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What Are Lease Options And Straight Options?

By: Omar Johnson
Submitted: 10:18AM on Wednesday 17 September 2008

An option is an agreement between a buyer and a seller that says the seller (optionor) WILL sell and the buyer(optionee) MAY buy a particular piece of real estate. An option gives the optionee marketable resale rights to the property and is typically used as a marketing agreement. An option is technically binding upon the optionor but not upon the optionee, though in practice the optionor will usually be released from the option in the event that he or she finds an end buyer before the optionee does.

Most states require a minimum option fee to be paid by the optionee to the optionor in order for the option to be enforceable. The basic idea in using an option is to secure the property for yourself at a good price so you can secure a buyer willing to pay you a higher price.

A lease option is simply a lease agreement executed in conjunction with an option agreement, granting the optionee the right to lease and perhaps to sublease the property as well as the option to purchase and resell the property at any time during the lease term. The basic idea with a lease option is to control the property so that you can sublease it to a tenant buyer for positive cash flow and eventually sell it for a profit.

Profit Centers in Lease Option Transactions

Your profit as the investor in a lease option transaction comes in three ways:

1) Up front profit, from the spread between non-refundable option fee paid to owner and that received from tenant buyer.

2) Monthly profit, from the spread between rent collected from tenant-buyer and rent paid to owner.

3) Back-end profit, from the spread between purchase price from seller and sales price to tenant buyer.

In a straight option scenario, the profit simply comes from the difference between your purchase price and your sales price, couldn't be simpler.

Advantages to the Investor, Seller, and Buyer of Lease Options

What does the seller get out of doing business with you?

If the seller doesn't have any needs filled, why should he or she do business with you? Understanding and being able to explain these benefits is key to being able to negotiate with sellers. The primary benefits to the seller are as follows:

-Debt relief - the monthly payments will be taken over.

-Freedom from property management concerns - the tenant buyer will deal with minor repairs and maintenance, and you will deal with the tenant buyer.

-The owner retains ownership until the property sells, and the tax benefits, such as depreciation, that go with it.

-The owner makes a profit when the property sells (assuming there is enough equity).

-The owner's credit is improved by payments being made on time and the loan eventually being paid off.

-The rental income from your lease will help seller qualify for new financing.

What does the buyer get out of doing business with you?

Similarly, you need to be able to show your buyers the clear advantages of doing business on your terms. Those advantages are:

-The buyer gets to live in the house right away, without qualifying for financing.

-The buyer gets to make installments towards the down payment.

-The buyer gets time and help to restore his or her credit rating.

-The buyer gets to try out the house and neighborhood before being committed to buying.

What are the advantages to you, the investor, of doing business this way?

And of course there are clear advantages to you the investor of doing business this way, which include:

-Three profit centers: up front profit, monthly cash flow, and back-end profit.

-Your profits are not taxable until the property is sold.

-You face minimal expenses, minimal risk, no credit exposure.

-There is an abundant market for buyers and sellers.

-You are not responsible for routine maintenance.

-You do not incur holding or closing costs.

-You can choose to deal only with nice houses in nice areas with quality sellers and buyers.

Advantages to the Investor and Seller of using Straight Options

What does the seller get out of doing business with you?

In a straight option scenario the seller benefits from working with you as well. The specific benefits to the seller in this scenario are:

-The house is aggressively marketed by a real estate professional.

-The seller incurs no expense and no risk.

-There are no tenants.

-The seller gets cash when the property sells.

-The seller gets the fastest sale possible.

What are the advantages to you of doing business this way?

Straight options are ideal for you the investor as well, for the following reasons:

-You have no expenses and no risk.

-There is no dealing with repairs or contractors.

-The higher-priced the homes the larger the profit potential.

-You get a great way to learn to sell to the retail market without any capital at risk.

-You incur no closing or holding costs.

-You are under no long-term commitment; it's safe to walk away at any time.

At 11:48PM on March 08, 2009 - Rocky Lawson said...

good nugets of wisdom.