Difference between lease option and owner financing.

7 Replies

Is it good to find free and clear properties too for lease options so the bank can't close on your note?

@James McCray

Leases and options can be put on properties regardless of bank notes being in place. Both the leases and options are in junior position behind the lender. Free and clear is nice if you are structuring a seller finance deal OR a lease OR an option, as well as any combination of the three. If there is an existing note in place, you can buy subject to the loan staying in place as well.

Happy Investing

Derek Dombeck

I'm talking about the due at closing clause in most lending contracts. The bank has the option to foreclose on the property during a lease option. Is anyone afraid of this? tThat's why I was wondering is it better / safer to just do a lease options on a free and clear property so the bank doesn't have the ability to foreclose if they wanted? Also, what is the difference between a lease purchase and owner financing? They sound very similar.

@James McCray , yes the bank usually has the option to accelerate the loan if an option on the property is sold. No most people who use this strategy are not worried about it because it rarely, if ever, happens and if it did you would most likely be given the chance to just unwind the position. If you are worried about it then yes looking for those unicorns known as distressed sellers with free and clear properties would be best.

One of the primary differences between a lease/option and owner financing is who holds title. For a lease/option it is the seller. With owner financing it is the buyer.

@Edward B. Thank you. I'm wanting to start some lease option sandwich deals soon, or something similar. I had just a few more questions about it. When putting a home under a lease option, does the original seller expect to make a lot of profit from the monthly lease or are they trying to just get the mortgage payment? So I'm paying for all the expenses like taxes / insurance etc right? And if it is just the Mortgage payment, how can I make sure he's passing that on to the lender and not pocketing it for himself? Otherwise the bank may call the note. Or does subject to just take of mortgage payments? Also, when I lease option to someone els on the other end of the sandwich, I'm not managing them right? What's a good way to analyze homes to find a good spread to profit from on the other end? Don't you need to know the average rent for the kind of home you're lease optioning, so you can negotiate a low enough monthly payment so you can still raise the payment on the other end and get a tenant in there and still be in a competitive price range with other similar houses? Can this be done with any home at or close to market value? What's a good argument to persuade a seller to take the lease option and that it's the best idea for them? Where's the best place to find lease option contracts. Does BiggerPockets have a resource for all kinds of investor contracts?

@James McCray , I don't do lease options. I have looked into them and don't understand why people get so high on them. I suppose it is the lack of responsibility that goes along with it since you are not on the hook for anything aside from your option price. I do not like the lack of control, though, too much can go wrong. I would much prefer a Sub2 deal where the property is deeded over to you. Much harder for the seller to go behind your back or for his problems to become your problems. You will be much more vested in the outcome of the deal, though.

In either case you are looking for a distressed seller with a problem you can solve for them by taking over the property. These typically are not sophisticated sellers so trying to explain a lease option and how it benefits them is much harder than "look, deed the property to me and I will give you a little bit of cash and take over the payments for you." I'm sure if you talk to a lease/option guy he would totally disagree, but that is not me. 

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