BiggerPockets

Lease options are a valid way to make money with real estate, but they are no panacea. When you do a lease-option, you are really just renting the property, with all the same problems you have with normal tenants. Most lease-option buyers will never buy the property.

In addition, it can take a lot longer to find a lease-option tenant than a regular tenant. Basically what you're looking for is a person whose credit is bad enough that they can't get a normal mortgage, but that has a big pile of cash for the option premium. While you're waiting for this person to show up, you could have been renting the property.

I could go on and on, but suffice it to say that lease options are not any more profitable than simply renting.

Good Luck,

Mike

Lease options are one of my main focus areas right now in investing. Instead of rehabbing a property and putting it on the MLS and hoping someone will buy it, I rehab it, refinance it(pulling some cash out and my investment) and then look for a lease option tenant or a regular renter. Lease options are great because you can get some money down that is taken off their final purchase price, plus we usually charge full appraisal for the purchase price. The other thing we do with lease options is make the tenant responsible for repairs and all utilities if they were to own it themselves. Plus since the property manager's job is not as involved they charge a smaller fee.

We work with the tenant on their credit throughout their lease so as soon as they qualify for a mortgage we get them approved to purchase.

I think you will find that most lease options or even regular tenants will eventually purchase the property if you assist them with their credit.

I guess I should have been more specific with that. Its basically general maintenance that they are responsible for. I rehab everything I buy now, so when we put them into the property there should not be anything needed to be done, however things do come up. If its something that we did not take care of in the rehab or has broken since the rehab, or was not done right we take care of it.

I look at it on a case to case basis really, the tenant signs a contract stating that they are in charge of all maintenance, but then again their intention is to purchase the property anyway as soon as possible so most of them like the fact they can take care of their own home or soon to be home.

Lease options are a great way to make money. In CA however if you give them the option to buy you must abide by it no matter what. They have cracked down on some that decide not to sell.

When drafting one of these I have to be very aware of who I represent. If I am representing a buyer/Tenant, I want that tenant to have equity in the property. I want it to look like he is treating it as if he has a fee ownership in the property. If I can make it so the Buyer/Tenant looks like they have equity in the property- I have done my job. I will craft the language to say that within each monthly payment there is a contribution to the equity of the property.

If I am representing a Seller/Lessor I want to craft this transaction to make it clear that the tenant is not getting equity in the property== it will make it easier to evict the tenant. I will draft a lease and a separate option to purchase. I will make sure that the option price is high, and that it is NOT applied toward the purchase price. I will also not apply any portion of the monthly rent toward the purchase price. I will simpily advise my client to set the purchase price a little lower than normal to show appreciation for a good tenant. I will also segregate the damage deposit.

In NC the courts look to see if it walks like a duck, quacks like a duck, and swims like a duck.. if it does then the court will call it a duck...

I always advise my client to tell me what they want and then I make sure my documents will lead to that end.

This can be tricky and filled with traps for the unwary..

I want to craft this transaction to make it clear that the tenant is not getting equity in the property

Never let tenant pay taxes or insurance either, on a sandwich. Thats " equitable interest" , and you'll have to foreclose, instead of evict. Always get added as " additional insured" on the sellers fire insurance policy. If your tenant burns the place down, guess who they are going to point the finger at.

Can some of the more experienced investors please elaborate more on some of the important details of a lease option sandwich? I'm actually looking into doing one on one of the properties I'm looking at.

Well... I don't know that I consider myself an expert. But I do them...

I would say you should start off by reading the posts that are here on Bigger Pockets... You will find a lot of good info on how to get started...

And should you have any questions... Just ask away!

If you owned the property would you do owner financing or do you still prefer lease option?