Understanding the benefits of selling your properties using lease options

From Buyincomeproperties.com

Lease Purchase
Understanding the benefits of selling your properties using lease options
By Sean Flannagan
May 15, 2005, 11:26

During my early years as a real estate investor I heard the words lease option quite frequently. Upon further inspection I realized that the reason I was hearing the term so often was because the technique is one of the most powerful ways to sell a home. It is important to note that while selling on a lease option is probably the best way to sell in most situations, it probably should not be your first choice as far as creative buying techniques are concerned. The reason for this is simple...when you buy on a lease option you do not have full ownership of the subject property until the deed has changed hands. As you are probably aware, that does not happen until the original owner is paid in full. A much better way to buy is "subject to" an existing mortgage, which is a fascinating subject that will be addressed thoroughly in a future article. This article will deal with selling your property using the lease option technique. I will start by walking you through a typical lease option sale and then go into further detail on how to increase your monthly cash flow and back end profit using this powerful technique.

After I have acquired a new piece of property, whether it has been purchased subject to an existing mortgage, bought outright or I have entered into a lease with option to purchase with a seller, my single most favorite way to sell the property is on a lease option. There are many reasons I prefer this technique of selling over others. The first reason is that I retain ownership of the property while increasing my monthly cash flow without having to deal with minor maintenance issues. The second reason is that I know I will get a price higher than the current market value for the sale of the house and I will also receive a monthly payment that is higher than if I were to rent the house to a tenant. For discussion purposes, I will begin illustrating this technique with marketing the property and take you through moving the tenant/buyers into the home.

I prefer to run an occasional ad on a regular basis to locate potential tenant/buyers and build my buyers list. The advantage to doing this is that as soon as I get a new property I can send a simultaneous fax and/or email to the prospects on my list. Doing this usually gets the house occupied quickly with minimal effort. The standard ad should read something like the one below:

HOUSES FOR SALE
RENT TO OWN
Down Payment Assistance
(407) 555-1212

After placing the ad, my phone begins to ring. I recommend using a voice mail system to prequalify all callers. I explain on the voice mail that I often have houses available to purchase using my rent to own program. I continue to explain that I need them to leave there name, phone and fax numbers, email address and how much can they afford to put down and pay monthly. I also explain our wonderful down payment assistance program (which will be explained to you in the next paragraph). After collecting names and building a buyers list, I send each prospect a description of the house along with directions so they can take a look. I always have them look at the house by themselves because I do not want to waste my time showing houses to prospects all day. I would rather let them look themselves while I am out finding new deals. After they have seen the house, they contact me to discuss terms. At this point they have usually already mentally moved there furniture into the house and the kids have picked there bedrooms, so you are operating from a position of strength. The benefit to you from setting up your transactions this way is that you are working smart instead of hard and you can use the time you saved to locate new deals.

Now for the exciting part. This down payment assistance program can dramatically increase your monthly cash flow. The way the program works is simply any amount of money the tenant/buyer can afford to pay on a monthly basis beyond the minimum payment will be applied toward their down payment when they go to purchase the home. So for example, if I have a home that I am selling on a lease option and I need to get $800 per month to cover my underlying payment and give myself $150 per month positive cash flow, I will ask $800 per month with the added incentive that anything paid by the tenant/buyer over that amount will not only be applied to the down payment to be used at the time of purchase but my company will also match the amount that is paid over the minimum payment dollar for dollar with our money. It is important that you realize I am not actually using money out of my own pocket, but I will adjust the end purchase price to make it appear as if I am contributing funds on a monthly basis. I always make the end purchase price negotiable based on there down payment and monthly payment. For example, if I was asking $800 per month and the tenant/buyer elected to pay $1000 per month, I would raise the end purchase price by $2400. This is the amount that my company would have contributed had we been matching the extra $200 per month dollar for dollar. The beauty of this is that the tenant/buyer is actually getting a $400 per month credit toward a down payment should he exercise his option to purchase the home (on paper at least). The key to making this work, however, is making sure you do not commit to a purchase price until after working out the down payment assistance plan. This down payment program creates a win-win situation. The tenant/buyer is building a down payment which will make it easier to purchase the home and you have increased your monthly cash flow significantly.

Fortunately, or unfortunately, depending on how you view this, the tenant/buyer often will not exercise there option to purchase the house and you will get the house back. The good part of this is that you get to repeat the process, only with higher numbers this time. The downside, if there is one, is that you do not get your back end profit yet. However, no matter what happens, you will be in a good position.

In closing I would like to note that lease options are probably the most powerful and advantageous ways to sell a property. I have touched briefly on a few of the reasons why they are so powerful in this article, but this is only the tip of the iceberg. Selling on lease options is a topic many authors have written entire books on. They can not possibly be covered from A-Z in one article, but I hope I have at least sparked your interest enough to make you realize that this is a topic that can be used to generate HUGE profits!!

Thanks and happy investing!!