Success Mentoring on Risks with Lease Options

When getting into creative real estate investing, investors must be coached on the good and bad of lease options if they want to use this strategy. 

What is a drawback with using a lease options as a business opportunity in your real estate strategies?  From the seller’s point of view, you could default.  You could have a tenant that doesn’t pay the mortgage and then you also don’t pay the mortgage.  In our real estate mentoring program we advise that a risk, and even in a home based business, you have to be able to honor a contract that you signed.  Before going into a lease option or lease purchase, make sure that you have a tenant that is qualified, that they have money that will pay the rent, that you also have option consideration and you probably kept some of that in escrow in the event that they don’t pay or they get evicted, or you should have reserves in cash or savings to pay that mortgage while it is empty.

Our mentees are taught that the risk in a lease option is that the seller might say, “You might not pay my mortgage and therefore you’re going to damage my credit.”  You are going to have to reassure them that you really don’t make money until your tenant purchases the property.  Sure, there is an option consideration you are making up front.  Sure, you are making money now each month in cash flow.  You essentially want to tell them that your big payday, most of the money made on a lease option is when you sell the property to the tenant when they’re ready to purchase, which is true.  You wouldn’t jeopardize that by having the loan go in foreclosure and getting the seller in trouble.

You’re telling them you’re not doing this just for fun.  You are doing it to be profitable.  Your service, in the meantime, is to get that buyer to purchase the property.  The money upfront, just call it a slush fund, in the event that something happens; you have it in escrow and you don’t spend it all because you can then pay the mortgage if the tenant doesn’t, for whatever reason.

Success can be an illusion if you may have a tenant that may damage the property.  They may get in there and, for whatever reason, they really mess up the property.  You’re responsible for that.  You have to make sure, once again; the key is, when you get a tenant in there, that they are really qualified.  That’s why you want to collect a lot of money up front in option consideration.  The adage goes, “The more you have at risk, the more you’re going to be tied to the deal.” This is not only true in many business opportunities from the investor standpoint but also with the client, your tenants.

A lot of times, people have left their houses; the value has gone upside down because they didn’t put any money down.  Imagine if each person put down 20-30% into a property; we wouldn’t have as many foreclosures.  They left the property because they have no skin into the game, except for their name on a loan. If tenants have a lot of money up front that they’ve given in option consideration, plus getting some nice rental credit each month, they have more to lose.  The key is; make sure you get a qualified tenant that has a lot of stake.  They will not damage the property and less of a chance for tenants to scam you and take you for a ride since there is accountability.

There are other risks involved in a lease option and lease purchase; yet, those risks are really risks that accompany any real estate purchase or transaction.  You can name it; house burning down, taxes going up, neighborhoods that go down in value, neighborhoods that go south because of the residents in the neighborhood.  Those things all relate to any type of property that you purchase.  On a lease option, those are the main drawbacks, yet, there is something you must consider; you want to look at the good, the bad, the neutral, and the ugly before doing any type of real estate transaction or business opportunity.  If you like more information on this and other strategies go to www.GuaranteeProfits.com