In my Day to Day Real Estate Investing Career I have noticed I get a lot of questions about Lease Options.
Folks say, Wallace, give me the detailS Exactly how these Work and How I can make money doing them. Be careful for what you ask for. Here goes.
Leases and options are not widely understood. They are just Control without ownership. Each of these are very powerful. When you pair the two together, they will open up a lot of money making possibilities.
Leases control use and possession. Option on the other hand control the right to purchase. You buy with lease options and you can sell with lease options and you can assign you options positions. You can even do any of this for a Fee for others.
The First place you should consider applying lease options is in your current rental program. You must understand something: Straight rental will give the advantage to your tenants. Your position is weak. You should use a Lease Option to make it so you are now in a position of strength and not your tenants.
Don't just RENT your properties, use a RENT TO OWN. This is simply what a lease option really is. Does that make sense? The only difference is your dealing with people who want to have the American Dream: Home Ownership, but need help. Lease Options will give them the chance to own and its a soft sale.
What you will ask your owner/tenants for is a 3% to 5% of your Sales price of the home up front, and it is non-refundable. It is what is called an option Consideration. You will apply this to their cash down payment at closing with they buy the house in either One year or Two years, depending on how long you make your lease option.
The Lease and the option can be for a One or Two Year period. These are two separate documents. There usally is no mention of the option in the lease, but the option is conditioned upon all terms of the lease agreement being met. The lease payments are the market rate.
The selling price on the property is at retail with the buyer paying the closing cost. You can be flexible here.
A rental credit can be added to help make the deal work. I suggest to allow $200 a month to reduce the purchase price for every month the rent is paid on time.
The Demand for RENT TO OWN homes is Strong! When you run an AD in your local paper you will be swamped with calls. Have a voice mail box set up! I will ask people how much they have saved up for a down payment and how much money can they afford to pay a month in rent before I give out any information.
What's nice about this is that Bad Credit is not a problem for them. Cash Qualifies them. As long as they have a few thousand dollars in a non-refundable money and can afford the monthly payments you can work with them.
Selling or renting on a lease options PAYS you in several ways:
UP FRONT CASH IN YOUR POCKET: This is the money form the non-refundable option consideration. Even if it is only $2000.00 is sure beats a refundable deposit with is the biggest cause for tenants fighting with a landlord. This can be huge for you. Lets say you have 25 houses and you collect $2000.00 on each one, that's $50,000.00. Not too bad, right.
YOUR MONTHLY POSITIVE CASH FLOW: Cash flow is KING. I alway try to get at least $200 a month on each house and hopefully more. Don't forget your RENT TO OWN tenants have an incentive to pay on time (to get that $200 a month rent credit towards the down payment). Another thing is you make them responsible for all minor repairs. Hey, they are buying the house and that's part of ownership.
PROFIT WHEN YOU SALE THE PROPERTY: Lets say at the end of a One or Two year lease Option that 1/2 of these make it to closing, for whatever reason. Don't worry if this does happen. You will already have made money. If they don't close then just do another lease option again and get up-front money and cash flow again! Of course you goal is to get all of them to close for your tennant buyers.
Lets face it. Most of these people can not buy a house. They have bad credit, bankruptcy, Divorce, self employed etc. You may be the only one willing to give them a chance to own a home.
The tenants will have to do their part. They must get themselves ready to qualify for a loan. The money you make here is from the difference you paid for the property and what you set your sales price at. You will get a higher price and have lower cost, pay no Real Estate Agents a commission, their is no holding cost and you pay no closing cost.
This is absolutely the best way for a beginner to get started as a Real Estate Investor.
Until Next time, Happy Investing.
Wallace Hobbs
Real Estate Investor
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life
Great post Wallace! I just recently bought my first home (finally!) with a lease/option purchase.
Jan 07, 2007 03:49 PM
KEIRE Realty Group - Manassas, VA
Principal Broker/Owner
Hi Wallace,
Thanks for your post. I think this is the way to go for many Buyers out there in this sluggish economy. Certainly a good topic for Sellers & Agents to consider in marketing their listings.
-Keith
RE/MAX Olympic, Manassas VA
Sep 06, 2007 04:09 PM
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