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The “Step By Step Guide to Exit Real Estate at Top Dollar Prices” By Ralph Mark Maupin, Mr. Lease Option
A few years ago I was an overly ambitious investor, I thought the more properties I had the better. I ended up with 300 rental properties which was far more properties than I could manage. After concluding that I would be better off selling most of those properties I encountered another problem. How was I going to sell so many properties at a price to make a profit before things spiraled out of control? That’s when the answer hit me, “RENT TO OWN”, otherwise known as Lease Options.
I put together a Lease with Option to Buy Program to sell most of those rental properties. The result was I got long term tenants who pay above market rent and show pride in ownership, making improvements to the property. This is a tool that you will absolutely want to include in your "toolbox" of investment strategies- especially homeowners in slow moving markets or investors purchasing property for re-sale. The sales I made would not have happened at above market prices if not for this strategy.
Rent to Own, Lease Option, Lease with Option to Purchase all mean the same thing. Tenants might not necessarily know the meaning of Lease with Option to Buy, but they do know the term, Rent to Own! Rent and lease mean the same thing; a lease is simply a rental agreement that is for a set period of time whereas people often refer to month-to-month situations as rentals.
The benefit of Rent to Own is it attracts more interested and qualified tenants as well as getting you higher monthly income from your property with higher sales prices and reduced maintenance expenses. If you place an ad for your property offering a lease with Option to buy, you can generally expect five times the number of responses to the “Rent to Own” add than you get from a regular "For Rent" ad. More People are looking for an opportunity to own their own home, than just continue to rent.
An option is a grant of the right to purchase property, at set price and terms, from the owner of the property. The person who receives the option can (but is not required to) purchase the property during a set period of time agreed to by both parties when they enter the option.
An option is different from an agreement to sell (Purchase Agreement) in that with a Purchase Agreement, the buyer agrees to buy and the seller agrees to sell. Under an option, the seller agrees to sell, but the buyer does not agree to buy, they simply have the option of buying during the option period.
Note: In an Option, the Seller is the Optionor (The one who gives the Option) and the Buyer is known as the Optionee (The one who receives the Option.
To set up a Lease with Option to Purchase with a tenant, you will need all of the documents you would normally use to set up a simple rental/lease. Find a rental agreement, written by an attorney, according to Michigan Law at http://stores.ebay.com/Real-Estate-Investing-Guide
You will need an Option agreement, and you want to be sure that you're using one that protects you as the Optionor, as many option forms available favor the Optionee. Attached to the Option will be a Purchase Agreement, which will spell out the terms of the sale that the tenant may purchase under, in the future.
Over the years, I have developed a good guideline for structuring Lease Options. I suggest you don't give discounts on rent just because the tenants are also paying you a monthly option fee or they are planning on buying the house; the option is separate from the rental agreement. Get as much option fee as you can up front, the more the perspective tenants pay up front, the greater their risk will be if they don't follow through. I will take a note and payments combined with cash as option fee. The option fee is non refundable in the event the tenant defaults and the note keeps the tenant at risk. The option fee is credited towards the sale price, if they close.
When doing an option, don't charge a security deposit; apply the funds the tenant would have paid to the option fee, which is non-refundable. Make your option cancelable by you if the tenants default in any of the terms of the rental/lease. Work with a mortgage loan officer to qualify your perspective tenants. Have the loan officer advise you on how long it will take to have the tenant "mortgage ready", then set your lease option term accordingly. When pricing your property, you will be able to get more than market price, but remember the property will have to appraise for the purchase price when they qualify for the mortgage.
Last but not least, make the tenant responsible for repairs and maintenance to the property; make sure your rental agreement states they are responsible for the cost of such repairs and renovations. (Check state and local laws for rules) As you can see, options create opportunity though creating larger profits, decreasing management and repairs, and selling your property at top dollar.
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Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.