Lease options have benefits to buyers, sellers and investors. Buyers, for instance, can realize their dream of owning a home, and lease options can be a win-win for all involved. Investors can take control of properties for little to no out of pocket money. Here are 6 creative ways you can profit from lease options.
- Charge fee to connect buyer and seller – Many buyers cannot get bank financing and many sellers cannot sell or rent and a lease options is a perfect solution. Find sellers who will lease option their home, then market the property and bring in a lease option buyer. Charge a fee for creating this win-win situation.
- Sandwich lease option – Lease option a home from a seller, then lease option it with better terms to someone else and you keep the difference. You can get more down payment, higher option price, higher purchase price, etc.
- Lease Option assignment – Lease option a home from a seller, then assign the lease option contract to another buyer for a fee.
- Take control with a lease option, rehab then flip – Lease option a home from a seller, rehab then flip the property.
- Round Robin Auction – I marketed 2 properties for lease option using just the cross streets. The response was overwhelming. You can easily hold a one day open house, get bids then do a round robin auction to bid up the purchase price and terms. Just make sure it is still a win-win, the value must appraise for the buyer to execute the purchase contract.
- Referral fees – You can even get fees referring people to credit repair agencies, agents, lenders, property managers, etc.
If you are an active investor and have not considered lease options as a way to make money, you may want to. Remember to focus on a particular strategy and areas and become a master. Best of luck to all you investors!
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11 Comments
Good article. One thing to point out is that Lease Options statistically do not lead to an actual purchase of the property. Most of the time, the buyer does not take the necessary steps to clean up their credit and get approved for financing. I hear a lot about setting up lease option deals and profitting from them on the front end, but the real money is made on the back end if the tenant actually purchases the property. Figure out how to cash out your lease option buyers and you will have found the most profitable of all lease option tactics, the sale.
Right you are, I heard that 37% actually execute the purchase contract. It is wise to get a solid down payment and high option price so they do execute or you get to keep a lot of non refundable money and lease option or sell to someone else.
The best way to increase the likelihood of tenant executing the purchase contract is to put them in a credit repair program. Usually they do not know how to improve their credit so this way they have a plan and you can double the likelihood of them executing the purchase.
How do you put them in a credit repair program?
In California, I read lease options being executed was as low as 20% (most likely less than that because many L/O’s are not recorded).
The most important thing to do when drafting a lease option is to get a top notch attorney who really understands the ins and outs of lease options in your state. EVERY STATE IS DIFFERENT. In one state lease options are fine and a part of everyday real estate transaction life, in other states a lease option can land you in jail or close to one.
One of the best pieces of advice I’ve ever gotten on L/O’s is to keep the lease and the option separate. By keeping the lease and the option separate the tenant will have a harder time proving equity in the property (which is how most L/O end up in court).
Make the option contract one deal and the lease a completely separate deal. I know there are a lot of people who say to give the tenant rent credits or part of the payment to go toward their down payment but this only sets the tenant up for a claim of equity.
Instead have them write a separate check, preferrably to a separate company. This will go a long way to showing they have no equity in the property.
About getting the tenant to execute the option, I would say make it as easy as possible for them. Check their credit score when they move in and have a loan broker set up and waiting for them to raise their score. A good loan broker will be able to help them clean up their credit in a few months or have a number of sources to get them the loan quickly.
The worse thing you can do is move them into the property and wait until the last minute to try and get them to execute the sale. You have to get them into the mind set of getting it done now and not getting it done 12 months from now.
But this is just my .02 cents.
Hope it helps
Great comment Steve, much appreciated. I imagine that CA’s high priced homes have something to do with the low % of purchase contracts executed. The lower priced markets seem to me to be a much better fit for lease options. Much easier to get approved for 100K than 400K+ let alone come up with the down payment. Thanks again for the very helpful info.
Thank you Ryan for a well done article on my favorite crei niche! It seems to me to be the closest thing to a win-win-win scenario for all involved.
I have learned a lot from l/o specialist John Jackson here in the forum about l/o’s. He has systems in place that cause him to have about 95% in completing the lease purchase transaction.
It is always good to follow in the steps of experts with a proven track record for safety and success.
I look forward to more of your posts Ryan!
Ryan, thanks for breaking down the different ways to profit with lease options. Number 4 on the list stuck out to me the most. (Lease option a home from a seller, rehab then flip the property.) That sounds like the type of thing I would enjoy doing the most as my interest revolves around interior design. Being a young investor I know it will be difficult for me to obtain finances through a traditional bank, so it’s good to know there are a few options for people who are still trying to get started.
Could you please explain this one a little more please.
Charge fee to connect buyer and seller – Many buyers cannot get bank financing and many sellers cannot sell or rent and a lease options is a perfect solution. Find sellers who will lease option their home, then market the property and bring in a lease option buyer. Charge a fee for creating this win-win situation.
What is the difference between # 1 and # 3?
In both strategies your finding a buyer and seller and getting paid a fee right?
Awesome deatils and very insughtful – I am ready to jump. Looks like the water is just fine. Registered for Webinar