I have been doing lease-to-own contracts for a few years for a few houses. I now have 3 out on lease-to-own contracts. I had another, but they recently bought the house after only 1 year. So far, they have worked great for me. I have tried to make sure I get people who can actually perform. Of the 3 I now have, I really do believe that all will eventually buy the house. I know there are scammers out that that do it with people who have no ability to buy with the intent to do a "rinse and repeat" operation. I have only collected 3% or 4% in option consideration (the down payment).
However, I have had some warn me that they can be trouble. I know in Texas they are illegal, but where I do them in Ohio, they are fine. It is something about the recent Dodd-Frank legislation. I have a lawyer that see no issues, but also is not that knowledgeable in this area.
Can anyone on BP that knows the pit-falls of Lease-to-Own for the seller share with me what these are?
@Kelly McE I can't contribute to your question at all but would you be willing to share some ballpark numbers? Home purchase price, repairs, sale price & down-payment?
pits falls in ohio are as fallows
1) you let them pay off more then 20% of the purchase price of the house. if they own 20% or more you will have to foreclose on them as if you were a bank and that is a very long process here in ohio can take a year or even more of them living there for free!!!!!
2) If they live there longer then 3 years on the same lease to own contract again you will have to foreclose on them as if you were a bank.
3) if you come close to option 1 and 2 and you need to redraft a contract of these people you do not i repeat you do not use the exact same contract! you need to change everything the purchase price the down payment the dates everything! that way they can't go into court and say you are just extending the contract.
I hope this helps.
Thanks to Jeremy for the advise.
As for the numbers. One of my tenants just exercise their option to buy, so I sold it after 15 months.
Purchase Price $77K
Rehab Costs: $20K
Rent: $1300 with $200 given as option bonus
Agreed to Sale Price: $139K
Option Period: 3 years
Seller gave me $4K in option consideration and through monthly rent bonus, they earned another $3K ($200 per month for 15 mo). I wanted to sell, so I incentivize them to buy sooner by giving them another $2K.
Money given to them was: $5K
My total costs were $25K
Real Estate Commission: $zero
Closing Costs: $1K
Monthly Cash Flow: $200/mo cash flow so netted another $3K from rent (after the bonus was given paid)
I netted $139-77-20-5-1= $36 from sale and $3K from rent.
I now pay long-term capital gain taxes on this, since I held for longer than a year.
@Kelly McE Looks like you did a great deal. Congratulations!
Under the Dodd-Frank law, it's not clear whether it will encompass lease options. I haven't seen anything definitive one way or the other, and I hear varying opinions from real estate attorneys. If the CFPB does try to include lease options under Dodd-Frank, I expect a court case down the road will make it definitive one way or the other.
@Jeremy Davis A lease over 3 years including renewals, has to be notarized and recorded (or a memorandum). I've never heard or read of anyone having to foreclose on a Lease. I've heard a rumor where a poorly written lease-option was construed as a land contract and had to be treated as such.
On the other hand, a Land Contract needs to be foreclosed on if there is more than 20% equity from the purchase price, or more than 5 years from the start of the contract.
On a side note; Uncontested foreclosure in Montgomery County is taking about 6 months, contested can take 2 or more years. I'm sure every county in drastically different in that regard.
Sorry for the late response. I live down in the Columbus and I am very interested in starting in lease options. I love the idea, and think you can do it in a very ethical way that can be win, win, win situation for all parties involved. I am actually trying to come up with a business plan for this type of a business. Below is a link regarding an overview of the Dodd Frank Law. This attorney breaks it down so well. He has alot of videos out there. Enjoy
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