Whether you are a seasoned real estate investor or simply want to try your hand at it for the first time, you have an opportunity to take advantage of and create huge profits from the real estate bust as desperate property owners of top quality, pristine real estate compete to sell their properties against the glut of properties in various stages of foreclosures that are driving down the housing prices. With property sales steadily declining, and as banks continue to make it difficult for potential buyers to borrow for a mortgage, property owners seeking to sell their properties are ripe for making a deal in which you can negotiate favorable terms on a lease option deal.
What exactly is a lease option? A lease option (also known as a lease with an option to buy, lease-to-own and rent-to-own) is a lease combined with an option to purchase the property within a specified period, usually 3 years or less, at an agreed-upon price. The buyer pays a non-refundable upfront option fee, usually 1% to 5% of the price (this negotiable in today’s market and can be even less), which is credited against the purchase price. The buyer pays rent, and an additional amount of money (also negotiable) that is also credited to the purchase price. At the end of the option period, the buyer has the right to buy at the predetermined price. If the purchase option is not exercised, the buyer loses both the option fee and the additional premium.
The lease option offers property ownership opportunities to any interested buyer even if they’ve experienced a bankruptcy, foreclosure, divorce, have bad credit, no job history and have little or no money. During the option period, they have the opportunity to rebuild their credit and accumulate equity while creating income from the property. Some additional benefits include: equity accumulates much faster (five times or more) than with conventional financing through a bank or lender because of the way a traditional loan is amortized; option money and monthly payment are working towards the purchase (like buying a property on layaway); minimum cash out of pocket to take control of the property; increased buying power; no taxes and less liability; minimal maintenance; and privacy since your name will not be on the deed or in the public records until you exercise your option to buy.
Even though it seems costly, the right to not exercise the option is of value to buyers as well. It gives you the right to test drive a property without the commitment and cost of a traditional purchase. If there is something seriously wrong with the house, neighborhood, or neighbors, the money left behind on a lease option is much smaller than the cost of an outright purchase followed by a sale.
Although lease options can be used in any market, right now is a particularly good time to use this strategy. According to the Association of Progressive Rental Organizations, the rental industry’s trade association, the lease option business generates $4.4 billion in revenues for the industry, and serves nearly three million customers. It shows no signs of slowing down. In fact, all indications point to increased revenues for years to come.
Steps to a Successful Lease Option Deal
Step 1 - After assessing your available resources (available cash, credit, etc.), and regional trends (potential growth areas), choose a geographic location to specialize in.
Step 2 – Locate leads (For sale by owner is best) and qualify them by analyzing the numbers. It’s all about profit potential.
Step 3 – negotiate with the seller to determine the purchase price. You must delineate all terms of the purchase at the time you make the lease-option agreement. If property prices go down, you will have to choose between buying the property at the originally agreed-upon higher price and losing the option money.
Step 4 - Agree on the term of the lease. This will be the maximum length of time you want the opportunity to exercise your option to buy. You may be asked to put up option money - typically 1% to 5% of the purchase price paid to the seller - for the privilege of having the option to buy.
Step 5 - Determine how much you will pay for your monthly rent. (This is the amount a person would pay to simply rent the property.) Then add $250 to $1,000 per month to be applied toward the future down payment of the property. (This is not a requirement, but it helps you accumulate money for a down payment.) All option and additional rent monies paid to the seller are nonrefundable if you do not exercise the option to buy.
Step 6 - Agree upon terms regarding the exercise of the option, such as the escrow period and financing.
Step 7 - Determine who will pay for inspections, work and warranties when the time comes to complete the purchase.
Step 8 – Have your attorney review the lease-option contract.
Step 9 - Handle the transaction as a lease until you are ready to exercise the option.
Step 10 – Generate income from the property (by subletting, vacation rentals, government programs, etc.) to cover your costs.
Step 11- Exercise the option in writing.
What exactly is a lease option? A lease option (also known as a lease with an option to buy, lease-to-own and rent-to-own) is a lease combined with an option to purchase the property within a specified period, usually 3 years or less, at an agreed-upon price. The buyer pays a non-refundable upfront option fee, usually 1% to 5% of the price (this negotiable in today’s market and can be even less), which is credited against the purchase price. The buyer pays rent, and an additional amount of money (also negotiable) that is also credited to the purchase price. At the end of the option period, the buyer has the right to buy at the predetermined price. If the purchase option is not exercised, the buyer loses both the option fee and the additional premium.
The lease option offers property ownership opportunities to any interested buyer even if they’ve experienced a bankruptcy, foreclosure, divorce, have bad credit, no job history and have little or no money. During the option period, they have the opportunity to rebuild their credit and accumulate equity while creating income from the property. Some additional benefits include: equity accumulates much faster (five times or more) than with conventional financing through a bank or lender because of the way a traditional loan is amortized; option money and monthly payment are working towards the purchase (like buying a property on layaway); minimum cash out of pocket to take control of the property; increased buying power; no taxes and less liability; minimal maintenance; and privacy since your name will not be on the deed or in the public records until you exercise your option to buy.
Even though it seems costly, the right to not exercise the option is of value to buyers as well. It gives you the right to test drive a property without the commitment and cost of a traditional purchase. If there is something seriously wrong with the house, neighborhood, or neighbors, the money left behind on a lease option is much smaller than the cost of an outright purchase followed by a sale.
Although lease options can be used in any market, right now is a particularly good time to use this strategy. According to the Association of Progressive Rental Organizations, the rental industry’s trade association, the lease option business generates $4.4 billion in revenues for the industry, and serves nearly three million customers. It shows no signs of slowing down. In fact, all indications point to increased revenues for years to come.
Steps to a Successful Lease Option Deal
Step 1 - After assessing your available resources (available cash, credit, etc.), and regional trends (potential growth areas), choose a geographic location to specialize in.
Step 2 – Locate leads (For sale by owner is best) and qualify them by analyzing the numbers. It’s all about profit potential.
Step 3 – negotiate with the seller to determine the purchase price. You must delineate all terms of the purchase at the time you make the lease-option agreement. If property prices go down, you will have to choose between buying the property at the originally agreed-upon higher price and losing the option money.
Step 4 - Agree on the term of the lease. This will be the maximum length of time you want the opportunity to exercise your option to buy. You may be asked to put up option money - typically 1% to 5% of the purchase price paid to the seller - for the privilege of having the option to buy.
Step 5 - Determine how much you will pay for your monthly rent. (This is the amount a person would pay to simply rent the property.) Then add $250 to $1,000 per month to be applied toward the future down payment of the property. (This is not a requirement, but it helps you accumulate money for a down payment.) All option and additional rent monies paid to the seller are nonrefundable if you do not exercise the option to buy.
Step 6 - Agree upon terms regarding the exercise of the option, such as the escrow period and financing.
Step 7 - Determine who will pay for inspections, work and warranties when the time comes to complete the purchase.
Step 8 – Have your attorney review the lease-option contract.
Step 9 - Handle the transaction as a lease until you are ready to exercise the option.
Step 10 – Generate income from the property (by subletting, vacation rentals, government programs, etc.) to cover your costs.
Step 11- Exercise the option in writing.
