LEASE OPTION!!!! OVERRATED OR UNDERSTATED (SELLER/OWNER SIDE)

[Shawn Ackerman]

Here we go......As I'm putting in offers I know one of them will eventually be accepted and the deal will close.  Had a few snags after having offers accepted recently but it's par for the course.  

So when the good deal closes, I would like to lease option the property to a buyer.  Actually I would like to do a lease option in a duplex, triplex or 4plex.  From what I know lease options have some advantages I.E.

1. Increased rent for the option tenant as you can apply a paper credit of 10% toward purchase down payment.  ex.  Rent $650 P/M  Charge 10% mark up, so $715 P/M .

2. Option tenant will likely take care of the property as there is an "equitable interest" in the property.  This can allow for the removal of the property management component freeing up 10-15% of the gross rents to be distributed to another purpose.

3. Keep the purchase down payment if the option tenant does not close on the property at the end of the set term.

4. Allow for the sale of the property at a significant mark up.  I.E. purchased for 50K but sell it to the option tenant for 80K on a 3-4 yr term. $2,300 - 3,100 depending on the term.

and on and on and on.......

So, is this an old/outdated strategy or a good strategy for cash flowing rentals?  The numbers on the property I'm looking at cash flow around $140 per door after all expenses and debt service without the option.

Any and All input is greatly appreciated

Shawn

[Brian Gibbons]

Originally posted by @Shawn Ackerman:

@Roy N.  I read up a little on the lease option strategy and I did read that the two should be separated.  Thanks for reinforcing that for me.  Additionally I read that the Option should be subject to the lease.  Thus if the lease expires therefore the option is voided by default. I know that the statutes are different in each state so I will definitely consult an attorney before enacting such an agreement.  Thanks for sharing.

I'm just looking for some advantages.  So from your perspective what would be a good strategy for purchasing a duplex rental property cash?  Let's say for 60K cash flowing $140 per door after expenses and debt service?

 Shawn, you can't have an option subject to a lease and vice versa 

Any judge seeing that will deem it a disguised sale.  So will the IRS Tax Court; It is pure guru speak. You give some one a 12 mo lease that is extendable, and a 12 month option.  See how tenant performs.

@Bill Gulley