Real Estate Articles » Mortgages & Lending

Should You Do A Lease Option Or Sub 2?

By: Jason Hanson
Submitted: 06:31PM on Thursday 25 June 2009

Whenever I can, I prefer to do a subject-to deal. I only do a lease option deal as a last resort. I usually end up doing lease options with savvy landlords who don't want to give up ownership of the property (they want to keep all of the tax deductions).

Here are a few of the reasons why I like subject-to's better. First, I own the property. The deed is in my company name. Second, I get all of the tax deductions and benefits of owning the property. Third, I don't have to deal with any third parties or sellers because I own the house.

Here's why I want to do lease options last: Because you only control the property, you do not own it. This means you have to trust the owner and you will never do a lease option deal with someone who is in financial trouble. Of course, you don't simply trust the seller. You have your ironclad paperwork. You go to the courthouse and record a memorandum of option to cloud the title on the property (so they can't sell it behind your back). You ALWAYS make the mortgage payment directly to the company (because if you send the owner a check, and they don't pay the mortgage then you're screwed).

In some cases the monthly rent you're paying will be larger than the mortgage payment. Here's an actual deal of mine: I owe the owner $1,000 a month and his mortgage is $890. So, every month I pay the mortgage company $890 and then I send the owner a check for the difference of $110.

You will also want to run a credit check on the seller. Make sure he's not in debt up to his ears. And use an authorization to release form to check the monthly payments and mortgage balance. All of these items are so important because remember you're promising your tenant/buyer that they will have the option to own the home down the line. If your seller goes bankrupt, or puts liens against the property then you won't be able to sell to the tenant/buyer and you'll lose your backend payday of $30,000+.

Luckily, I have never had a problem with a lease option deal. All of the sellers I have worked with have been honest and very thankful for the help I gave them. In a way, this is just like screening a tenant……you screen the sellers up front that way you know your deals will close and you won't have any problems down the line.