Lease Options
Lease Options-Is it all the rage?
There are many people out there talking about lease options these days.
The idea is that you can offer a potential buyer the ability to lease (rent) your property, with the option of buying it at some point in the future. Typically the buyer signs a lease to rent, and an option contract that gives them the first right to buy the property usually one to two years later.
Another one of the benefits that many preach is the tenant buyer will have the pride of ownership as they will be buying the house in the future. This logic makes sense, however, this is not always the case.
There have been many investors “abusing” this strategy. This strategy looks good for the investor because the option payment can be anywhere from 1-3% of the purchase price of the home, and it is paid up front. If the tenant decides to exercise the option, then the option payment goes toward the purchase, but if the tenant does not exercise the option, the monies go to the investor. It is taught as an easy way to capture thousands up front, and then keep the monies when the tenant does not buy.
While the average 80% of lease options do not result in an actual purchase, a responsible investor should make sure that the person signing the option has a serious intent to buy the property in the future. The tenant usually has a credit issue preventing them from getting financing now, and a plan should be put in place in good faith to help the tenant improve their credit so they can really buy the house.
There is also a strategy known as a “sandwich lease option” that is taught. Basically the investor controls a property with a lease option from a motivated seller, then turns around and offers the same property to another tenant/buyer, effectively sandwiching themselves between the two lease options. The strategy works, but this would be considered an advanced strategy, as there are many potential problems that can come out of an arrangement like this. You as the investor sandwiched need to be very aware of the lease you have with the first party, making sure they honor their commitments and not over finance the property, as they hold title to the house. You also need to make sure you can find the owner at some point in the future when you choose to exercise your option. On the tenant side, you need to keep up and make sure the tenant is working on their ability to purchase in the future, as well make sure they pay their rent.
If you go into a lease option with the intent to work with your tenant/buyer to truly purchase the home in the future, and go into it with the mind set that this is a rental, with the upside of an extra infusion of cash up front, then a lease option can be a good strategy for you. Before you consider a “sandwich lease option” get specific training as it is high risk, and really, there are many other ways to get deals done with less complications!
Copyright RimfireWholesaleDeals.com
If you would like more information, tips, and offers, sign up for our email updates!