Aaron -- Thanks.  I am glad to provide you some insight to the process.  Keep me in mind if you have any clients that want to invest in the Philadelphia region -- The City of Chester, in Delaware County, especially, is a great market for this type of deal.

Nestor and Katerina -- the key to keeping the landlord around is having them use you (or your broker) as a Property Manager.  Payments from the tenant go to you, and you pay the debt service on behalf of the landlord, and forward any possitive cashflow to the landlord's address.  This becomes a book-keeping exercise but it can help stem the tide of foreclosures with absentee landlords.

Missy -- thanks for the compliment.  I always try to explain things in the most simple terms.  The homebuying process becomes much easier to manage when your clients understand the process completely.  By boiling it down to plain language and understandable terms, a complex process becomes much less stressful, as well.  Kudos to the agent in your office that does these types of deals.  Spend some time learning from them, and you will find that you will begin to see more win-win situations for your clients, as well.

Lizette -- thanks.  I also appreciate the gold-star, but am not sure who to thank for that...

Stacey (and anyone else for that matter) -- if you would find it helpful in educating your clients, feel free to click on the "Re-Blog" button in the post above.  That will syndicate it on your "outside blog" with the proper citation and link to source.  If any of them want to do a deal in the Philadelphia suburbs, send them my way!

WEICHERT, REALTORS® - Synergy -- Using a self-directed IRA or 401(k) is a great investment strategy, and when combined with the Lease Option strategy, can create that win-win-win-win situation -- and your client gets to benefit from 2 of those wins!

Lillie -- Before jumping in to these transactions with your interested client, be sure to have the neccessary contract forms for your state, and understand their use, fully. 

Lance -- Builders and Developers know the value of the lease purchase.  They often use them to stabilize their bottom line in slow markets, especially with new construction.  You could have gotten a "paycheck" as you put it by having the client essentially sign a rental listing contract prior to closing on the lease with the buyer/tenant -- or perhaps less messy would be a "retainer fee" which is able to be spelled out in your agency contract.  (each state will have specific business relationship forms for this)

Vicki -- as I mentioned to Lance, above, your "paycheck" can be as a result of the initial lease placement, or as a "retainer fee."  If you are setting up a client to make a sizable profit, they should have no problem paying for the advice and expertise that got them there.

Steve Pawera -- As I pointed out in the example, to really make this work, you must have both parties agreement at the outset.  I dont know what market you are in, but in my local market (Delaware County, PA) prices have stabilized and are improving.  As long as the cash-flow is positive, the deal will profit the landlord.  As long as the original option payment is substantial enough (2-3% of purchase price, plus monthly payments, the buyer is not likely to "walk away from the deal."  Even if the buyer does chose to let the option expire, and lose that money, they stiil have a place to live that they perhaps couldn't have gotten into with a standard lease.

Ellie -- the Lease Option is not viable in ALL markets.  I am fortunate enough to be in a stable market, with areas that have continued to appreciate in value, while other areas of the contry have seen a deep decline.  I agree, though that if the values go down, the sale cannot be consumated under the pre-negotiated terms, because of the appraisal barrier.  The simple answer then is for the landlord and tenant to re-negotiate, just as they would in a standard contract that had an appraisal issue arise, or for the buyer to let the option expire.

Max -- I am not an attorney (and I don't play one on TV, either).  My lay opinion however, is that the purchase of an Option is not a transfer of the property, and ought not to trigger a due on sale clause.  The option is not "attached" to the lease.  It is a separate, stand alone contract, which in essence purchases the right to purchase the property.  The Option contract is not an agreememt of sale for real property.  It simply specifies that if an AOS is submitted by the option holder, the grantor will accept the terms defined by the Option contract.  Perhaps I am missing something.  I don't see a COE violation at all here.  Remember, I did say that the contracts must be drawn up (or at least reviewed) by an attorney to make sure they comply with all state requirements.  That woul include your concern about the "due on sale" clause of the note.

Keith -- that "reblog" comment is directed at Active Rain members.  If you were logged into the Active Rain network when you read the article, you would have seen a "re-blog" button right next to the title of the post.  That allows you to put other people's content on your Active Rain outside blog, with proper links back to the original content.  Don't be discouraged if you dont understand it.  It is a new feature that was just rolled out.

Jeff -- as someone who chooses to not practice dual agency, this becomes "sticky".  Here are some ways it can be resolved:

• Prior to setting up the deal, have an Exlusive Buyer Agency Contract with each Client.  Once it is clear that the Lease Option is going to work for both parties, then
• Refer the tenant to another agent in your office (transfer the agency contract) to negotiate the terms of the lease. Then...
• Negotiate the terms of the "option" with the other agent representing the potential buyer's interests.  Or:
• Create a "Transactional Agency" relationship with both parties.   You are not advocating or negotiating for either party, simply processing the transaction.  You can negotiate your fee with either or both parties.

You would essentially be the buyer's agent in the initial purchase, the listing agent for the rental, and then a transactional agent when the resale happens. 

All along the way, you can include a fair retainer fee in your contracts, or transaction fee that you negotiate with your clients.

Mercure -- thanks for taking the time to read it.

Pat -- good to hear from another agent actively doing these deals.  As you point out, it is possible to do it in a way that satisfies everyone's needs.

Stephen D. -- the $16,000 out of pocket from Client B is their money needed to purchase the property initially (they are buying a property, to rent to Client A, remember.)  The $16,000 was a simple 10% of the purchase price.  Of course there are other closing costs, which I did not detail in the example.  When evaluating a scenario for a client, all costs have to be factored in, before agreeing to the deal, of course.  The numbers have to work for both parties to make this a truly viable option.

Frank & Jodi -- I would be surprised if someone who had no intention to buy down the road would want to get into this type of situation, just to rent a house.  The Option fees would never be recovered by the tenant.  But then, tenants are used to throwing away money, aren't they? (With rent, all payments go to the landlord.  With a mortgage, at least a portion (usually) goes to increase your equity position in the property. The option fees can be recovered only when the option is excersized.)

Stephen D -- The option fee money does benefit the seller -- if the buyer does not exercise their purchase option.

Kevin -- thanks.  I will check out your site.

Ed D. M. -- I appreciate your statement.  Last time I checked, however, educating readers about how a hypothetical real estate transaction might pan out is not the same as rendering "advice."  I even point out in the post how important it is to consult with an attorney, before entering into this type of transaction.  I tell all my clients to contult with their accountant before making any transaction -- they need to understand how homeownership (or rental insome) will effect their taxes, at the very least, before entering into any real estate transaction.

Ellie -- you raise an interesting point, but as I understand installment sales, (sometimes refered to as "contract for deed" - where the seller holds title till the loan is paid off) this shouldn't be an issue, since the only contract (other than the lease) is a an option contract, and there is no loan involved.

Stephanie B -- There is no requirement for a "1 year commitment" from a lender.  The buyer/tenant purchases the option to buy.  That option, by itself, is not a guarantee to buy, nor does it guarantee they will even be able to qualify for a mortgage when the time comes.  It is a risk the buyer takes to get into the property.  They must be responsible for keeping their credit in good standing, so that they will be able to excersize the option should they choose to.

Betina - as I mentioned in the post, an attorney is definately needed to draft or review the contract that conveys the option.  Some states, like Delaware, for example, require an attorney review before closing any transaction.

James -- You hit the core point of my post -- these type of transactions are becomming not only more popular with buyers, but more palatable for sellers, as well.  The loss of Down Payment Assistance programs will make these even more likely in today's market.  (Your comment "hiccuped" and got posted 3 times  -- I deleted two duplicate comments.)

NOTE TO ALL:  My scenario outlined a situation with three consumers:  Seller, Investor/Landlord, and Tenant/Buyer.  If you remove the Investor/Landlord, and the Seller agrees to the Lease-Option deal, it can be even more profitable to the Seller, (presuming they don't need the sale to pay off a mortgage, and renting won't violate the terms of their mortgage).  Here again, though, each situation has to be thoroughly evaluated (by thoroughly I mean by the appropriate licensed professionals) before any action is taken by either party to the transaction.

Erica -- As I mentioned above, there are essentially 3 "commissionable" events.

1. The sale of the property from the Seller to the Investor.
   (The commission is the co-op fee the Seller's Broker has offered on the MLS)
2. The Lease of the Property to the Tenant
   (The commission is negotiable, of course -- I ask for 1 month rent, just like I would for a rental listing.  This can be done as a retainer fee, also.)
3. The Sale to the Tenant
   (Negotiated in advance, payable only if the Tenant exercizes their purchase option -- a flat fee, similar to what would be charged as a Transactional Agent.  A retainer fee can be negotiated up front, too, of course.)

The purchase of the Option by the Tenant from the Landlord is not a commissional event.  The landlord that stands to profit from the deal though, will likely be grateful for the opportunity, and will likely be more receptive to your retainer fees.

If the option term is longer than the renewal period of your license, you had better be sure to renew your license, or you won't be permitted to collect.  If you are concerned about this, use an up-front retainer fee, in lieu of the transaction fee. 

Ellie -- Be careful  -- IRS.COM is not the Internal Revenue Service.  It is a domain that redirects to a site maintained by Banks.com -- a commercial entity.  I would not consider their content to be definative.  IRS.GOV is the actual IRS site.  It states that:

"An installment sale is a sale of property where you receive at least one payment after the tax year of the sale."

The installment sale is essentially a method sometimes used for deferring gains on the sale of a property.  The Option Contract is not a sale.  Payments of the Option Fees are not "installments" of a loan on the sale of the property.  There is no sale (nor taxable gain to defer using the installment sale method) until the actual sale happens.

Again, it is imperative that the proper professionals are consulted when entering into lease-option contracts.  Lawyers, Accountants, Actuaries, Securities Brokers, Mortgage Bankers, Butchers, Bakers and Candlestick Makers all have their areas of expertise.  Consult the right ones at the right time.