got something from reading this article about how do you negotiate a lease option agreement
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