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Last Updated: May 14th, 2012 - 22:24:01 |
If you don＊t remember what a lease option is, a lease option when you are buying is you have the right to rent and to purchase the house at a set time at a set price. It is called a unilateral contract. In other words, you have the right, but not the obligation, to purchase this house.
Think of it in a different way then renting- think of it as a service. When you are approaching someone to lease option their house, you are performing a service for them. You are not looking for a house as a end user. When you approach someone just keep in mind you are helping someone who doesn＊t want the hassles of a renter.
When you are performing a service, you do not pay them money. I have done that before when I first started - but I don＊t do that any more at all. Most of your opposition from sellers, wanting a deposit, has to do with your attitude and how you approach them.
With a little self confidence the seller will see that you can handle it and that you are not begging to buy their house. You are helping them - in a sense - they should be paying you.
If someone asks me for some money down - I come at it from a different angle. Explaining that I am managing the tenant and responsible for up keep. I haven＊t had much opposition after that.
I will say something like "well... I won＊t charge you for my services - and we handle the tenant directly and take care of up keep."
After I have said this, very few will even mention me giving them a deposit or option money.
Even though I have done lease options, and still do a few lease options, buying on a lease option, to be perfectly honest, is not my favorite animal. I love to sell on a lease option, but buying on a lease option is a lot different.
What I do when I BUY on a lease option is I have one contract. It combines both the lease part and the option part - giving me the right to lease and the option to purchase. It is much different when I SELL on a lease option.
In order to buy this house, it has to be less than the contract I am writing with my tenant buyer. The difference, or the spread, is my income. Plus, the difference in the rental amounts from what I am paying the seller and what I am getting from my tenant buyer. It is mine to keep.
If I take on a lease option I want the selling price to me to be at least ten percent less than the market value - and then I bump up the price to my tenant buyer by another ten percent about the market value.
The tenant buyer is paying for terms - he should expect to pay more than the houses around him.
What I do is I find a tenant buyer. Now this tenant buyer IS going to pay an option amount down - I don't but they will. Remember they are the end user. I am responsible for the house - but they are the end user and so they should put money down.
So what I do - is I have two contracts for the tenant buyer. The first is just a standard rental agreement. And the second is the option agreement giving them the right to purchase the house at a set time at a set price.
In this option document I do specify that they are responsible for repairs. But you need to be realistic and know that if something big happens - your tenant may not be able to pay for this. If the roof starts leaking and your tenant doesn't fix it you are going to have to step in and fix it to protect your investment.
When you say they are going to do the repairs, it sounds good on paper, but in reality, there are times where you will have to step in. Also, there are some state and county rules that might make it your responsibility.
If the furnace goes belly up in winter - you can ask them to repair it - but you could be facing some housing enforcement groups if your tenants balk at it and don't want to.
You might be forced to fix it. If this happens, you can always tack the cost on to the end payment they owe you.
Of course, if they move out, you're kind of stuck.
I only bring this up to point out some of the complexities to lease options - and to warn you that even with lease options you could incur costs.
Let's get back the the example of the hundred thousand dollar house. I put it under contract to buy for ninety thousand and I'm selling it for one hundred and ten thousand to the tenant buyer.
So that is a twenty thousand dollar spread in there.
Maybe I'll charge the tenant nine hundred and I might pay the owner seven hundred.
As I see it, there are two down sides to buying on a lease option, and I'm not knocking it - I still do it once in a while.
I just think you need to take off the rose colored glasses if your are going to buy on lease option.
The first down fall is the extra attention. You have two groups of people to please. The seller and your tenant buyer.
I've had situations where the seller didn't like my tenant＊s dog, or didn't like all the cars they had on the property. Or maybe the tenant didn't keep the property as tidy as the seller wanted.
So it gets to be a pain to please both sides. But if you have the personality to handle it - go for it. What works for one person might not work for another and vis versa. For me though, I didn't particularly like that side of the business.
Now the next thing we need to talk about is the risk. Very important.
The big thing about buying with a lease option is you are at risk of the buyer jeopardizing the property through financial and legal mishaps on their part.
If they were to, say, get into a car accident and their insurance didn't cover all of it. They could in theory, lose their house.
Although, the biggest problem would be financial rather than a law suit. If they file bankruptcy and include the house in the proceeding, it could be divided up to pay creditors.
At that point you would have to have your lawyer involved and see if you can be included as one of the creditors or somehow have the house excluded - or who knows what else. Since I am not a lawyer, I don't know what the full ramifications of this would be.
What I have found, in most cases, the individuals who are willing to lease option their houses already have some financial trouble. Just be forewarned and don＊t make their problems yours.
Can you imagine the face on your tenant buyers when you tell them that you can＊t convey clear title and they can＊t have the house after they already lived there a year?
Not a pretty picture.
A bit of advice, when you are working with your lawyer on writing up the option part of the agreement, stipulate that if you are not able to convey a clean title that your tenant buyer is entitled to their option money back plus five hundred dollars.
I always put that in there just in case I get sued and the judge will look at this and say, see here 每 she was being reasonable. She told you she might not be able to convey a clear title and is offering an additional five hundred. I just put that in their so I look like a reasonable business person 每 not someone who is trying to take advantage of the tenant buyer.
There are some safe guards to take on lease options. You can put the property in a trust, which might prevent the property from having a lien attach to it before you sell it to your tenant buyer. The draw back to that is it is a little confusing to your seller and they might not agree to do so.
Another thing you can do, and it falls out of the scope of this tape, is to transfer title to your company＊s name. In this case it is not called a lease option, but a deed transfer.
One other thing you can do to safe guard the property 每 this is actually a safe guard against an unscrupulous seller. Something we didn＊t really talk about. If the seller gets antsy and starts feeling a little envious of your business deal earning you money 每 he or she can go behind your back to try and sell the house out from under you.
To prevent this, you can file what is called a "memorandum of agreement to sell", or "memorandum of agreement". It＊s called a lot of different thing by different people.
It＊s a one or two page document stating that you have the right to purchase the property.
In theory, this is supposed to cloud up the title and a title company won＊t want to insure the property. I say in theory. Because a funny thing happened just a few short months ago regarding this.
I had a house which I knew the seller was trying to sell out from under me. And sure enough, the escrow company called and asked me to remove my claim to the house. I refused and explained that I had the right to purchase the house.
I expected the deal on his end to fall through and that I would get a humble call from the seller.
I waited and waited, but no call came. So I finally checked with the county and sure enough- the sale went through.
So 每 like I said, in theory it should work 每 in practicality, it doesn＊t always work.
I know why the seller did it 每 he needed money. Could I sue him? You bet 每 and I＊m sure I＊d win, but since he has no money 每 what＊s the point.
There are two ways to sell on a lease option you are buying an a lease option 每 as a line item or as a simultaneous closing, also called a double closing.
In this example 每 you have the right to buy the house plus the right to sell the house. So as a line item, the escrow agents list all the expenses that the tenant buyer is incurring and you are just one of those items. You can see it listed on the lines of the hud 1, which is the break down sheet for closing.
In this instance, you will write a quick and short one page letter giving the right to your tenant buyer to purchase the house and the difference between your buying price and their purchase price is the amount that goes to you and is written on a line of the hud 1.
In the simultaneous closing, it is the easiest to understand. You buy it from the seller and then you sell it to the tenant buyer. In this type of closing, you have two closings. One with they seller and one with your tenant buyer.
You don＊t have to come up with the money yourself, the money is taken from the tenant buyer and used to pay the seller. That is why it is called a simultaneous closing 每 everything is done essentially at the same time.
The advantage to doing it this way 每 with the simultaneous closing 每 is that neither the seller or the tenant buyer know how much you are earning.
I generally use the line item approach though 每 it＊s less expensive in my state. In my state, the transfer fee is 1.78% so I prefer to do the line item.
Some people prefer to do the simultaneous closing because there is privacy 每 and they＊re afraid that either the seller or tenant buyer will back out when they see you are earning so much money.
If I thought one of them would be jealous or vindictive if they thought I was earning so much money 每 I probably would do simultaneous closing as well. Some people might balk if they saw you earning thirty thousand dollars.
Which, kind of gets me off on a tangent here on how much you should be earning. How much should you be earning on a lease options? You should be aiming 每 I aim for 每 twenty thousand dollars on a lease option 每 I won＊t touch one if I＊m not going to earn fifteen thousand.
It＊s just not worth my time. You may be willing to accept less 每 but like I said 每 buying on lease option isn＊t really my favorite thing to do 每 so I want to make sure I will get compensated relatively well before I＊ll walk into a deal.
It＊s, you know, double the work, so I want to get compensated for it. So I aim for twenty and will except fifteen thousand.
Even though buying on a lease option isn＊t my favorite thing 每 I do like selling on a lease option.
More free articles and resources on real estate investing at his online "Academy of Advanced Real Estate Investing Techniques" at www.AAREIT.com
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