How to Lease Purchase a Home

Buy a House Using a Lease Option

Rent-To-Own Your Own Home! Most people will never be able to own their own home because they don't have enough cash or their credit is not enough for the bank to extend them any line of credit. However, you don't actually have to have much money at all or have a good credit score to own a home like everyone else can! If you wonder why most methods of buying a house are not working for you, then keep reading! This could be the way that you finally own the home that you deserve! This guide from Don Mayer shows you how to take advantage of Lease Purchase Advantage, where you can approach sellers directly and pay them a monthly fee to own the home eventually. You're just renting until you pay off the money! That's all that it takes to own your own home. Don takes you through all of the legal aspects to doing this for yourself You will soon be able to buy the home that you deserve! Read more...

Buy a House Using a Lease Option Summary

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Author: Don Mayer
Official Website: www.renttoownblueprint.com
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Looking Into Lease Options

A lease option is an excellent way to control and eventually purchase a property without the significant cash investment in a down payment. A lease option is essentially two different types of contracts combined into a single agreement. You have a lease (rental agreement), which has all of the usual terms, but the tenant also has the unilateral right to buy the property under certain terms and conditions in the future. A lease option obligates the owner to sell the property but doesn't obligate the tenant to buy. This is a unilateral contract until the tenant exercises the option and a bilateral contract is created. One of the key issues with lease options is the option price (purchase price) that the buyer must pay. This figure can be a fixed price based on current market value, but often it's a future projected value based on anticipated appreciation with set time limits for exercising the option. For example, a home valued at 200,000 today may be offered as a lease option with an...

Purchase Option Buying Strategy One The Lease Option How to Buy Homes in Nice Areas with Nothing Down

Without question, the single most important of the five Purchase Option buying strategies is the lease option. If you were only able to master one of the five strategies, this one would be the most important. Currently, approximately 50 percent of all the deals we do are lease options. This is the easiest and simplest of the buying strategies. Plus, it is probably the lowest-risk way to get started in real estate investing.

The Lease Option Simplified

Have you ever seen a rent-to-own store Did you know that you could walk into that store and buy a brand-new big-screen TV All you need to do is make nice, easy monthly payments and, in a few years, you will own that TV. Of course, in the long run you will end up paying between two and three times more for that TV than if you paid cash up front. Why do people pay more for something on a rent-to-own basis They are paying a premium for the easy financing with which they are then able to own that item. What most people don't know is that you can do the exact same thing with real estate Just by controlling a property and changing the terms with which you make it available to a new buyer, you instantly increase the value of that property. You are going to be using the rent-to-own concept, which has been around for many years, in a new way with real estate. You are going to be a matchmaker, matching up a motivated seller and a hungry tenant-buyer. And by helping both these people get what...

Creative Beginning with Lease Options for Investors

To start building wealth fast without investing much money up front, try the lease-option approach of Suzanne Brangham. Although Suzanne stumbled into her investment career quite fortuitously, you can follow her path more purposely. From her book, Housewise (New York HarperCollins, 1987, p. 39), here's Suzanne's story Three months later, Suzanne was on her way. She then bought her renovated condo unit at her lease-option price of 40,000. Then, simultaneously, sold the unit to a buyer for 85,000. After accounting for renovation expenses, closing costs, and Realtor's commission, she netted 23,000. Suzanne no longer had a home, but she had found a career.

How Lease Options Work in the Real World

Let's go over a couple more examples to show exactly how the lease option method works in the real world. Mark and Trish, two of our students in California, found a motivated seller of a four-bedroom house in an upscale suburban neighborhood. The seller called Mark and Trish after she saw their I Buy Houses sign posted near the side of a road. It turned out that the seller's mother was sick, and the seller was moving in to care for her. The seller just didn't want to get stuck with making payments on their soon-to-be empty 255,000 house. Mark and Trish agreed on a three-year lease option for a price of 235,000, a monthly rent of 1,500, and with 1 paid as option consideration. Yes, Mark and Trish did in fact hand the seller a dollar when they signed up the deal it's an important formality to make the agreement legally binding. The neighborhood the property was in had appreciated at over 14 percent for the previous two years. Mark and Trish spent a weekend doing some cleaning and...

Control with Lease Options

If you lease a property for five years with the option to buy it, you do not own it. What if the world goes into a massive depression Suppose you bought the property with borrowed money and then were obligated to pay it back You would be in hot water because you would own the property and would have an obligation to pay. With a lease option, even if a depression hits and the property value Do people get out of leases Yes. However, I am not recommending you do a lease option just so you can walk away from it. I recommend doing it because you have the freedom of not being tied to the property like the owner would be. You have less liability and risk. And if you have done your homework and have lease-optioned it properly, you will make money. So it is possible to get out of a lease, but it is not usually smart. goes down by half, you still have an option to buy but no obligation. (Read Chapter 8 for more in-depth discussion of lease options.)

How Lease Option Works

To get started, find a fairly motivated seller. With lease optioning, unlike wholesaling, you do not have to find a supermotivated seller. The most profitable real estate deals require you to buy properties or put them under contract for 25, 30, 40 percent below current market value. That is, if you want to wholesale a property and it is worth 100,000, you need to purchase it for 65,000 to 70,000 so there is enough room for you to sell it and make a profit. If a seller says the property is worth 100,000 but he needs 82,000, many investors would walk away. With lease optioning and rent to own, however, you do not have to walk away, even at a moderate discount like 82,000. The best way to find a motivated seller for a lease option is through the For Rent ads. Call landlords and property managers. If a property is for rent, do you think they might be motivated to lease-option it Quite possibly they will be so motivated, and here's why In the world of owning rental property, a For Rent ad...

How to Find Lease Option Opportunities

The lease option is a win for Joe because Lisa is paying his mortgage, so he doesn't have that weight around his neck every month. It is a win for Lisa because she has an option to buy the property from Joe for 10 years for only 175,000, even if the property increases in value. Joe can't sell the property without Lisa's permission and her negating her contract. Joe is guaranteed to receive 175,000, even if the property's value continues to decrease. Of course, the opposite might also happen. If the property increases in value, and if somebody offers him, say, 250,000 for the house, Joe could try to get Lisa to assign her contract back to him. If she agrees, Joe pays Lisa a fee for doing that for example, he might offer her 10,000. In that case, Lisa still makes 10,000 on her original investment of 1,000. And if Lisa's subtenant pays her 1,450 per month, she'll make 250 each month on the rental. That's why we like lease options. If you're in a down market, lease options are great...

Lease Option of Your Personal Residence

Why buy when you can rent We've all seen the ads used by real estate agents Why rent when you can buy Consider the other side of the coin Why buy when you can rent In most parts of the country, a typical 100,000 house will rent for about 1,000 per month. Assuming a reasonable down payment and interest rate, the monthly mortgage payments would be less than 1,000 per month. In this case, it makes sense to own the home. However, more expensive homes don't rent as well as cheaper homes. A typical 500,000 home does not rent for 5,000 per month. The more expensive the home, the cheaper it becomes to rent compared to buy. If you are concerned about the proverbial throwing away rent, consider a lease option of your next home. Case study lease option builds equity. A student of mine from the Phoenix area (we'll call her Sharon) was interested in purchasing a home to live in, but she didn't have much cash. She was at her new A few points are worth noting here First, had Sharon purchased the...

The Sandwich Lease Option

The sandwich lease option is an old technique used by real estate entrepreneurs to create cash, cash flow, and equity buildup with literally no money, credit, or bank loans. Let me give you a typical example of how a sandwich lease option works. A seller (soon to be landlord) is transferred out of town and rents his property. A year later, the tenant vacates (after skipping a few months rent) and leaves a big mess. The owner wants to sell the property for 110,000. It is the middle of the winter, the house is vacant, and the real estate market is a bit slow. The house needs new paint and carpet and therefore looks ugly. The 850 per month mortgage payment is a burden to the owner. He decides to lease it on a month-to-month basis but cannot find a tenant because nobody wants to lease a house for sale when he or she may have to leave within a few months. The owner is a perfect candidate for a lease option. The potential buyer (AKA tenant) filed for bankruptcy two years ago. He just moved...

Lesson 9 If Youre Buying on a Lease Option Record a Performance Deed of Trust or Mortgage

Remember how you recorded your option or Memorandum of Option. Well, that put a cloud on the title. An option, however is a contract and not an interest in real estate. In plain language, what that means is that a recorded option protects your interest like a 7 out of 10. A 9 out of 10 is to have the seller execute a deed of trust or mortgage in your favor to secure your interest. A 10 out of 10 would be having the seller actually deed the property to you putting you or your company on title. This is one reason why buying subject to the existing financing is almost always better than buying with a lease option. foreclosure. Typically, the deed of trust secures a promissory note, but not in this case. In this case, you are going to have the seller sign a deed of trust that secures the seller's specific performance of the lease option agreement.

Convert Rental Property to Lease Options

Lease options are also a great way to take over rental property. Whenever I take over a rental property, I go to the tenants with my mortgage broker, show them the benefits of buying a property, and tell them how they could get preapproved. In fact, we can usually process a preapproval right there and then. Often, they can buy the property for less than what they're paying in rent, taking the tax deductions into consideration. They become homeowners and begin to build wealth. A lot of times when I put rental property under contract, I sell it or lease option it immediately to the renters. It's a win-win situation.

Consider Lease Options

A lease option is an agreement that allows the tenant the right to purchase the leased property at a predetermined price for a certain period of time. Sellers typically use lease options in slow real estate markets to create additional interest in the property even a potential buyer currently without a down payment has the opportunity to eventually become a homeowner. There are many other benefits to the rental property owner willing to offer a lease with an option to purchase the property. You can often sell the property for a value above the current market, and the lease option usually requires a one-time option fee that you can keep if the buyer can't exercise the option. Also, the renter buyer typically pays a higher monthly rental payment with a lease option because a portion of the payment is applied to the ultimate purchase price. The higher monthly payments can be beneficial to you if the cash flows for the property are currently negative. Check out Chapter 3 for more on lease...

Lease Optioning

One of the best ways to control or rent property is through lease optioning. Consider leasing commercial property, houses, vacation property, duplexes, land. Instead of borrowing money to buy a property, thereby getting your name (and all the liability that comes with it) on the deed, consider leasing it for 1 year, 5 years, possibly 50 years. When you lease with the option to buy, you are locking in the lease for a set number of years as well as having the choice to buy it. Remember, you are not obligated to buy the property, but you do have the right to. When you lease-option property, you control it. You can re-lease it, buy it, option to buy it, or sell it for more than what your option price was. The sky is the limit.

Lease Options

Minimized income), unstable income (commissions, tips), or lack of cash, do you believe that you can't currently qualify for a mortgage from a lending institution Then the lease option (a lease with an option to purchase) might solve your dilemma. Properly structured, the lease option will permit you to acquire ownership rights in a property. At the same time, it also gives you time to improve your financial profile (at least from the perspective of a mortgage lender).

The Lease Option

The lease-option strategy is a great way to leverage your real estate investments because it requires very little cash. The lease-option method is more of a financing alternative than a financing strategy because you don't own the property. The basic lease-option strategy involves two legal documents, a lease agreement and an option. A lease gives you the right to possess the property, or, as an investor, to have someone else occupy it. If you can obtain a lease on a property at below market rent, you can profit by subleasing it at market rent. An option is the right to buy a property. It is a unilateral or oneway agreement wherein the seller obligates himself or herself to sell you the property, but you are not obligated to buy it. By obtaining the right to buy, you control the property. You can market the property and sell it for a profit. The longer you can control the property in an appreciating market, the more value you create for yourself. By combining a lease and an option,...

The Lease Purchase

The lease purchase, like a lease option, is two transactions a lease and a purchase agreement. A regular purchase contract is a bind In practice, lease purchase and lease option are just buzzwords that mean the same thing. Except as noted, we will use the two terms throughout this book interchangeably.

Every Possible Way to Find Great Deals in Real Estate

Phis book shows you how to analyze deals contract deals lease option deals wholesale property buy, fix up, and sell property rent property and determine many other possible avenues of income you can get from real estate investing. However, one critical detail must be covered first how to find a good deal.

Disclose Everything in Writing

For example, if I lease-option property from Bill, I have a five-year lease with a five-year option to buy it, then I turn to Susie and say, Susie, would you like to become a homeowner You can lease-option or buy the property from me. Give me 5,000 down and 1,000 a month. She is now a homeowner who has owner's terms or some kind of ownership in the property. What if Bill (whom I got the property from) suddenly goes bankrupt, gets divorced, or has the IRS chasing him, and he cannot pass clear title At the same time, Susie says, I'm ready to exercise my option. I want to buy the property. I would have to say, I can't sell you the property because I don't have title to it, Bill does, and he is having some financial difficulties. Susie is upset and says, Hey, I thought you were going to sell me the house. Through these actions, I have committed fraud. That is why you always disclose everything in writing any time you exchange information with someone a mortgage banker, a title lawyer, a...

Move Forward to Make Money

Now that you control the property, you can move forward and make some money. The beauty of lease optioning is you really have four paydays. Here is how that works. You run an ad in the paper that says, Rent to own. Stop throwing your rent money away. Become a homeowner. Easy qualifying. Do you think that would draw some attention and get some phone calls Absolutely. Remember, about half of all real estate contracts fail because the buyers cannot get financing. a month. At this point, you should be thinking, How many lease options can I do How would you like to have 3, 5, or even 20 of these going every month Eight months from signing the lease-option agreement, one of two things will likely happen 2. The tenant-buyers come to you and say, We've gone to the mortgage company. We've been approved and we're going to buy your property. Many landlords get sad about this because they do not ever want to lose the property. However, that result is not as bad for an investor. They pay you...

Questions and Answers

A The beauty of renting to own and lease optioning is that the original owner still owns it. That person has all the liability and responsibility to pay for insurance and taxes. As you now have an interest in the property, be sure to get copies of that insurance, or even become named as the insured, which is easy to do. You also want to make sure the mortgage taxes have been paid, so ask for copies documenting that for every year you are involved in that property. Sometimes investors will take over a property, and the original owner stops paying the mortgage and taxes. It goes into foreclosure, and that causes problems for everyone. So make sure everything is current and stays current. Q What is a fair commission to set up a lease option and flip it over Q How many lease options would you like to have going A How many do you think you could find What type of property do you want to lease-option Where If you do not want to do it in your area, maybe there is a vacation area you want to...

Separate Asset Base SAB

Before we discuss asset protection, though, let me explain how you can get 1,051,694. Simply do this From this moment forward, every time you make money (whether it is a check from your regular job, from wholesaling a house, from a lease-option deal, from a rental, from selling a house that you control, or from brokering a mortgage), take at least 10 percent of it and put it into a Separate Asset Base (SAB) account.

Getting Started

Then I learned how to flip property, fix it up and sell it, or lease-option it. I also learned that I did not have to use my own money or credit to buy homes. Most people, including myself sometimes, have no hands-on experience in the subject matter about which they are giving advice. You should seek advice only from experts. Even my mother would say, Robert, this no-money-down stuff, I don't buy it I don't believe it can be true. Now, every time I go to my mother's house for dinner, she says, Robert, I've seen you on As a full-time real estate investor, I have bought or sold about 500 properties in the last five or six years. At one time, I had more than 300 tenants whom I managed for years, and I still manage some. I constantly buy, flip, lease-option, and manage properties.

Crunch the Numbers

Answer all tax, insurance, rental rate, and expense questions. Document all the details so you are an informed buyer. Do this for any property, whether you are going to keep it, wholesale it, lease-option it, or finance it. You want to make sure it will provide cash flow for somebody, even if that somebody is not you.

Controlling Property

Lease options are not only good for rental or rent-to-own properties, but they also provide an excellent way to control properties without using much of your cash or credit. Suppose you found a beachfront condominium you could have either purchased or lease-optioned for 50,000 10 years ago that is worth 100,000, 150,000, or 200,000 today. If you had lease-optioned it for 10 years for 50,000, you could have purchased it within that time frame. (Lease option means you have the right to buy a home, but not the obligation to buy it.) Today you would either own it completely or sell it for a handsome (depending on the market) profit. What results Now, suppose every condo house in the neighborhood was available for lease option. How many could you lease option in the next 10 years for their investment value, knowing the

Make an Offer

The response will likely be, That would be great. How do we do that Then ask, How would you like to not worry about collecting rent money for the next five years You just have to go to your mailbox and get your check. You don't have to worry about the property anymore. If you get a positive response, now offer the possibility of renting to own or lease-optioning the property to you. The next step is to negotiate an option price by saying, What is the absolute least amount you would sell or option this property for today If the response is, The property is worth about 100,000, but I'd take 82,000, you would either accept it or keep negotiating. You point out it will probably take another 30 to 60 days to rent it and your first payment will not be due for 60 days. You explain that you are a professional real estate investor who will paint and do repairs and make payments regularly. In your disclosure, make it clear you do not represent them or their interests. Also be sure to disclose...

Give Rent Credits

Second, put in writing that the new tenant-buyer is responsible for all of the repairs up to the amount you agreed with the original owner (e.g., 300, 500, or 1,000). Also, explain that it is their home. They now rent to own it and are therefore responsible for repairs. This is important as most renters have no pride of ownership. Generally, when we rent a car, for example, we do not take good care of it, because it is not ours. If you instill in your tenant-buyers' minds that this is their home, that gives them incentive to take care of it, plant flowers, and so on. Third, make sure that you have a separate lease and a separate option agreement in your documentation. If you ever have to evict your tenant-buyer, you need only the lease agreement when you go to the eviction court. Judges in eviction courts understand leases. A joined agreement that includes lease-purchase or rent-to-own documentation could confuse the judge and weaken your case.

Star Student

One of my students, Larry B. from Atlanta, Georgia, used this information to lease-option 14 executive homes in the 200,000 to 500,000 range. The average differential between rent money taken in and his costs was between 500 and 1,500 a month on each property his profit. In the first year, three of the properties closed, so he made almost 100,000. Every time Larry closes a sale, he goes out and finds one or two properties to lease-option. You can do a lease option with any type of property vacation property, rental property, or commercial property. It is very powerful. It works.

Consulting Fees

In the beginning, I gave away my ideas, and friends would buy 30 properties and make 500,000. I had consulted for free, and I felt good about it because I love helping people however, please learn from this mistake of mine. You can actually charge consulting fees to help people get a house, help them rent to own, help them do wholesaling, and so on. After they get started, they could become excellent long-term clients. Consulting fees can be an excellent source of added revenue.

Real Estate Option Grants Only an Irrevocable Right to Purchase Property

I want to state right from the get-go that the only thing that a straight or naked real estate option grants is an irrevocable right to purchase the property under option within the option period. Nothing more An optionee has absolutely no beneficial or equitable interest whatsoever in a property under option. Furthermore, in my professional opinion, the creation and sale of a straight or naked real estate option does not violate the due-on-sale clause contained in government-backed and conventional mortgage or deed of trust loans secured by a lien on residential property containing five or fewer units. Again, in my professional opinion, there is absolutely no way that any lender can legally exercise its option pursuant to a due-on-sale clause on discovering the creation and sale of a straight or naked real estate option. Why do I hold this opinion Because Title 12 of the Code of Federal Regulations refers specifically to lease-option contracts, but makes no mention whatsoever of...

How a Stay at Home Mom Bought 14 Properties and How You Can

When I went to meet with the sellers, I was so nervous. I kept thinking to myself that the sellers were going to know I was a fake. I had this fear that the husband was going to take one look at me, laugh, and say, You're not an investor, you're just a mom. But it actually went much easier than I thought. When I went inside the house to meet with him and his wife, I left my two teenage sons in our minivan to wait. We talked for a while, and then he turned to his wife and said that selling me the house for 2,500 down on a lease option (something that you'll be learning about in this book) was a good fit for them. He signed and then pointed to his wife and told her where to sign. I thought, Isn't this ironic, it's like things came full circle here. I used to be the one whose husband told her where to sign, and now I'm buying my first investment house.

Calls and Call Strategies

Options are contracts that grant specific rights to the buyer and impose specific obligations on the seller. If you think of options as intangible contractual rights (rather than as tangible items such as shares of stock, for example), the entire discussion of how to use options is easier. It may be worrisome for you as a conservative investor to consider trading in an intangible product, but when you relate it to other types of investments, you can appreciate both the logic and the need for options. For example, in a real estate lease option, you have two parts a lease specifying monthly rent and other terms, and an option. The option fixes the price of the property. If you decide to exercise that option before it expires, you can buy the property at the specified contractual price even if property values are significantly higher.

Barrier 3 Negative Cash Flow

But now, it doesn't have to be that way. In this book, you are going to learn how you can control homes in nice areas and have a breakeven or positive cash flow right from the very start. You'll accomplish this by getting above-market rents for your properties by selling them on a rent-to-own basis and by also locking in below-market payments because you're buying intelligently from motivated sellers.

The Sublease Option Strategy Requires the Lessee to Become a Landlord

The standard sublease-option strategy being pushed today involves leasing a property and then subleasing it to a tenant-buyer. This requires the lessee (tenant) to become a lessor (landlord) responsible for managing the tenant-buyer. A sublease is also known as a sandwich lease, which is generally defined as A lease agreement in which the lessee (tenant) becomes a lessor (landlord) by subleasing the property under lease to a sublessee (tenant) who takes possession of the property. Under a typical sublease-option arrangement, an investor signs a lease-option agreement with a property owner and then subleases the property to a third party, known as a tenant-buyer, by using a sublease-option agreement. It is sort of the real estate equivalent of a threesome, in which the following three parties are involved in two separate lease-option transactions 1. Lessor-optionor The owner of the property being lease-optioned.

The Standard Lease Option Agreement Violates the Dueon Sale Clause in Loans

Although I know of no case nationwide where a residential mortgage or deed of trust lender has declared a loan to be in default because the borrower signed a lease-option agreement on the property securing the mortgage or deed of trust and promissory note, you need to know that the lender's discovery of a lease-option agreement can trigger the due-on-sale clause contained in residential mortgage and deed of trust loans. Section 591.2 (b) of Title 12, Banks and Banking, of the Code of Federal Regulations states Due-on-sale clause means a contract provision which authorizes the lender, at its option, to declare immediately due and payable sums secured by the lender's security instrument upon a sale or transfer of all or any part of the real property securing the loan without the lender's prior written consent. For purposes of this definition, a sale or transfer means the conveyance of real property of any right, title or interest therein, whether legal or equitable, whether voluntary or...

Many Equity Skimming Scams Involve the Use of Lease Options

You also need to know that many equity-skimming scams involve the use of lease-options. Equity skimming occurs when a property owner uses any part of the rent, assets, proceeds, income, or other funds derived from the property covered by a mortgage or deed of trust loan as personal funds. In a typical lease-option equity-skimming scam, a property owner collects an option fee and security deposit upfront and then collects lease payments for months on end without ever making a single loan payment to the lender. This goes on until the lender finally

Most Lease Option Transactions Are Really Installment Sales

Finally, the standard lease-option that everyone seems to have gone gaga over is a lease-option in name only. In the real world, this is called an installment sale. Why Because under the terms contained in a standard lease-option agreement, the relationship between the parties is that of debtor and creditor, and not that of lessee-optionee and lessor-optionor. This debtor-creditor relationship is created whenever the terms of a lease-option call for the property owner (lessor-optionor) to credit the option consideration and a fixed portion of the monthly lease payment toward the purchase price when the real estate option is exercised. Once this debtor-creditor relationship is created, the tenant (lessee-optionee) has an equitable or ownership interest instead of a leasehold interest in the property being lease-optioned. When a lease-option agreement gives the lessee-optionee an equitable interest in the property being lease-optioned, it becomes an installment sales agreement and not a...

Why You Must Always Use Separate Lease and Real Estate Option Agreements

If you do not get anything else from this chapter, please get this Always use separate lease and real estate option agreements to document your lease and option transactions. And never, ever use a standard lease-option agreement, which includes both the lease and the option to purchase in the same agreement. That is a big no-no. Why is that Because under the terms contained in a standard boilerplate lease-option agreement, once the lessee-optionee defaults on the lease and is evicted, the option agreement becomes null and void, too. However, when you use separate lease and option agreements, the option agreement will not automatically get wiped out if you default on the terms of the lease agreement and are evicted. The separate option agreement will still be valid until it is exercised or expires. And you will still have an opportunity to profit from the house under option. Also, in order to use the lease and option strategy that I am telling you about in this chapter, both your lease...

Benefits to Tenant Buyers an Eager Market

In recent years, the benefits of lease options to tenant-buyers have been extolled by the respected, nationally syndicated real estate columnist Robert Bruss as well as by most books written for first-time homebuyers. For example, in my book, Yes You Can Own the Home You Want (New York John Wiley & Sons, 1995, p. 59), I tell hopeful homebuyers, There's simply no question that lease options can bring home 1. Easier qualifying. Qualifying for a lease option may be no more difficult than qualifying for a lease (sometimes easier). Generally, your credit and employment record need meet only minimum standards. Most property owners will not place your financial life under a magnifying glass as would a mortgage lender. 2. Low initial investment. Your initial investment to get into a lease option agreement can be as little as one month's rent and a security deposit of a similar amount. At the outside, move-in cash rarely exceeds 5,000 to 10,000, although I did see a home lease optioned at a...

Benefits to Investors

Although the lease option might help you buy a property, it can also prove to be a good way for you to rent out your investment property. You can structure lease options in many ways. This type of agreement can typically benefit you as an investor in at least three ways (1) lower risk, (2) higher rents, and (3) guaranteed profits. Lower Risk As a rule, tenants who shop for a lease option will take better care of your property than would average renters. Because your lease-option tenants intend one day to own the house, they will treat it more like homeowners than tenants. Also, they know that to qualify for a mortgage they will need a near-perfect record of rent payments. (If your tenant-buyers don't know that fact, make sure you impress it into their consciousness.) As a minimum, lease-option tenants expect to pay up front first and last month's rent, a security deposit, and, more than likely, an option fee Lease-option tenants take better care of properties. Higher Rents...

How to Find Lease Option Buyers and Sellers

To drive the best bargain on a lease option as a buyer lessee, don't limit your search to sellers who advertise lease options. These sellers are trying to retail their properties. It will be tougher for you to find a bargain here. Instead, look for motivated for-sale-by-owner (FSBO) sellers in the Homes for Sale classified ads. Or, you might also try property owners who are running House for Rent ads. Often, the best lease-option sellers will not have considered the idea until you suggest it. When you search for tenant-buyers, generally you will be able to choose from three different classified newspaper ad categories (1) homes for sale, (2) homes for rent, and (3) the specific category lease option that some newspapers include. Unfortunately, no one can say which ad category will work best in your market. Experiment with each of these choices. To learn which one is pulling the best responses, ask your callers to tell you in which category they saw the ad. Don't simply assume that any...

Lease with Option to Buy

These involve real estate investors doing lease options. They may be motivated. They may be willing to do owner's terms. It's definitely worthwhile to find the other players in the market who are doing lease options. When you're calling For Sale by Owner and Lease Option ads, here are the three questions you should ask. (1) Are they motivated sellers (2) Are they buyers (3) Do they have any money By probing for answers to these three questions, you've tripled your rate of success with every call.

Does the Lease Option Sandwich Really Work

Theoretically, it can work. (Just make sure you protect yourself fully in the lease-option contracts you sign.) Robert Allen and James Lumley, for example, two well-known real estate investors and book authors, claim to have used this technique successfully to generate big profits with little or no cash. Personally, I wouldn't try it. For my taste, giving someone an option to buy a property that I don't yet own seems fraught with dangers. Nevertheless, in theory this technique can yield high returns. So, if you're interested in biting into a lease-option sandwich, read Lumley's 5 Magic Paths to Making a Fortune in Real Estate (New York John Wiley & Sons, 2000). Also, Peter Conti and David Finkel advocate this technique in their book Making Big Money Investing in Real Estate (Chicago Dearborn, 2002).

Lease Purchase Agreements

As a practical matter, the lease-purchase agreement works about the same as a lease option. However, instead of gaining the right to either accept or reject a propertythe lease-purchaser commits to buying it. As an investor,you can often persuade reluctant sellers to accept your lease-purchase offer, even though they may shy away from a lease option. The lease-purchase offer seems much more definite because you are saying that you will buy the property you would just like to defer closing until some future date (say, six months to five years more or less) that works for you and the sellers.

Find Extra Profit in Every Deal You Do

There is hidden profit for you in every lease option deal you put together. Most investors miss out on this extra profit simply because they do not have the specialized knowledge contained in this book. Let's say you have a four-year lease option on a house at a 200,000 option price. The loan balance at the time you sign up the deal is 175,000. Hence the seller had 25,000 in equity. This equity is calculated by taking the option price of 200,000 and subtracting the total amount of the money owed against it which, in this case, was 175,000. Why all this fuss over figuring out the seller's equity at the start of the deal Because when you resell the property to your tenant-buyer in three years, that 175,000 loan will no longer be that high. Depending on how old the loan is and a few other variables, the loan balance will be roughly 170,000. That means there is an extra 5,000 in this deal for someone It's up to you whether you give this to the seller or keep this money for yourself. It's...

Amount of the Earnest Money Deposit

The real firmness of either a lease-option or a lease-purchase contract lies in the amount of the up-front money the seller receives regardless of whether it's called an option fee or an earnest money deposit. If you want to really show a seller that you intend to complete a lease-option or a lease-purchase transaction, put a larger amount of cash on the table. By the same token, if you truly do want to keep your options open, negotiate the smallest walkaway fee that you can, even if it means conceding elsewhere in the agreement.

Turnaround Property

The solution master-lease the entire building and guarantee the owner a steady no-hassle monthly income. In return, you obtain the right to upgrade the building and manage the property to increase its net operating income (NOI). Generally, a master lease gives you possession of the property for a period of 3 to 15 years and an option to buy at a prearranged price. During the period of your lease, you would pocket the difference between what you pay to operate the property, including lease payments to the owner, and the amounts you collect from the individual tenants who live in each of the apartments. This technique resembles the lease-option sandwich that

Purchase Option Buying Strategy Two Equity Splits How to Partner Up with Your Seller

What do you do when you come across a seller who is motivated to do a lease option with you but is not quite motivated enough to give up on all the future appreciation of the property This is a perfect scenario in which to try using Strategy Two the equity split. An equity split is a way of doing a lease option with the seller of a property. But rather than giving the sellers a set price for their property down the road, you give them a set price plus a portion of your profits at the time you resell the property to a tenant-buyer. Here is an example of how this might work. You find a seller who owns a rental house, and he is open to selling it to you on a two-year lease option. But he's just not motivated enough to give you a longer term. You ask him, Mr. Seller, if there were a way we could get you your asking price of 180,000 plus a small percentage of the appreciation too in exchange for a bit more time, is this something you might be open to, or maybe not The seller scratches his...

The Hybrid Equity Split

The best way to understand the concept is to walk through an example of a deal we did with the owners of a two-bedroom, two-bath property. The sellers were motivated because the husband had been transferred in his job. When we met with them, we talked through doing an eight-year lease option on the property. Right at the very end they balked, and we pulled out this hybrid equity split idea to sweeten the deal just enough to close it. The terms of the lease option were as follows A term of eight years with a monthly rent of 913 and a purchase price of 102,000. The upfront option consideration we paid was 1. Now, most investors would structure their equity split as follows They would split with the seller on a 50-50 basis anything they as investors sold the property for over 102,000. For example, if they sold the property on a two-year rent-to-own basis for 120,000, they would give the seller the first 102,000 and split the remaining 18,000 profit 50-50. In other words, they would make...

One Final Benefit You Enjoy When You Get on the Title

One additional benefit you get when you buy the property subject to the existing financing (or with a big money cash close or with an owner carry, both of which are described later) is that you have the ability to offer the property with owner financing when you sell it. If you buy on a lease option you can either rent it, retail it, or sell it on a rent-to-own basis. If you own the property as opposed to having the option to purchase the property, then in addition to those three exit strategies, you can sell the property with owner financing using either a land contract or a wraparound mortgage. While selling with owner financing is beyond the scope of this book, the key point for you to understand is that when you sell with owner financing, you'll get typically three to five times as much money up front than when you sell on a rent-to-own basis (10 percent to 15 percent down versus 3 percent to 5 percent up front.) Also, you'll typically be able to mark up the monthly payment even...

Purchase Option Buying Strategy Four Big Money Cash Close How to Pay a Seller with Borrowed Money

How do you handle a seller who owns a property free and clear, has a strong motivation to sell, but who doesn't want to do a lease option or to carry back all the financing In other words, these sellers are willing to carry back some of the financing as long as they get a sizable chunk of their equity now. We turned around and sold the property to a tenant-buyer on a three-year rent-to-own basis for a price of 213,000 with 7,000 option money paid. All totaled, we'll have made over 28,000 on this one house.

Waiting and saving during redemption

In addition to buying them some time to explore options, if the homeowners can set aside the money they would normally be paying on the mortgage, they can sock away enough cash to pay a security deposit on a lease or to cover an option fee to purchase a more affordable property on a lease-option contract, as explained in Chapter 18. The problem with this option is that homeowners whose finances are already strained may not be able to actually set the money aside. I have seen situations in which homeowners were very successful with this strategy, so you should present it as an option.

Newspapers and Other Publications

As another way to use the newspaper, read through the houses for rent,condos for rent, and apartments for rent ads. Not only will this research help you gauge rent levels, often you'll see properties advertised as lease-option or for rent or sale.These kinds of ads generally indicate a flexible seller.

Assessing the homeowners credit health

The answers to these questions help you paint a financial portrait of the homeowners to assist you in determining the types of options you want to offer them. If the homeowners have a terrible credit history and not much promise of future income, you probably don't want to set them up with a lease-option contract or rental agreement, because that's like to set up them and you for future failure. If, however, the homeowners have experienced a temporary financial setback and have the resources in place to recover their footing, you may want to help them regain their footing.

Use the Two Chair Close to Lock Up the Deal

Let's walk through an example of how this works in the real world. Imagine you have just gotten the seller to agree to a five-year lease option on their house at a fair price and fair monthly rent. You know you can make money on the deal and want to make sure it stays closed. You have written up the deal with the seller, signed the agreement yourself, and now turn the agreement to the seller and hand him the pen. Here is what you do next

Get Agreement on the Concept Then Pin Down the Details

See how you got the seller to agree on the general concept of you making him a guaranteed monthly payment for a period of time and then cashing him out down the road. This descriptive statement could be describing a lease option, a subject to purchase, or even an owner-carry deal. When you get the seller to agree to the concept, then and only then do you move to pin down the deal to specific numbers. If you include all the numbers in your trial what if'offer, there is too much information that the seller might object to. Far better to introduce fewer variables into the negotiating equation to help you determine where you need to spend time working with the seller, where the seller is unwilling to go, and where the seller is happy to go.

The Difference between a Straight Real Estate Option and a Lease Option

First things first There is a world of difference between the straight or naked real estate options that I am writing about in this book and the rather ubiquitous lease-options that everyone and their brother has written about over the past 10 years. For starters, the real estate option agreement that I am writing about is a stand-alone document, which is not part of a lease agreement. Second, under the terms of a lease-option agreement, the lessee-optionee takes possession of the property under lease and is legally obligated to pay a monthly lease payment. The only payment required on a real estate option is a one-time option consideration fee. And unlike real estate options, lease-options violate the loan due-on-sale clause contained in residential mortgage or deed of trust loans. In other words, in the event that a lender discovers that a property owner has entered into a lease-option agreement, the lender could call the mortgage or deed of trust loan due and foreclose if the loan...

Seller Objection Four The Seller Wants a Large Down Payment

Here are two ways to handle this objection. The first is used when you are negotiating a lease option. Seller I'm willing to do this five-year lease option, but I'm going to need a down payment of 10,000 to do it. Cheryl later resold the property on a rent-to-own basis and made a nice cash flow from the spread between her payments and the rent for the place. She also sold it for 22,000 more than she paid for it. And the final part to the deal was that she also collected 5,000 option money from her tenant-buyer up front, so this was really a nothing-down deal for her.

How to Find subtenants for singleFamily Homes

If you're buying a property on a lease option basis and renting it out during the term of the lease option with the ultimate goal being that you want to live in that property yourself, you should take the long view. In our case, if we loved the area in which a property was located, and if we knew the area well and what the property was worth, we would buy it because the price wouldn't really matter 5 or 10 years from now if that was a place we wanted to live in. A lease option is a great way to invest in property like that. In 1990, Lisa bought a home in Fort Collins, Colorado, on a one-year lease option basis. The seller was a pilot for USAir. He needed to move to Pittsburgh for his job. He couldn't sell his property because the market in Fort Collins at that time was very weak. Lisa was moving from North Carolina to Fort Collins. Because that move would be a really big change, she wanted to see if she liked Fort Collins before settling there permanently. The neighborhood that she...

Internal Rate Of Return

Assume Investor Lincoln wants to add an additional space to a small retail strip center. Construction costs to add the space are estimated to be 100,000. As illustrated in Table 7.3, Lincoln has two choices. In Scenario 1, he can lease the space to Tenant A on a lease-option agreement for three years at a rate of 10,000 per year and then sell the space at the end of the three-year period for 110,000. In Scenario 2, he can lease the space to Tenant B on a lease option agreement for six years at a rate of 10,000 per year for the first three years and 12,500 for the next three years, then sell the space at the end of the six-year period for 120,000.

Issue 7 Know Your Options for Property Disposition

Lease Option Out If you are looking for a way to maximize your price, you can use the Lease Option Out strategy by finding a renter who wants to buy but cannot qualify for traditional lending. In the lease option contract, you can offer to apply some of the rent toward the purchase, agree on a higher-than-market rental rate, and negotiate the terms of the future sale at a precise point in time. With this approach, you should have a higher NOI and usually a higher sale price. If the renter does not exercise the purch-es option when the contract expires, you can do it again with the next renter. In a lease option or any sale you also can opt to be the lender. Many nonqualifying buyers will pay a premium in both price and interest rate because you are their last or only source of financing. If they default, you get to do it again, probably at a higher price. One of millionaire investor Bob Guest's best deals was on a lease option. The woman who leased his home for a...

Step Four Inspect the Property

Obviously, before you go through with your purchase of the property, you are going to want to take a close look at it. How close of a look will depend on the type of Purchase Option deal you have put together with the seller. For example, if you have a five-year lease option with the seller where they are responsible for any maintenance over 200 in any month, then you might not feel the need to spend 300 to 500 for a professional inspection. If you are buying the property using a big money cash close, you will definitely want to hire a reputable, professional property inspector to go through the entire property.

Investing in Mobile Home Parks

There are also investors who use a rent-to-own strategy, which is another way of buying mobile homes. For example, Lisa bought a mobile home for 2,000 and refurbished it for 500. She then sold it on a rent-to-own basis, whereby the tenant paid 450 a month for a five-year period, at the end of which the tenant owned the home outright. The people who typically buy mobile homes on a rent-to-own basis are on fixed incomes, and they prefer to own their home instead of renting it. Mobile homes provide housing for many people who have low incomes or

Its Up to You to Nahe It Happen

Spend an hour or two calling 10 For Rent ads.You're looking for people who are interested in lease optioning their property. If you make 10 calls and no one calls you back, make 10 more, and 10 more, until you have talked to at least two or three people. Leave messages with the rest, so that you can start to build your lease-option business. Record the responses and follow up. Lease Optioning, Part 2 i Lemember, you've focused on solving people's problems, but you have to make sure they have a problem first. With lease optioning, you're dealing with landlords and property managers who may be tired of the day-to-day hassles of taking care of the property. On Day 32, spend time carefully qualifying your prospects and making sure they can benefit from your lease-option offers. The following questions will guide your discussion.

Things to Look Out

On any property you lease option, protect yourself by taking care of the following issues So if you're lease optioning or getting owner's terms on a property, what's the best way to make sure those items are taken care of You pay them. You pay the mortgage, taxes, and insurance. Make sure your name or corporate identity is written on all of the paperwork.

Lesson 6 Pass the Maintenance onto Your Buyer and Seller

If something breaks and needs fixing in a house you either own outright or control with a lease option, who do you want to be responsible for organizing the repair and paying for it Obviously, anyone other than you Let's take the case of you lease optioning a house from a motivated seller. If you had bought the house outright and it needed an 800 repair, what would it cost you 800. But because you set up your contract as you learned to do in Chapter 2, how much of the 800 repair will you have to pay If you asked the seller, he would say that you are responsible for the first 200. But you passed on this amount to your tenant-buyer. In this way, you won't have to pay for any of the repair. Wouldn't you like to have this kind of home warranty on every house you buy

Issue 13 Minimize Your Tax Exposure

An out-of-town owner called me wanting to sell four properties. They were all in great condition, just needing a little paint and one new roof, and they were all fully occupied. But he had happened to get my postcard at the time he was trying to get the tenants out so he could sell them and do a 1031 exchange into an apartment building in Florida. So he told me that if I bought all four by the date he needed to sell, he'd take 90 of their value. I negotiated him down to 82 of what they were worth, and I bought them for basically no cash out of pocket. That is, I had two people in lease-option agreements who refinanced at about that time, so I used the 130,000 I got out of those two lower-end properties as down payments on four occupied properties worth 360,000. And it was a 1031 exchange, so I didn't pay taxes on anything.

Lesson 7 Quickly Record Your Agreement

Have you been wondering what keeps your motivated seller from backing out of your agreement and selling the property to another investor The simplest protection you have is to record your agreement with the seller (whether it be a lease option agreement or a purchase agreement) against the property. When you record your lease-option agreement or purchase agreement, you are telling the world all the details of your deal with the seller. You may not want to do that. Instead, you can record a document called a Memorandum of Agreement or Memorandum of Option (see Figure 4.2), which simply tells the world that you and the seller have entered into an agreement concerning that property and that any interested party should contact you at your address and phone number. Notice that the Memorandum of Agreement or Memorandum of Option does not spill the beans as to what your purchase option price is or other critical terms of your deal.

Lesson 8 If Youre Going to Have a Delayed Closing Escrow Your Closing Documents Up Front

A delayed closing is any closing that doesn't happen within 60 days to 90 days of the day the deal was signed up. For example, if you have lease optioned a house from a seller, you might not exercise your option for several years. In these cases, it makes sense to Here is a list of the most essential documents you will want to have signed and placed into escrow on any lease-option transaction you do We have found that at the closing which happens a few years after we have signed up a deal on a lease option, we actually use freshly signed documents. But we have also found that it is much easier to

Offering a Lease Option Agreement

When a buyer really wants to purchase a property but is not currently in the financial position to do so (whether they're the previous owners or some other buyers), you may consider offering them a lease-option agreement, as discussed in Chapter 9. Perhaps the buyers need more time to secure financing or fix something on their credit report, or they're waiting for an insurance check or some other payment. With a lease option, the buyers agree to rent the property from you for a fixed period with the option to purchase the property at the end of that period. Lease options are not always viable, but if the homeowners can come up with a down payment and provide some assurance that they will be receiving money or be able to qualify for financing in the specified time, a lease option enables you to establish some revenue flow while you're waiting to sell the property. I usually structure lease-option deals as follows Terms and conditions The agreement should spell out the lease term and...

Lesson 10 Remember to Recommit the Seller to the Deal

See how easy it was to set up this meeting. Bring a clipboard to the meeting and do three things First, have the seller help you list the top selling features of the house and area (while you could probably do this yourself, it makes sense to get the seller involved in the process and feel like a part of your team). Second, go through the property closely to see what work needs to be done to have the house show well. Many times, the seller will offer to fix and clean things at this point. Let them Third, place your Rent to Own sign or For Sale sign in the front yard. There is something so powerful about the seller making that little step to allow you to put out your sign. It is the seller making a public statement to the world that they are committed to the deal. I must admit I have been guilty of not following this advice. One five-bedroom house I had signed up as a five-year lease option cost me 75,000 I signed up the deal on a Monday night and didn't call the seller back for five...

Selling Your Properties for Top Dollar

The typical way you'll sell a house using the Purchase Option strategies is to sell it on a rent-to-own basis, which means you are going to sell the house on a lease option. A key point that you are going to learn is that when you sell a house on a rent-to-own basis, you will approach things very differently from when you buy a home on a lease option. You'll learn about important contract differences and negotiating attitudes when selling and buying. But first, we want you to see the real beauty of selling on a rent-to-own basis.

Recording in the Public Records

If you are writing up a lease option, lease purchase, contract-for-deed, or some other type of purchase offer that delays closing of title for, say, more than six months, make sure you can record the signed contract in the public records. This recording serves notice to the world that you hold rights in that property.

How to Turn Your Properties into Hands Off Money Makers

When you are selling your property on a rent-to-own basis, you simply find someone who is agreeing to rent out the house for a period of time typically one to three years with a set option price at which they can purchase the property at any point in time over the lease. For the privilege of tying in their purchase price, they will pay you a nonrefundable option payment of 3 percent to 5 percent of the value of the property. Because they have given you a chunk of money up front and because they are coming into the house with the intention of buying it, your typical tenant-buyers will treat the house much kinder than the typical renter. This lets you, the investor, relax and collect a check each month, pay your lender, or seller if you lease-optioned the house yourself, and just spend or invest the excess cash flow. If something breaks, your tenant-buyer is responsible for not only We typically set up our tenant-buyers to pay for all the maintenance responsibilities. After all, if they...

Is Up o You o Nahe I Happen

1 Ask property managers if they know people who would like to sell their property. Make it very clear that you're willing to still pay their management fees and commissions.You're looking for lease-option potentials and property that you can buy, fix up, and sell or buy and hold.

Why Tenant Buyers Mean Cash Flow

One of the biggest benefits you get by selling one of your properties on a rent-to-own basis is cash flow. For example, we had one three-bedroom property that was bringing us an 81 per month cash flow. Do you get excited over an 81 cash flow We already had 81 per month for 24 months. This totaled 1,944 in cash flow over the two years. See how that small monthly cash flow adds up. But wait, it gets even better. If you add in the 7,000 option money you get to keep along with the 1,944 of cash flow, you get a total of 8,944. When you divide this by the 24-month period we are talking about, you get 372.66 of cash flow each month. Do you get excited over this monthly cash flow Remember that this is money that you got mostly up front. And you didn't have to deal with the maintenance of the property. Now do you see why a sale on a rent-to-own basis means more cash flow And wait until we share with you later in this chapter about rent credits to boost your cash flow by a few hundred dollars...

The Three Magic Words to Find Your Tenant Buyer

Finding a tenant-buyer is fairly straightforward when you know the three magic words that grab their attention and clearly communicate what is in it for them. These words go bold and centered in your signs and at the start of any of the classified ads you run. These words are Rent to Own. Don't change them. Don't use lease with option to buy. Don't use lease option. Rent to Own works, don't change it. When someone sees your Rent to Own classified ad, they instantly know what it means. And what is more important, they know that they may want it. See Figure 5.1 for an example of our standard Rent to Own ad. We place this ad in the For Sale section of the newspaper. Note Some larger city newspapers have a separate Rent to Own section of the paper, e.g., San Diego Union Tribune. If your paper does have a special Rent to Own section, then that is where you should run your ad. The reason you place the ad in the For Sale section and not in the For Rent section is that you are looking for...

The Single Best Way to Find Your Tenant Buyer

For the front yard and corner lot of the street the house is on, we use a professionally made Rent to Own sign. These are fairly inexpensive (they'll cost you about 30 to 50 each) and can be created by any local sign shop in your area. Figure 5.2 has an example of this type of sign. Also, you can attach a weather-proof envelope to the sign in the yard containing copies of a flyer about the property stapled to a rent-to-own application with a fax number on the bottom. Each time you go to the property to show it to prospective buyers, you FIGURE 5.1 A Standard Rent to Own Ad Rent to Own Spacious 3 Bed, 2 Ba house. 30 Rent Credit. Great schools. 1,495 mo. 888-555-1212. 24 hr. rec. msg. FIGURE 5.2 Professional Rent to Own Signs for the Front Yard and the Corner Lot of the Street the House Is On

The Three Keys to Finding Your Tenant Buyer

When you put out your Rent to Own ads and signs the problem won't be too few calls, the problem will be too many. In most areas of the country, when you advertise your property on a rent-to-own basis, you will get between 20 and 40 calls per week on the property. Can you imagine the hassles of having all these calls come in This recorded message will have on it a scripted message 60 to 90 seconds long. Here is an example of this script that we used on a home we were selling on a rent-to-own basis Hello, here's your chance to quickly and easily rent to own your next home. There are no banks to qualify with. You don't even need perfect credit. This program was designed so that anyone can quickly and easily get in their own home right now. We even have a down payment assistance program. This scripted message does three things. First, it introduces the caller to the benefits of the rent-to-own program Your chance to quickly and easily rent-to-own your next One of our students, Gary, whom...

Selling as a leasetoown purchase

The typical lease option combines a standard lease with a separate contract giving the tenant a unilateral option to purchase the rental property during a limited period of time for a mutually agreed upon purchase price. The rental property owner has agreed to sell the property during a limited period of time however, the tenant isn't required to exercise the option. (For more on lease options, see Chapter 3.) Investors can use the lease option to increase cash flow and also sell their properties without paying the usual brokerage commissions. A lease option is really a real estate rental transaction combined with a potential sales transaction and financing technique. The seller can generate additional cash flow because a lease option generally consists of a monthly rental payment that's higher than the market rent, with a portion of the additional payment being applied to the option purchase price. Both parties can realize a savings on the brokerage commission because the transaction...

You Can Afford to Pay Rent

As if in an aside, if the owner would rent to you with your having an option to buy the property. If there is any sign or reaction from the owner that he or she would consider such a proposition, then proceed and make a direct offer. You can use any of the techniques that I have presented to you in this book. The likely best choice in this event would be exactly what you asked. Lease with an option to buy. Spell out the terms that work for you, but make sure you establish a purchase price before you sign the lease option deal. Once you have those terms, build into the transaction the right for you to begin to make improvements to the building paint, landscape, and so on. Your tactic here is to improve the value of the building so that when you exercise the option to buy you will be purchasing a more valuable building than when you started out. In essence, you have built up leasehold equity that the lender will recognize. In addition, oh yes, ask (in the purchase agreement) that all or...

Working through an example

Each lease option is unique, but here's an example of how a deal may be structured An investor owns a rental home with a current market rent of 1,000 per month and a current market value of 120,000. Real estate forecasts indicate that appreciation will be 4 percent, or approximately 5,000, in the next 12 months. The investor receives an additional cash flow of 200 per month. If the tenant exercises the option, the tenant receives a credit toward the down payment of 200 per month for each month that he paid the option fee. If the investor has used her standard lease form and the lease option documents are drafted properly, she still has the right to evict the tenant for nonpayment of rent or any other material lease default. Proceeding with caution HftNG Avoid long-term lease options. Real estate appreciation can be unpredictable. Don't provide a set option purchase price for any longer than one or two years, or include a clause that the purchase price will increase by an amount equal...

How to Make Sure Your Tenant Buyer Is a Renter Not a Buyer

First, make sure you separate out both halves of the transaction with your tenant-buyer. The first transaction is the lease the second transaction is the option to purchase. Use a separate lease and a separate option agreement with your tenant-buyer. Now, when you are buying on a lease option, you do not want to separate your lease and option but tie them in together. The opposite is true when you are selling, where you will use a prolandlord lease with all kinds of tough language in it to protect you. Also, your option agreement with your tenant-buyer will clearly spell out how your tenant has the option to purchase, not the obligation. An option is not an interest in real estate. It is merely a contract and as such the optionee, your tenant-buyer, has no claims to the title of your property. You use a stand-alone lease so that if you ever go into court to evict, you can show the judge a simple lease agreement without any option language in it to muddy the waters.

How Five Ordinary People Created Extraordinary Lives by Investing in Real Estate and How You Can

One recent lease-option deal Marcia negotiated was with a young couple who owned free and clear an immaculate brick, lakefront house. Marcia explains, I talked to them about a lease option. Just as Peter and David had taught me, I asked for a long-term deal of ten years. We ended up at seven years with 10 down and 550 a month in rent payments. The price was 139,000, which was market value. Marcia then marketed the house on a rent-to-own basis. She says, Because it was in great shape, I didn't have to do a single thing to fix or clean the property. I put out some signs, ran some ads, and within 30 days I had 10,000 from my tenant-buyer, who had a two-year rent to own at a price of 159,000. He faxed into our office the three-year lease option he had signed at about 10,000 to 15,000 below market value. He also estimated that it would take about 3,000 to replace the carpet and paint part of the inside of the house. He said he would do it with a buddy of his from work over the weekend....

Purchase Option Buying Strategy Five Owner Carry Financing How to Turn the Seller into Your Bank

The most well known creative buying strategy is to have the owner carry back all the financing. All the earlier Purchase Option buying strategies have in a sense some form of owner financing involved. Whether it be a lease option or an equity split or a subject to financing purchase or a big money cash close, the seller is helping in some way with the financing. Here is an example of how you can put together deals with straight owner financing. One of our students responded to a For Sale ad in her local paper. She talked to a nice man on the phone and set up an appointment to see a midpriced home in a quiet suburb. When she met him at the property, she found out that he wasn't actually the seller but was the attorney for the seller who lived out of state. They sat down and talked the purchase over and agreed on our student buying the house with 2,500 down with the owner carrying back a 30-year first mortgage at 8 percent interest. Originally, the attorney told our student she would...

Millionaire Real Estate Investors

Areas of Expertise Lease options subject-to acquisitions and VA foreclosures I do long-term lease option agreements, he says. I've created a transaction where the people moving into the house are basically buying it, but I get to treat it like a rental, so taxwise it's viewed as an investment, not a dealer property. Arlt, who got his real estate license in 1997, serves as the chief operations officer of the business he established with Burley, who serves as the president. When scouting deals, they look for a deal that will give them a 50 percent annual return on their net investment. Their main goal with lease options is to create cash flow. If I'm wrapping for cash flow, I want price and terms, Arlt says. And when I'm dealing with tenants on these lease options, I'm always skeptical and always prepare for the worst. It took a while to hone their buying and leasing formula, but they found a method that yields a solid return. For example, if they purchase a house for 70,000, they spend...

Our Bias in Real Estate Investing

Also, while we still have rental units in our portfolios, we do our best to sell most of the properties we buy to tenant-buyers on a rent-to-own basis so that we have occupants with an ownership mentality not a renter mentality. The difference is huge. Currently, approximately only 10 percent of our properties are traditional rentals. It seems like we have more hassles from these properties than from the other 90 percent combined So our bias is away from being a landlord and more on being like a banker receiving monthly payments from well-behaved tenant-buyers. In fact, we're even willing to give up some of the future appreciation to our tenant-buyers just so that we can, for long periods of time, turn our properties into hands-off income streams.

The Secret System

I'm sharing with you a secret system for becoming a successful real estate investor. It took me seven years to discover it. Most people do real estate backwards. They try to figure out what they're going to do with the property before they even have a property. But the secret is this First, find a motivated seller. It doesn't matter what you're going to do with the property (wholesale, fix and sell, lease option, rent). In every case, you have to find a good deal. Making money in real estate hinges on that. Second, analyze the deal. Third, once it's a deal, immediately control it by putting it under contract. Then, you have time to figure out how you'll use your deal to make money.

Control without Cash

Ideally, through this lease option you gain control of the property for two to five years. Your cash-out-of-pocket totals less than you probably would have paid in closing costs had you immediately bought and financed the property with a new mortgage. Next, you spend some money on spruce-up expenses (if desirable) and readvertise the property as a lease option. You find tenant-buyers and sign them up on a lease option with you as the lessor. Your tenant-buyers agree to pay you a higher monthly rental and a higher option price than you've negotiated for yourself in your role as lessee with the property owners. You profit from the markup in price and option money.

Find Their Pain

Say I'm calling on a potential lease-option deal. I'm trying to lease option the property from the landlord, so I'll ask her, What don't you like about the rental property She might say, I don't like collecting the rent, I'm tired of the repairs, and I never get any free time, I don't have the weekends off. I probe further If you didn't have the property and had some money, what would you do She might say, I'd love to travel, go fishing, spend more time with my family.

Cash Flow and Equity

If you want cash flow and equity, you have three options for building and attaining them Lease Option, Buy & Hold, and Buy, Improve, & Hold. In the game of cash flow and equity, an option that requires little or no money is the Lease Option. By the way, you can Lease Option In, Lease Option Out, or do both. Lease Option In is when you negotiate to lease a property from the seller (usually for two to five years) with the option to buy at the end of the period at a prenegotiated price. You may or may not have to put money down. As a part of your Lease Option con tract agreement, you've secured the right to lease this property to a lease-to-own buyer, and that's exactly what you do, except that you lease the property to a tenant for more than the original lease. The difference between the rent you collect and the lease payment you make is your cash flow. Any difference between the prenegotiated sales price and the market value at the end of the option period is your equity if you...

Negotiating Wrap Up

Also, it takes practice to put these new techniques into action. Repetition is the best way for you to internalize these negotiating attitudes and language patterns. The payoff is worth the time and effort to master these strategies. Over the years, our students have used them to buy, sell, and lease option over 100 million worth of real estate. They will work for you too.

Turn It Around

Once you lease a property with an option to buy it, you can turn around and rent-to-own it (or lease option it) to someone else for an even higher monthly payment. So, if you've lease optioned it for 1,000 a month and the market rent is 1,400, you can turn around and lease it for 1,400 and make 400 a month. If your option price to buy the property is 150,000 and the property is worth 180,000, at any time, you can sell it to someone for 180,000, exercise or use your option for 150,000, go to closing, and pick up your check for the difference of 30,000. Lease optioning is an excellent way to control property without all the borrowing or using credit. You can lease option the house you live in, a vacation home, or investment property. Also, when you lease option, part of the rent payment goes toward the purchase price every month. If you're paying 1,000 a month, you could perhaps negotiate 200 to 300 a month of that going toward the purchase price. So in a year, if you decide to buy it,...

Offer Your Program

To start building your lease optioning business, follow up For Rent ads, using the systems discussed earlier. See if you can find motivated landlords or property managers who might want to lease option the property or perhaps even sell it to you. Run the numbers with them to point out how little they are really making.

Rent Credit

When negotiating your lease option, ask for as much money in the form of rent credit as you possibly can. As an extreme example, the last lease option deal I did, I got 300 percent of my lease payment to credit toward the purchase price. My deal involved a high-end condominium in South Beach, Florida, with an asking rent of 3,000 a month. Here's the contract I worked out For the first year, every month that I pay the rent on time, I get three times that 9,000 each month as credit toward my down payment for the purchase of the condominium. So over 12 months, that 9,000 will add up to 108,000. You won't usually get 300 percent credit on your lease options, but why did it happen this time Because I asked for it. You should at least get 5 percent to 10 percent of your lease payment, 20 percent to 30 percent if you can, going toward the purchase price. Be sure to ask.

Repairs

The repair clause on your lease will stipulate that you, the buyer, will be responsible for the first 300 or 500 of repairs. You've sold the landlord on helping him get out of the repair business. This is how you do it. But you don't want to get stuck with doing the repairs yourself. When you turn around and lease option or rent-to-own to other people, they're going to be responsible for the repairs. You'll write that into their lease. Make sure to preapprove and prequalify them never skip that step.

Protecting Yourself

In your considerations, take into account that you've got to make sure you can rerent the property you lease option. Protect yourself by running an ad, calling on similar For Rent ads, and talking to market professionals to see what the market value actually is. Another way to reduce your risk in a lease option is to give yourself a 30-day contingency stated like this This lease option is contingent on my taking over the property and trying to put it on my program for 30 days. Then advertise it or talk to the real estate agents and managers to see if you can rent it. If no one calls you in 30 days, either exercise your contingency or renegotiate. How would you like to have had every property in your town lease optioned 10 years ago at the rents and prices 10 years ago, and have an 11-year lease option What's going to happen to property in your town in the next 5, 10, or 15 years In the real market, I have lease options at various terms for 1 year, 2 years, 3, 5, 10, and so on. Simply...

Cash Flow

So how do we, as real estate investors, fit in Find the owner who fits the picture and sign up a lease-option agreement wherein you are the tenant buyer. You are not going to live in the property but are still considered a master tenant. The lease-option agreement will give you the right to sublet the property. If the price you pay is lower than market rent, you can create cash flow by subletting the property to another tenant. Depending on the deal, this can create several hundred dollars per month of cash flow not bad for a property you don't even own

Option Money

How much option money or down payment money should you collect when you're lease optioning a property or selling it on owner's terms As much as possible. Consider this If someone doesn't have any money to put down, he or she probably won't be a good renter. Generally, you want at least two or three months of rental payment up front as option money. If the lease optioners don't have an extra two or three months cash, they'll probably fail to pay their rent on time. This means that if they get in trouble, you'll have a problem. You may be amazed whom you can attract to your lease option property. A lot of people who are self-employed don't think they have good credit, but they have a lot of cash. Some of them are willing to put a lot of money down because they want to park it somewhere. You solve their problem by lease optioning the property to them for one year. After one year, if they don't buy it, they lose their option money. They also lose their option money if they don't pay the...

Length of Lease

When I'm taking over a property, I want to control it for as long as possible. When I'm selling or lease optioning the property to someone else, I want to give that person as short a period as possible. I usually suggest one year, although it's even better to have only six months. Then, after one year, I have the right to renew the option, have them move, or let them buy the property. Then, I set up a second year. After the second year, I have the same rights. However, I don't think it's wise to lease option my property to someone for five years. Why would I do that if I don't have to If a great negotiator wanted to lease option a property for three years or more, I'd say, Great. But I'm going to put in automatic rent increases and have the property go to the full market value of an appraisal, and you've got to give me more option money every year. I suggest getting whatever you can negotiate for. Again, don't give things away that you don't have to. And if you're going to give them...

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