Real Estate Deal Analysis & Advice

Better Than BRRRR: Introducing the BRRRLO Model

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If you have been around BiggerPockets for any length of time, then you have most likely heard of the BRRRR method of investing (Buy, Rehab, Rent, Refinance, Repeat) that Brandon Turner conceptualized so well.

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I would like to state up front that this article in no way is meant to be disrespectful toward Brandon. I respect him a ton. However…

When it's coming up on 2020 and you're still rocking the real estate investing equivalent of the VCR (for the millennial generation, that is a machine that would play movies on large tapes), it's time for an upgrade. And this is your upgrade!

The BRRRR method of real estate investing was fantastic for its time. It was the epitome of investing with little to none of your own money, yet still quickly and efficiently growing a real estate portfolio.

So with such a great investing method, why change it or add to it? Simply because of man’s desire to create greater things… and this is the greater thing.

What Is BRRRLO?

The BRRRLO model uses the best of what the BRRRR method has to offer, then it cuts out the worst parts and adds on even better parts. Let me explain.

The “Buy, Rehab, Refinance, and Repeat” portions are fine. Let’s keep those. But the “Rent” part is lame!

Renting brings with it renters. And renters can be very lame! (I say can be rather than certainly are because some people who read this are renters. Maybe they are sensitive, and it will hurt their feelings to say it the other way.)

Renters tend to come with renter mentality, which can sound like, "Oops, did I do that? I wonder if the landlord will notice. I hope not." Or, "Mr. Landlord, I need you to call a plumber. Little Timmy got ahold of the baby wipes again and flushed the whole packet of them down the toilet this time. Now poop is coming up all the drains in the house."

miserable-new-investor

With the “It’s your house. Come fix it.” mentality, it can get pretty old being a landlord.

“But I don’t manage my own properties,” you say? That’s fine. But someone’s getting the calls, and someone’s getting the bills. And guess who that person is who’s getting the bills?

That’s right, you guessed it. In one way or another, the actions of renters can take cash out of the investor’s pockets.

How BRRRLO Differs From BRRRR

What if there was a way to stop renters from damming up our streams of cash flow? Well, there is. The answer is to stop renting to renters, and start renting to buyers.

In general, buyers tend to have a different mentality than renters. Buyers tend to want to keep their things nice because it’s theirs. Whereas, renters look at things as not theirs and therefore are less attached to your things and less sad when your things break.

How do you rent to buyers rather than renting to renters?

Related: 3 Strategies for Using a Lease Option to Invest in Real Estate Creatively

LO = Lease Option

This is where the LO of the BRRRLO model comes in. LO stands for Lease Option, baby! That's right: lease with an option to buy.

Lease options involve two separate contracts for two different purposes: the lease contract obviously explains the lease, while the separate option contract gives the tenant buyer an option to eventually buy the property.

Some people say that there is a third contract, which is the purchase contract. OK, fine. There is a purchase contract that eventually comes into play at the end.

How Is the Lease Structured?

So, how does this type of lease differ from a standard lease agreement? It is different in a few ways.

For one, this lease is usually at a price above market rents. In fact, it is quite a bit above market rent, because we charge a premium and we give discounts.

How does that work?

Well, we usually charge about $200 more than market rents on the lease agreement. This is because people who really want to own their own home but are unable to qualify for a bank loan are willing to pay a premium to get into a house they can someday own—one that the landlord isn't going to sell out from under them.

We go over the lease agreement with the potential tenant. If they see the amount and think it seems too high, then we go to section 15 of the lease, which outlines the volunteer nuisance repair clause option. This states that the tenant may perform landlord duties, such as specified repairs, maintenance tasks, alterations, and remodeling. By taking care of those minor repairs, the tenants can receive a $100 rent credit for the month.

However, the rent credit is only available to them if they are abiding by the lease agreement and paying the rent on time. Paying late takes that rent credit away and adds additional late charges. Needless to say, most of our tenants pay on time.

Wait, what if there is something majorly wrong with the property?

Paper house on cracked earth, crisis concept

Let’s say that there is a major problem with the roof or the plumbing. If the property has been rehabbed and a major problem is found within the option period, then we usually just come in and fix it. We would have fixed it in the first place if we had known about it. But because we didn’t live in the property and weren’t aware of the major flaw, we just take care of it as soon as we find out about it.

But this is usually only for major issues, such as flooring, plumbing, roofing, and electrical. Most minor things are taken care of by the tenants.

Another difference in the lease agreement is the length of time. Our leases usually go for a much longer timeframe than the average lease. These leases are written for three, four, or five years (whatever timeframe the option is written for).

How Is the Option Structured?

What about the option agreement? How is that written?

The option agreement gives the tenant the option to purchase the property within a certain time period for a certain price, as long as they are occupying the property. In the option agreement, the tenant buyer agrees to pay the closing costs. These are mostly just title transfer fees, since there are no Realtor commission fees.

What about a down payment or monthly credits? The option fee is not a down payment. It is simply a one-time fee that is collected up front that gives the optionor the right to buy the house for a specified price within a specified period of time. It is non-refundable, and does not in any way goes toward the purchase price.

What about monthly credits toward the paydown of the property? There are no monthly credits toward the paydown of the property.

Related: Rent to Own Homes: How to Profit from a Lease Purchase

With an option fee that doesn’t go toward a down payment to buy the property and no monthly credits toward the purchase, why would anyone want to do a lease option like this?

Well, I’ll tell you why. The type of person who would like to do an option like this would most likely be someone who is tired of moving around, they want to set down roots, and the only thing that is holding them back is that they cannot get a bank loan to purchase a property right now.

Instead of watching the market go up while they are repairing their credit, a tenant buyer can get into a house that they can customize for themselves sooner rather than later. They can lock in that price now (even though it might be a price that is higher than current market value), rather than wait and chance that the market may be much higher later on when they are finally ready to buy.

BRRRLO vs. BRRRR by the Numbers

What do the numbers look like for a BRRRLO? Are they really better than a BRRRR property? I’m glad you asked.

Here are the numbers for a BRRRLO property in Arizona compared to the traditional BRRRR method.

Address 905 Main St. 905 Main St.
BRRRLO Numbers BRRRR Numbers
Purchase Price $40,000  $40,000
Closing Costs, Carrying Costs, Hard Money $6,000  $6,000
Rehab Costs $45,000  $45,000
Property All-In $91,000  $91,000
Months From Purchase to Leased 5 5
Estimate ARV $125,000  $125,000
Bank Loan at 70% $87,500  $87,500
Appraisal, Doc Fee, and Closing Fees $2,000  $2,000
Our Portion Before Option Fee $5,500  $5,500
Option Fee $3,900 0
1st Month’s Rent $1,025  $925
Total Left in the Property (Original Investment) $575 $4,575
Cash Flow
Monthly Rent $1,025 $925
Long-Term Loan Payment (5% for 20 Years) -$575 -$575
Taxes -$50 -$50
Insurance -$50 -$50
Property Management $0 -$92.5
Repairs, CapEx, Turnover, Vacancy $0 -$92.5
Cash Flow $350 $65
ROI 730.43% 17.05%
Agreed Upon Sales Price $135,000 $0
Market Value (If Increased 3%/Year for 3 Years) $136,591 $136,591
Month to Exercise the Option 36 36
Total Outstanding on Loan $79,250 $79,250
Closing Costs $1,350 $0
Net Profit Upon Sale After 3 Years $54,400 $0
Total Cash Flow Throughout 3 Years $12,600 $2,340
Total Profit After 3 Years Minus Original Investment $66,425 -$2,235
Average ROI Each Year or IRR Over 3 Years 2310.43% -9.77%
Total Equity Left in the Property $0 $57,340.88

As you can see, after three years, the total collected in cash flow from the BRRRLO model was $12,600, while the BRRRR method created $2,340 in cash flow in the same time span. The higher cash flow numbers helps with the debt-to-income ratio, which ultimately helps get more loans for more properties.

Although the tenant buyer can exercise it at any time, all the math in this example is done as if they exercised it the last month of the option period. So, let’s just say that happened.

Now, you have $54,400 from the sale of the house. You can either take that $54,400 and pay the 15 percent long-term capital gains tax, which would leave you with $46,240, or you could 1031 exchange the whole $54,400 from the sale into a new property or a couple of new properties. It’s your choice.

brrrr-investing-strategy

Then, let's say you repeat the same process over the next three-year period, but this time you were able to do it with three houses from the proceeds of the first house. This allows you to triple your returns. And because you are able to get the majority of your money out of the deal, you now have about 4 times the amount or roughly $216K. This is after six years of doing four deals compared to $79,590 equity build-up in the first deal from the principal paydown and supposing the same 3 percent per year of appreciation.

But here is the main problem with the long-term hold strategy: Things start to wear out and break. Now the 10 percent held for maintenance, CapEx, turnover, and vacancy isn’t enough to cover a lot of the repairs. In fact, just one turnover could take up your total cash flow from one year to get the property up and running again.

Also, if you are planning on selling it in the future, the property (or at least parts of it) will probably need to be rehabbed again to get it ready to be sold.

What If the Tenant Backs Out of the Purchase Option?

But what if the tenant decides not to exercise the option to purchase the property? What then?

Well, to be honest, you then get the best of both worlds.

Let’s say the tenant is fully intending to purchase the property. They have been repairing their credit or getting closer to those coveted two years of self-employment tax returns they’ll need to qualify for the loan. Then out of the blue, they get a call about a new job opportunity in a different state that is exactly what they were hoping for. Or they get a call informing them that their mother is ill and needs help being taken care of. Whatever the circumstance, they need to walk away from the property instead of exercising the option.

In that case, the tenant doesn’t have to worry about getting the house ready to sell. They can just give their 30-day notice and move forward without any ties—without money and time spent trying to sell the house. The owner of the home would just get the property ready for the next tenant buyer. Bonus: It usually doesn’t take much to fix up because the first tenant who intended to buy likely took good care of it.

And the new $3,900 option fee should more than take care of the costs associated with getting the property ready for the new tenant buyer.

Now, I understand that the person following the BRRRR method could likely save up $4,600 for another property—or even do that several times over. There are a lot of variables in this comparison. And the BRRRR strategy is a really fantastic way to build wealth quicker than most traditional real estate investing strategies.

But this much I can say after doing the numbers, comparing the BRRRLO strategy to the BRRRR strategy: BRRRLO properties cash flow more, have less expenses, less turnover, less vacancy, take less time and effort to manage, and less money is left in them after the refinancing and receiving the option fee.

Simply put, the BRRRLO strategy, when done correctly, is easier to manage and provides greater returns.

I hope this new strategy helps you build your real estate empire in 2020.

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What do you think? Would you considering doing a BRRRLO? 

Let’s talk below in the comment section!

Shiloh Lundahl, LCSW, is a child and family therapist based out of Mesa, Arizona. When he is not providing therapy or teaching parenting classes he enjoys being with his wife and 5 kids in Burbank,...
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    Barry H. Investor from Scottsdale, AZ
    Replied 9 months ago
    SHILOH - This is a great article and I am glad you took the time to break down the positives / negatives. I agree with your assessment and I would add an optional "F" to your acronym for "Flip." Once you have a BRRRLO in place, another investor might be inclined to take advantage of the higher rent rate being paid by the tenant / optionee (is that a word?). I do foundation to roof remodels in Kansas City MO and I get above market rents because the homes are truly turn-key and the tenants pay electronically or direct from their paychecks. Investors purchase my turn key / tenant occupied homes with 20%++ annual ROI (even with loan costs). Though I have NOT considered Lease-Options (to date), I think I may start to do so in the future. Since the Investor/Buyer would be honoring the Lease-Option with the Tenant, then it should be feasible. Any additional commentary on that would be appreciated. :-)
    Alex Jones Rental Property Investor from Rochester, NY
    Replied 9 months ago
    Brilliant idea💡 and this article definitely given me an options to explore on my real estate office desk. I will try this concept for my first BRRRLO. Alex
    Dan Fulghum Flipper/Rehabber from Miami, FL
    Replied 9 months ago
    Shiloh, I enjoyed the details of your analysis. Great writeup. Thanks for sharing this. Maybe we can talk sometime!!
    Gordon Cuffe Investor from Roseville, CA
    Replied 9 months ago
    I like the lease option idea. My tenant in November put rocks, or nets from a fish tank in the toilet. Then the whole duplex starting backing up water into the house. Plumber goes out to the duplex and finds blockage from items tenants put down toilet and charges $1400.0 . Who puts items down a toilet like that? dumb tenants. so now we increased the rents by $100.0 per month to offset $1400.0 cost. At least rent to own buyers with a down payment have skin in the game.
    Mike Dmuchoski Flipper/Rehabber from Mesa, AZ
    Replied 9 months ago
    Great article, Shiloh. Very interesting perspective. I'm wondering how the marketing for LO tenants might be different vs traditional renters. What has been your experience?
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    We market our lease options on the MLS because it has the most reach. We market it under the "for rent" category. Here is an example of the words we may say to market it, "LEASE WITH THE OPTION TO BUY ONLY''. Not available for normal rent. Bad credit ok, Income qualification 3 times monthly rent. Lease option for $3900 down. Partially rehabbed fixer upper ready for finishing touches! Nice sized living room and kitchen. Good sized backyard. New paint and new AC unit!
    Roldan J Crespo Pabon from Bayamon, Puerto Rico
    Replied 9 months ago
    I would also have a good articulated line to pitch in LO to any potential tenant that perhaps haven't consider; hence to trigger their interest. The whole BRRRLO definitely got my attention, well done and thanks for presenting it with such a clear framework.
    Jon Dark
    Replied 9 months ago
    This is great stuff, really addressed my issues with being a landlord! There's really something for everyone in real estate!
    Katie Rogers from Santa Barbara, California
    Replied 9 months ago
    It is a mistake to assume that every tenant who would like a lease option has credit problems, doesn't have a down payment saved up, or is otherwise in any way financially irresponsible or disadvantaged. Maybe they would simply like to cut out the middlemen of real estate agents and lenders. Maybe they feel that since they will have to pay interest anyway, better to pay it to a person than a bank. Even if the tenant has a financial issue, that issue should not be used to take advantage of the tenant by subjecting the tenant to a nonrefundable option deposit, or higher rent. Supposedly, the higher rent is a kind of forced savings for the down payment. The lease should not be longer either. No one knows the future. Your version of a lease option is all kinds of financial risks and traps for the tenant, especially one assumed to already be financially disadvantaged. Each tenant should be considered an individual rather than interacting with a stereotype.
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    Katie, Not all people would would be interested in a lease option have credit problems. That is true. However, most of the people that are looking to get into a property that have good credit and that have the money to buy a house usually either buy or rent if they are not sure if they will be in the area permanently. But the people we work with usually want to buy but can not because of credit issues or lack of length of time running a new business. These lease options are really geared towards them. You say that even if a tenant has financial issues, they should not be taken advantage of and be subjected to higher rent. Have you ever purchased a car from a dealership and noticed the differences in payments for those who have good credit and those who have bad credit? Why do you think those with lower credit pay higher payments? Also, are you familiar with how options work in the stock market? If you buy a call option or a put option which gives you the right to buy a stock at a specific price, would you expect to get your option money back if you decided later that you no longer wanted to buy the stock? No rents go towards a forced savings account for the tenant. They are two separate contracts. One is a lease contract just like any other lease contract. The other is an option contract. If they do not like the set up they may lease from someone else or buy from someone else. This isn't a forced situation and they are several other options for renters/buyers out there. This is completely voluntary. Again, if someone doesn't like it, they don't have to do it. No one knows the future. That is correct. So lets look at the possibilities for the future. Let's say that the current value of the home is 100k and they can buy it in 3 years for 110k for a 4k fee. Here are some possible scenarios in 3 years: Value is 120k - the tenant is able to walk into 10k equity. Value is 110k - the tenant is able to buy the property at market value. Value is 100k - the tenant may decide to buy the property for 10k over market value because they really love the house and want the house to be their home or the tenant may decide that they want to move. Value is 90k - the tenant may not want to purchase the house because it is less then the market value. They may decide to move. They do not have to pay closing costs of trying to sell in addition to selling the house for 10k less than what they purchased it for. If they had purchased the house they would have lost more like 19k. By doing the lease option, they limited their loss by the 4k option fee.
    Shea Spinelli Rental Property Investor from Tyler, TX
    Replied 9 months ago
    This was a great read! I’m going to look into implementing this! Thank you!
    Gil Segev
    Replied 9 months ago
    First of all - I love the idea! Very smart! Isn't there a potential issue when refinancing the property (the "Bank Loan at 70% 87,500$" in the table above) when the property is already under a lease to own contract?
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    Gil, No, there is no issue with this (at lease not in Arizona) because I own the property. The deed stays in my name (or the name of my business) and doesn't transfer to the tenant until after they purchase it. I have had no issues getting loans on these properties.
    Beth Rosenblum Investor from Monterey, CA
    Replied 9 months ago
    Good question!
    Tyler F. Weith from Cincinnati, Ohio
    Replied 9 months ago
    The only thing I'm confused about is why the BRRRR is compared to the BRRLO when the BRRLO is being sold? It fails to consider the future revenue of the BRRRR into the future and what if you sold the BRRRR at the same time as the BRRLO, without a leasing option? These numbers would certainly look different. In other words, you're comparing the BRRLO numbers at the end of the road for that property against the BRRRR which is still going to generate income and could certainly be put on the market...
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    Tyler, When comparing the BRRRR and the BRRRLO model, I decided to see what the difference would be at the time the BRRRLO had the option exercised. If you were to sell the BRRRR at the same time, you would likely incur the following costs: Sales Price $136,591, Realtor commissions $8200, Title fees $1370, Concessions (lets say 2%) $2740, Minus original investment of $4575 plus $2235 from cash flow, Minus mortgage of $79,250, Total profit would be $42,796 compared to the $66,475 total profit of the BRRRLO model. By keeping the BRRRR you would get future cash flow that's true. However, the assumption is that you take the profits from the BRRRLO model and you purchase another property and repeat the same process. By continuing to role profits into future properties, the total profit continues to grow at a much faster rate than the BRRRR method.
    San Eng Rental Property Investor
    Replied 9 months ago
    Hi Tyler, I’ve the same question as you, also curious from author/others what % of tenants want the lease options - is thing a thing? For every 10 potential tenants do we get 1-2 that’d consider or more/less? Thank you
    Jay Gros from Frederick, Maryland
    Replied 9 months ago
    Love this idea and I have pitched it to a couple investor clients of mine. I would be hard to quantify the number or % of potential renters who would be interested. I will say that from a realtor's view point, lease/options are usually frowned upon because it complicates the process, requires a lot of work, and may not come to a successful outcome (ie. commission check). That being said, I speak to many potential buyers and renters who ask about the lease/option potential. I like the way Shiloh explained the option fee and the premium rent amount. There is a general understanding that a portion of the rent would go towards the eventual down payment but if marketed correctly, you can eliminate notion from the start. Not sure how it would work for potential tenants who a represented by an agent. When I've done a lease option in the past, there was a clause in the option contract that would pay the realtors commission when the option was exercised. Putting the listing on the MLS does increase it's exposure to all other sites as well but you may have to limit the potential tenants to those who come unrepresented by another agent which of course they would have to agree to as well due to agency considerations. Somewhere in there a buy/sell commission may have to be paid.
    Katie Rogers from Santa Barbara, California
    Replied 9 months ago
    It is hard to say what percentage of tenants would be interested in a lease option because most tenants (as well as landlords) are totally unaware that Lease Option is even a possibility.
    Melanie Hartmann Flipper/Rehabber from Baltimore, MD
    Replied 9 months ago
    Love this! We'll be looking into doing this for our rehabs later this year or in 2021! It's an excellent idea and the ROI is so much greater! And capital gains taxes are less! Wins all around!!
    Abolaji Olatoki
    Replied 9 months ago
    I enjoyed every details in the write up, i do hope to implement this soon.. Great Article!!!
    Ana M. New to Real Estate from Indianapolis, IN
    Replied 9 months ago
    This is a great idea! Its definitely something to consider for my first property.
    Tracey Callison from Durham, NC
    Replied 9 months ago
    In NC, I believe that the investor needs to own the property outright (by closing) in order to sell it to the lessor (ie no mortgage). How would that work? Hard money? That would detract from the payout.
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    This is not a sandwich lease option. According to the things I have read on lease options in North Carolina, the optionor may have a mortgage on the property, however, if the optionor defaults on that mortgage, then the optionee may be all of the money they have paid to the optionor. And a bunch of other things may happen as well. So don't default.
    Daniel Kidd Rental Property Investor from Fayetteville, NC
    Replied 9 months ago
    Did someone just use fear of tenants against people on bigger pockets and they all ate it up?! Solid write up, it’s just not a new idea...at all. I’ll bet a flip shows better returns than a brrrr in three years as well.... love the cool name though. Don’t take AirBRRRR or turn n BRRRRn though. Those are mine ;)
    John Murray from Portland, Oregon
    Replied 9 months ago
    I charge $5K up front for my LO. I avoid the IRS installment purchase clause and safe harbor with no funds paying down the principle. This way depreciation continues. If repairs are needed the minimum is $1000 threshold other than that the buyer pays. I always enter a LO with a journey level skills person and never to a low skill person. The term is a minimum of 1 year and maximum of 2 years. I will renegotiate if the property does not close in the time frame. Pretty easy and no commissions payed to brokers.
    AMBER HOLCOMBE Rental Property Investor from Canton, GA
    Replied 4 months ago
    Hi John, I have a rental that I may use for LO. I like your strategy. Would you be willing to share a copy of your lease agreement with me?
    Mat O'Grady Investor from North Stonington, CT
    Replied 9 months ago
    Hey John, Just wondering what your conversion rate is. How many people don't go through with a purchase?
    James Gregory Rental Property Investor from Columbus, Ohio
    Replied 9 months ago
    Thanks John for sharing this specific and helpful context. It sounds like you've found win-win success with this.
    Lewis Christman Financial Advisor from Macungie, PA
    Replied 9 months ago
    1 this assumes the prices keep going up. What if they go down? Granted if I entered into it the seller gets the benefit of the deal however I struggle to understand why someone would pay a one time option price, an extra 200 a month, risk the market moving (up or down) and be responsible for maintenance. If I'm paying extra I would expect the landlord to jump.
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    Lewis, Buying a primary house for most people is not a logical decision. It is an emotional decision. They are not just buying a house, they are buying what the house represents. They are buying the memories that they will get in the home. They are buying the feeling of owning verses renting. They are buying the feeling of security knowing that they are living in the home that they want to live in where the land lord isn't going to tell them to leave and where they can customize it to their liking. That is what they get for the above market payments of 100 a month and the option fee. Within the last 2 years, all of my friends bought new houses for their families. I tried to encourage them to buy in such a way that they would be able to create equity by buying a specific house or by buying the house a certain way but none of my friends did it. They all bought at market value. Why? Because they bought emotionally.
    Kim Surrency Rental Property Investor from Jacksonville, FL
    Replied 9 months ago
    Shiloh, This is a great article. I was just running numbers on our BRRRS very similar to your example and wondering if I could do this. It would give me the option out of the property as well as I am closer to that retirement window than some of the younger folks here. My question has been and maybe you can speak to it. How do you find these LO buyers? I have actually worked with an attorney to come up with a strategy similar to your example but I don’t know where to market the option.
    Brent Parsons
    Replied 9 months ago
    Love it..and I love the massive ROI with both BRRRR and BRRRRLO.. I considered doing something similar on 4 single family purchases I made in Phila last year. I’ve been recycling my money with literally nothing out of pocket all said and done. Instead of 20yr loans I’ve been placing 10 & 15 yr notes between 4-4.625% and still able to create 200-350/mth in pre maintenance cash flow on them. Thank you for the information and examples! I have 2 offers out right now and might do this.
    Pete Abilla Investor from Salt Lake City, UT
    Replied 9 months ago
    Excellent article Shiloh. Do you have lease option docs you could share that you use in your deals?
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    I don't have docs that I openly share because I didn't create the docs. I purchased them from John Burley who is the lease option guru in Arizona. He had his lawyers create the docs and I purchased them from him.
    Edin Mujanovic from Fort Lauderdale
    Replied 9 months ago
    Im new to real estate. What considerations are there in different states when looking to do the lease option? would by-passing an agent and finding a buyer on your own put someone in jeopardy, like in certain states, and be considered doing real estate without a license? where would be the best place to go to find more information on lease options?
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    We have found some people directly without a realtor. But it just so happens that my partner is a realtor and he does the proper paperwork such as the SPDS which tell the tenants if there is anything wrong with the property that we are aware of.
    Vince Wayda from Oconomowoc, WI
    Replied 9 months ago
    Great article Shiloh. I too have some of the same questions such as Edin Mujanovic and Pete Abilla. Also I would like to know how you market lease options?
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    We market the lease options in the rent section of the MLS. That gets sent out to a ton of websites and gives us great exposure.
    EMMANNUEL CHRISTOPHER from MERRILLVILLE, IN
    Replied 9 months ago
    Ron LeGrand on You tube is the Guru on LTOs/RTOs. He has covered this approach in the most direct & comprehensive form for many years. I was burned on my 1st deal as a RTO renter in 2012, when the Landlord lied to me that he was paying taxes when he wasn't. Bottom line, the property ended up on tax delinquent sale. Lesson Learned: #1) Make sure the property's Title/Deed is placed in Escrow when you sign the contract. #2) Go to the County Recorder's Office to record your interest in the property. #3) Check frequently when taxes are due to make sure it is being paid regardless of what the owner says. Trust but verify!!! Caveat: Buyer Beware. Some of these LTO deals are notorious for scams, especially in poor neighborhoods. FACT: Most tenants do not end up buying the houses, and forfeit their payments, Option fees, etc. So the owners simply keep all the money, and repeat the cycle. Maybe 1-2 renters out of 5 will close the deal.
    Lana Osborne
    Replied 9 months ago
    I agree with Christopher. i had a rent to own contract with a builder in Florida who went was bankrupt after the Real Estate Crash. He has a solid business before the crash and had built many nice homes so I decided to honor the commitment i made to him. I paid on time every month , faithfully. All repairs and maintenance was done performed or paid for by me . After the real market improved , he proceeded to take my $5000 deposit, fire the property management company contacted to manage my payments and attempted to evict me after the house was damaged after Hurricane Irma and I refused to pay an extra $250 per month. The house was uninhabitable due to mold and water damage however local rents increased due to demand . I am aware many potential landlords may read this article and consider the huge profits they may gain by offering prospective tenants Rent to Own options. As the previous writer mentioned Buyer Beware. i will add Landlord be Fair.
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    Lana and Emmannuel, I'm sorry to hear about your poor experiences with these types of deals. When we initiate a lease option, we fully intend to have the optionee exercise the option. It is fine if they don't but our business model is set up to where they do. We also can help connect them with lenders who can help them get ready to exercise the option before it expires.
    EMMANNUEL CHRISTOPHER from MERRILLVILLE, IN
    Replied 9 months ago
    In my case, I did offer the owner to pay off the taxes if he gave me the title. I had already paid for the house in full, yet he declined multiple times during the redemption period, which is why I recommend the Title be placed in escrow when the contract is executed. Checking County Records, he actually did own the property with his wife, and lived across the street from me on the block. This was in Gary, Indiana, where this scam is prevalent, as well as in many poor inner city areas. I have also seen it in a few suburban affluent areas as well. People selling houses they don't own, taking money, and disappearing.
    Jake Thornton from Los Angeles, CA
    Replied 9 months ago
    I really enjoyed this read and it’s absolutely something I’m considering doing this year. Another great strategy to consider.
    Zack Thiesen Contractor from Eureka, CA
    Replied 9 months ago
    Great article. I don't quite understand how you would refi if the property is on the ownership track with a 3rd party, but it's likely I just missed something? Only read it through once. Thanks for the idea!
    John Barnes Flipper from Manassas, Virginia
    Replied 9 months ago
    The lender does not have to know about the option unless you tell them.
    AJ Carter Real Estate Investor from Mesa, Arizona
    Replied 9 months ago
    Some of you need to reread Shiloh's Post. I thought that it was great. I have been doing L/O's here in Mesa, AZ also for about 4-5 years. I am not a landlord. I put Homeowners in Training into my properties. It works great. First, Shiloh PURCHASED the property, then rehabbed the property and went to the bank to refinance at 70% of the new ARV. You can purchase with your own capital, owner/seller financing, borrow money from a friend or JV partner, hard money lender, etc. He did not do a Sandwich Lease Option. That is doing a lease option from the seller and then lease optioning to a new buyer. You can L/O from seller then lease to a tenant, but not L/O. Never ever try to sell something that you do not own! As for finding a L/O buyer, you can advertise on Craigslist, your website, Bandit signs on corners, in the front yard of your house, like "Rent-2-Own" or something to that effect, just like you would do to find a tenant or a buyer to buy your house. Over 70% of people wanting to buy cannot get loans to buy. They do not have enough down payment, credit problems, self employed or some other reason that they cannot qualify at the local bank. That is a huge buyers list available to you. Not all of those will qualify of course. But some will, you only need one. They are willing to pay more for someone to help them, trust them to purchase a house in the future. And when the market does take a down turn just like in 2008, you still own the property, you do it again, maybe a little less rent, a little less down payment or your just do a straight lease to a tenant. Problem solved. Quit trying to find excuses to not do something. Do some research, network with other investors either here on Bigger Pockets, your local REIA, on MeetUp, etc. This is a great way to make better money like Shiloh said.
    Jon Lanclos Real Estate Broker from Houston, TX
    Replied 9 months ago
    This is a very interesting take but the real question is, how did you find the property that needs rehab in the first place - deal flow?
    Ray J. Investor from Cedar Park, Texas
    Replied 9 months ago
    Definitely an interesting take but I question the applicability of this method... at least in Texas. From LoneStarLandLaw.com attorney David Willis Lease-purchases, contracts for deed and lease-options have long been traditional tools of Texas residential real estate investors. No longer. Since 2005, these “executory contracts ” are heavily regulated under Chapter 5 of the Property Code. Many requirements now apply, and the burden is on the seller to meet these. Also, the existing lender, if any, must give consent. Violation may entitle the purchaser to cancel and rescind the contract and receive a full refund of payments made to the seller. That is not all, since a claim may also be made under the Deceptive Trade Practices-Consumer Protection Act (“DTPA ”) which can result in treble damages plus attorney's fees. Add up the numbers and one can easily see that the potential downside is significant. Note that the statute contains no significant defenses for well-meaning sellers who thought they were giving the buyer a fair deal, even if the whole arrangement was the buyer's idea in the first place. Accordingly, the risks to an investor of engaging in executory contracts have nearly eliminated their use in the residential context, at least as to contracts exceeding 180 days." Does the fact that you are NOT including any monthly "paydown" in the lease rate negate this risk? Would love to hear more from someone with Texas specific knowledge.
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    Ray, You bring up great points about Texas. Texas is the only state that I know of where the lease options is pretty much illegal. So I don't suggest doing this model in Texas. And this comment is for everyone, make sure you know well the laws in your state about how lease options work in your state before just doing one because you need to do them correctly or you may be breaking laws unintentionally.
    Katie Rogers from Santa Barbara, California
    Replied 9 months ago
    The legal problem with many lease option contracts is the blurring of ownership. If the landlord charges extra rent, and credits this extra rent as going toward the down payment, the tenant has acquired equitable interest in the property. Same with any nonrefundable option deposits. If the landlord does not credit the extra rent toward the down payment, the tenant will most likely not agree to pay extra rent. The reason some states look askance at lease options is because too many landlord/sellers use them to take advantage of tenants who might be at a financial disadvantage already if they happen to be one of those whose finances are not quite in order.
    Danae Aballi from Newport Beach
    Replied 9 months ago
    Something to think about: here in Southern California our prices can increase or decrease fairly rapidly. I don't recommend giving a lease to own option past 1 year because at the end of the year markets are likely to be similar and will be stable. At the end of 3 years LO there's likely to be a tenant who's mad they over paid, or an owner who's mad they under sold depending if the market went up, or the market went down. Either way the longer the time frame the more sour a deal goes and there's going to be resentment from one party. We've seen lawsuits because of this. I'd look for a tenant who for one reason or another just needs 1 year to get their financing in order. Maybe it's a big bonus coming in at work, a previous short sale that falls off their record, a divorce that's finalized...
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 9 months ago
    California is notorious for lawsuits. I don't really know what else to say about that. If you don't want to do it in California then you can do it somewhere else. However, Brian Gibbons is in California and he is teaching people and coaches people on using lease options.
    Rene Doyle Rental Property Investor from CA
    Replied 8 months ago
    Can you DM his contact info? I'd love to learn more on this.
    Katie Rogers from Santa Barbara, California
    Replied 9 months ago
    We should not assume that tenants want a lease option because their finances are not in order. Maybe they just want to cut out the middlemen, the agents and lenders. They are going to have to pay interest anyway. Why not pay it to a regular person instead of a bank?
    Eduardo Sanabria
    Replied 9 months ago
    This is a GREAT Article!!! It is much better to have 2 options as opposed to one. I had been presented this option before, and it is quite appealing for many buyers/renters. As in life, it all depends on the property, but I would definitely think about this option. Thank You!!!
    Garrett Wilson Rental Property Investor from Denver, CO
    Replied 9 months ago
    Great information; however, 95% of the millennial generation grew up with VCRs. I think you are thinking of gen Z.
    John Patterson Contractor from Canton, GA
    Replied 9 months ago
    80% of millennials cannot get a standard mortgage, either.
    John Patterson Contractor from Canton, GA
    Replied 9 months ago
    What I don't understand is why can't I get an option with principle only payments ..then lease/option to someone else? What separates this from having a mortgage and then doing a lease option. As always , get it in writing and get it on the deed. Sandwich lease options work but the owner is the carrier and you are the transferrer. You only carry the paper work you don't own and you don't sell. The Benefit is you don't have to deal with the Rehabs; you only have to find nice homes to present.
    John Murray from Portland, Oregon
    Replied 9 months ago
    The IRS is the main driver behind a Lease Option and Lease to Purchase. The misunderstanding for most is Lease to Purchase is an installment sale. This stops depreciation and from state to state the ownership should be researched. Attorneys involved in some states, so stay away from Lease to Purchase installment sales. The up front fee can be treated in 2 ways, declare in the tax year collected or in kinda like and escrow situation. I declare in the tax year the contract is signed, get it over with as quick as possible. Moral of the story, Lease to Purchase is evil. Lease Option is good from the landlord seller point of view. Maybe buyer can make out better since the principle payments are tax deductible and a complex issue who pays the property tax with that deduction. I'll take the Lease Option method as a landlord and seller.
    Richard A. Investor from Fayetteville, NC
    Replied 9 months ago
    Great article and definitely an option we've presented in some rentals. Our goal is long-term cash-flow. With that said, the LO strategy would depend on the market and property condition. We would prefer to BRRRR in a market where the property values are continuing to see a steady and substantial increase. Certain CA markets where you can achieve 6-figure equity in 3-4 years. We would also prefer to BRRRR if we just completed rehabbed a property and all the major components will be solid for 5-10 years (one of the Rs in BRRRR). We wouldn't anticipate much CapEx or repairs in that situation. We'll also likely get a "better" tenant because we'll charge slightly higher than average rents for a completely rehabbed property. BRRRLO would be a great option for market where values are consistent. Or where the property needs some work. Or there might be upcoming major repairs. In these cases, we would also throw in a seller financing option. Like most things in real estate, it would just have to make sense for the particular situation. Re: option fee. I agree with it being non-refundable. But, we apply the option fee towards the purchase price.
    Quentin McNew Real Estate Investor from Champaign, IL
    Replied 9 months ago
    Great strategy for people wanting more hands off!! This is one of my favorite models for real estate. Instill home ownership in renters by selling on contract, which translates to more predictable monthly expenses. My philosophy is buy and hold forever (unless 1031 exchanging), enjoy tax benefits, appreciation, build equity, equity equals collateral, etc. However after dealing with management craziness of 35 SFR (last day you seen it all is the last day your a property manager)……. and depending on your personal liquidity situation, find that selling homes on contract in areas where there is “no appreciation” outlook is a efficient strategy that I would do. 1. No credit on down payment toward purchase price? 2. No credit of rents to purchase price? (I typically see $100-$200) 3. There are buyers out in the world that do the two questions above? I am confused on buyers accept that….. unless they are really scared about owner selling underneath them or think market will appreciate I guess….interested to see if there is a big pool of buyers that do those terms. 4. Option fee looks to be close to 3x the monthly rent $1,025 x 3 = $3,075. Is there a calculation to do on determine the option fee amount?
    Ronald Starusnak Property Manager from Syracuse, NY
    Replied 8 months ago
    lol $50/month for taxes NY is $350/month
    Rene Doyle Rental Property Investor from CA
    Replied 8 months ago
    Great article, this has been on my radar. Where would you get the contracts?
    Vincent Pelletier Investor from Salmon Arm, British Columbia
    Replied 8 months ago
    Phenomenal article and very articulate. I love your break down of the numbers and your in-depth look at both pros/cons. I have had my mind set on the BRRRR strategy but now I may look into this option going forward. Thanks for sharing!
    Necho Williams Property Manager from Rocky Mount, NC
    Replied 5 months ago
    I utilized this method back in 2016 -- my tenant's mentioned that they wanted to buy in 1 year. So, they paid a 3% option fee for what I was selling the home for. Paid their rent and I held funds in an account to assist with their closing when they finally achieved their goal to own. 2017 came, and they decided they wanted to continue renting from me and that they would not like to buy anymore. That's pretty unfortunate for them because they couldn't get their money back. That's when I knew LO's wouldn't work for me. I started sharing with tenants that you'll rent from me only --and -- if you decide you want to buy from me, then we'll explore that option when the time comes. It saves them money.
    Patrick Q. Investor from Jersey City
    Replied 25 days ago
    This article is great. Does anybody know how common this method has become? As things become more popular 'the word spreads' and it is not as difficult a sell.