Why a buyer want a lease option?

Question

Why wouldn't they(buyers) rent and after they fix their credit they buy an house without a lease option?

Mary Cronin · Answer

Any number of reasons ...

Most common:

No money for down payment. LO with rent credits give equity = down payment.

Bad or no credit and can't qualify for a loan - LO allows them to gain equity while renting and either fix or create credit. Just renting doesn't yield equity.

Investor wanting to minimize cash outlays - one could buy multiple properties with LOs and maybe only 1 in normal purchase.

Property has no equity - so down payment would be required with bank loan - gain equity until you reach 20% then finance purchase. Often a "sandwich" lease option - investor LO property from owner at less than market rent and in turn LO property to end buyer at market rent. (overpriced properties, foreclosure properties, properties that went down in value so mortgage too high).

Less common:

Buyer has liens and can't have property in name. (Child support, judgments, IRS liens, etc.)

Buyer doesn't want property in own name - pending LLC or trust formation, or just because. Maybe more sensible than putting property in ex-spouse's name (yes I know someone who put at least $6M in ex-spouse's name - and it worked out well - in spite of what it sounds like. Investor had multiple properties, multiple businesses, multiple bank accounts, and feared multiple lawsuits over at least 3 continents.)

Buyer wants to be invisible.

Mary Cronin · Answer

@ Ari Hadar

A renter under a LO may (negotiable with seller) get a credit toward the down payment eg $1,000 rent every month and $200 is credited by the seller to the buyer's down payment (so $2400 per year). Some desperate sellers will give a 100% credit ... so $1,000 per month = $1000 per month credit towards down payment.

Minimal cash outlay - sandwich lease option - you lease option from owner and lease option to your customer. In most places you can use this ... say a pre-foreclosure where seller will sell for amount of loan ... you bring loan current (your only cash outlay) then lease option to buyer (who will pay you an option fee - probably more than you paid to bring loan current, so no major outlay until you exercise the option).

I don't understand what you mean here. I've never told a title company the name of a tenant - I'm not sure that with privacy laws that it would be permissible to do so.

Anonymity .... trusts, LLCs, corporations, other (trusted!!!) people's names (also called "straw buyers"). Some of these might have dire tax consequences so check with lawyer and accountant before you do them.

And if it's a lease option, there's no title company involved until the purchase.

If you haven't read it, get a copy of Nothing Down by Robert Allen (the 1985+/- version NOT the newer ones) and he covers all the different ways to buy real estate. Ignore the 11% interest rates and $25,000 houses.

And regarding saving - very few in US can save a penny. Most people spend every penny they earn (and more?) by the end of every month.

I'm reminded of a saying "pay yourself 5% first then live off the rest" with FIRST being important - and after complaint that they can't make it on 100% - the response "if you can't live off of 100% then you can't live off the 95% so why not try it". But most people don't do this and have no savings, no emergency fund and no way to survive if they lose their job or if COVID shuts down their business.

A friend did this, putting $100 in a brokerage account on payday - so she barely noticed that she had it. She expressed total surprise a couple of years later to find she had thousands in cash (plus stocks that I invested for her).

I'm guessing with the cost of living in Israel, that many are in the same boat.

Ari Hadar · Answer

How lo gain equity?

How do you minimizrd cash outlay?

The renter can rent until he save up for the down payment and then buy his new house without a LO

About property not on his name lo rental same usual rental and the buyer buy it's written in his name usually in a title company so anyhow he is not anonymous.

Mary Cronin · Answer

PS and a seller's reason - they can't sell any other way - usually overpriced, or problems with the property.

Why a buyer want a lease option?

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