Last week I wrote a very detailed article on how I personally structure my lease option deals, including how much cash flow I get, how much option money I get from a tenant/buyer, and how much money I try and make when a tenant/buyer finally exercises their option.
This week I’m going to answer a few additional questions about when I do lease options. First off, I always tell a landlord that I am a private real estate investor and that my company helps people with less than perfect credit to achieve home ownership. And that we are going to be putting a family in the house who will hopefully own the house one day.
Then I continue to tell the landlord that throughout the lease term his rent is guaranteed by my company. That if for any reason the tenant we place in the house does not make a rent payment, it’s my problem because the landlord will get his rent no matter what.
Once you tell a landlord you will guarantee his rent…
And explain to him how you do it and also provide testimonials from past landlords (if you have them) then the deal pretty much closes itself as long as the landlord is sufficiently motivated.
Now, another question the landlord may ask is what are the chances that a tenant/buyer is going to end up buying the house? Well, when the market was hot, a lot of people ended up purchasing their houses. That’s because everyone who had a pulse could get financing.
But these days you’re lucky if you get 50% of your tenants to buy the house. (And this 50% includes people that you thoroughly screened. If you let just anyone live in your house you’d be lucky to get 10%.)
So let’s say you found a motivated landlord and you found a tenant/buyer…
How exactly do you structure the lease-option deal?
With the landlord I use a document called the “Residential Lease With Option to Purchase.” It’s basically a lease that states I also have the option to buy the house within 5 years. These days I always try and get a 5 year term to give myself plenty of time to sell the house.
I also have the landlord sign several other documents which are disclaimers to protect my behind. For the tenant/buyer I use a lease and then I use a separate option agreement. (Don’t combine the two.) And again, I have several documents which the tenant/buyer has to sign to protect myself.
For the tenant/buyer, I give them a 12 month lease and then if they’re close to buying the house or are still working towards it, I will of course extend the lease when the 12 months is up.
Also, one critically important thing about lease options so you don’t lose money at the beginning, is that when you sign the paperwork with a landlord do one of two things:
Either have the paperwork state you will not start paying him rent until you find a tenant for the property… or… have the paperwork state that you have 60 days before you have to make a rent payment. Obviously, go for option one first, but if the landlord isn’t quite motivated enough, then do the 60-day-time frame.
There are a million nuances of doing a lease option, so my advice is to find a local investor who’s closed several lease options in your area and have them teach you how to do it correctly.