If you cannot get a seller to deed you the property, another way to buy it is with a Lease Option, where you lease the property from the seller with the option to buy.

What Is A Lease Option?
A Lease Options is a “Rent To Own?arrangement, which is simply a lease where the tenant has the option to purchase the subject property. This tenant is commonly referred to as a “tenant/buyer?or as some investors like to call them, “Homeowners In Training?

The Lease Option agreement itself can be one agreement, or it can be a lease agreement with a separate option agreement. In Module 3, The Agreements Quadrant, we will cover these agreements in detail. Basically, Lease Options are another form of seller financing, similar to an Agreement For Deed.

Control Without Ownership
With a Lease Option, you as a buyer can control a property without actually owning it yet. The lease part of the agreement gives you the right to occupy the property. While the option part of the Lease Option gives you the right to buy. As part of the lease, many times a portion of the rent payment is credited towards the purchase price or down payment. This means that you are occupying the property, the seller cannot resell it to someone else, and a portion of your monthly payment is going towards what is owed on your option to buy.

Once you stand back and look at what you are getting as a tenant/buyer, there is very little difference between a Lease Option and a seller held mortgage or Agreement For Deed. In fact, Lease Options are so similar to a seller held mortgage that many banks consider it as an “installment sale?and will actually let you refinance.

There are several benefits to getting a refinance loan rather than a regular purchase loan. First, you don’t have to put a down payment down because down payments are made on purchase loans, not refinance loans. The purpose of any refinance loan is to take an existing debt and roll it into a new loan. As part of most refinance loans, you can also roll the closing costs into the balance. The same is true when refinancing a Lease Option.

This means that you can move into a property and make monthly payments (which are partially credited to the amount you are purchasing the property for), without being required to put money down or having your credit checked. You can later exercise your option to buy and refinance without being required to put up any money and your closing costs can even be included as part of the loan. This is why Lease Options are so popular among real estate investors for both buying property and for selling them.

Why Sellers Will Do A Lease Option
There are many reasons why a Seller would consider a Lease Option. Most homeowners don’t know the difference between a contract for deed and a Lease Option. But most are more familiar with the terms “Lease Option?or “Rent To Own? Because a seller is somewhat familiar with what a Rent To Own is, they are more apt to consider it as a solution to their problems.

Sellers Can Get Debt Relief
The key factor to getting most sellers to do a Lease Option is debt relief.

Your objective is to Lease Option the property for the amount owed on the mortgage and give the seller the debt relief they need. You are going to solve the seller’s problem by taking over the monthly payments, living in the house and maintaining it until you actually close the purchase of the house. In the meantime, the seller receives enough money to pay for their mortgage payment, taxes and insurance, and they no longer have to worry about maintaining the property.

Also, some sellers may need to correct their “debt to income?ratio when buying a new home. They may be moving to another home that they have already contracted to purchase, or they have built another home and are now faced with the prospect of having to make two mortgage payments. This may cause the seller to have a debt ratio problem when qualifying for their new home because they are still liable for the payments on their old home. When you as a buyer Lease Option the house from the seller, the lease payment they receive is considered income and this offsets the debt of the monthly payment on the old home. Thus, helping to correct the seller’s debt ratio problem.

No Due On Sale Clause Violation
Also, when structured properly, a Lease Option does not violate the due-on-sale clause on the sellers underlying mortgage. The fact that a Lease Option does not give rise to the due-on-sale clause, may be a determining factor for the seller to do the deal. It may also help you as the buyer feel more comfortable too.

If you Lease Option the house, the title does not transfer until after you exercise your option to buy; therefore, the bank cannot call the loan due. Many due-on-sale clauses do state that the seller cannot give a lease to someone for more than a two-year term. However, this does not mean that you can’t create a Lease Option with a term of one year where the tenant/buyer has the right to renew for nine times. In essence, you would have a ten-year Lease Option that does not violate the due-on-sale clause!

When To Lease Option A Property
It is important to know when to offer a Lease Option to a seller so that you don’t short change yourself. You should only offer to Lease Option a property when you cannot get the seller to deed you the property “Subject To? give you an Agreement For Deed, or give you a sales price so cheap that you can pay cash. The reason for this is that both taking a property “Subject To?and getting an Agreement For Deed, give you a much higher level of control and ownership than a Lease Option does.

You’ll also want to consider doing a Lease Option if the due-on-sale clause is a major concern to either yourself or the seller. If the seller truly cares about their credit, they most likely will not deed you the property “Subject To?and leave it up to you to make the payments on the mortgage. If they deed you the house and you don’t make the payments as you promised, it is going to show on their credit and not yours. This is where a Lease Option can save a deal.

What To Do With A Lease Option Deal
There are four things you can do with a property after you Lease Option it. You can keep it to live in, make it a permanent rental, sell it under a Lease Option, or retail it to a home buyer outright.

Keeping the house for you to live in, retailing the house and making the house a rental, are all pretty basic concepts to understand. However, when you get into sub-leasing the property to another tenant with the option to buy, things can get much more detailed.

Making Money With Sub-Lease Options
As part of your lease agreement you can have the right to sublease the property. This is commonly referred to as either a “Sub-Lease Option?or a “Sandwich Lease Option? This allows you to Lease Option a property and then sub lease it to your tenant. It is up to you whether or not you give your tenant an option to buy. You could keep the property as a regular rental or you could give the tenant an option to buy and eventually end up retailing the property for full value.

Don’t misunderstand the title of Lease Options though. This does not mean that you have to buy properties and rent them out to tenants and have the responsibilities of being a landlord. As you’ll learn in this course, Lease Options are a great alternative to regular rentals because you can eliminate almost all of the hassles that come with being a landlord.

Finance Terms Create Value
When you make it easy for a buyer to purchase a property, that property is worth more because of the terms under which you are selling it. A house is worth more because it has non-qualify seller financing than an identical house next door that requires you to qualify at a bank. It’s ironic though that most appraisers ignore financing when determining a properties value.

Properties that are for lease with an option have a higher perceived value by the tenant/buyer because they are getting the opportunity to lease a property, build up a down payment, and have an opportunity to buy the property without having to qualify.

Because of this, when you can create a no qualifying situation for a home buyer, you will have no problem selling the property fast. Not only that, by knowing how to structure deals, you’ll be able to get a higher sales price than you paid the seller and a higher down payment.

Get Up To Three Paydays
When you Sub-Lease Option the property to a tenant/buyer, you can make money at three different times. You get money today, monthly payments coming in every month, and money at a future date when the tenant/buyer refinances.

1. The Option Fee
Your first profit center is the option fee you get from your tenant/buyer because you’ll be getting a larger option fee from your buyer than what you gave the seller (if you gave the seller any to begin with). This is why you need to get into the property with the least amount of money as possible.

2. The Monthly Payment Spread
Your second way to make money is in the difference in the payment spread. When Lease Optioning from the seller, your objective is to buy the property for what is owed on the mortgage. However, when selling, you’ll want to sell the property for as much as you can.

Usually, rent payments on a house are more than what they are on a mortgage and of course, when selling, you’re going to charge what the rent rate would be or even higher. You can also add an extra $100 or $200 that will be due in addition to the rent that is credited towards the tenant/buyers down payment.

We did say earlier that a tenant/buyer could refinance a Lease Option and not have to put up a down payment. However, there is no guarantee that the tenant/buyer will qualify for a loan high enough to cover the full purchase price or that the bank they qualify with won’t require them to pay some type of money. This is where this money can come in handy. Also, this money will be non refundable. So if the tenant/buyer fails to exercise their option for any reason, the extra money above the regular lease payment would be extra income to you.

3. The Equity Spread
The third payday you get is when your tenant/buyer exercises their option and buys the property. At that time, you’ll collect the difference between your purchase price with the original seller and the sales price with your tenant/buyer.

If however, you bought the property from the seller at a high price and there is not much of a payday coming to you, you may hope that the tenant/buyer never exercises their option.

This how to article is an excerpt from the Real Estate Investing Quadrant Success System course.

 

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