Lease option

31 Replies

hi guys, I was told that least option is the single most dangerous way to get involve in RE is that true. I'm planning on getting into least option soon, all feedback on this topic will be appreciated.

@Donald Baptiste

The first I ever heard of that statement. Did they tell you Why its the most dangerous aspect of real estate investing?

Kudos,

Mary

Some call lease options risky because you're still relying on a tenant paying rent and qualifying for financing to complete the transaction (the purchase option)

Ken Corsini wrote an article covering some of the risks, you can check it out here

A sandwich lease option just like doing a sub-2 for someone that has little or no knowledge can have risks, so I recommend lease option assignments starting off.

Originally posted by @Donald Baptiste :
hi guys, I was told that least option is the single most dangerous way to get involve in RE is that true. I'm planning on getting into least option soon, all feedback on this topic will be appreciated.

Are you selling with a lease option or are you buying?

@Donald Baptiste

Can you explain more what you're doing? I've heard that some owners will get you into a lease option, collect your option $, let you pay rent for a while, then find a way to kick you off the lease. Then repeat with someone else. Recommend legal advice on this and get the contract very specific and agreed to by both parties. I recently did one (as an owner). The buyer had legitimate concerns over the ability to buy it down the road; that we won't sell it from under them, or kick them off the lease for trivial matters. And that they get credit to the eventual purchase. As an owner, I have concern over their use of the property (it is land), that they would not build junk on it or use it as a trash dump, disturb the neighbors, having to evict, etc. So keep researching and talk to an attorney. Hope this helps

@mary just as Zaid said, they said its risky because we have too rely on a tenant , but I'm learning that RE is a risk in itself, so I'm learning how to minimize that risk

thank you Zaid I'm going to check it out

thank you John I'm thinking the same thing

@Bill and @paul I'm a new investor still learning everything that I can about least option and sub 2 thanks guys for all the responses

@Donald Baptiste I bought my first house with a lease option. We were able to get a rock solid contract between the seller and us. We had 12 months to buy the property. Each month $300 of our rent payment was applied towards our purchase price. If we did not buy in 12 months that $3600 was forfeited to the seller.

This was in 2011 and in that year our area rebounded greatly. We bought the house and it went smoothly. I am a success story with Lease Options.

Originally posted by @Gerry W. :
@Donald Baptiste I bought my first house with a lease option. We were able to get a rock solid contract between the seller and us. We had 12 months to buy the property. Each month $300 of our rent payment was applied towards our purchase price. If we did not buy in 12 months that $3600 was forfeited to the seller.
This was in 2011 and in that year our area rebounded greatly. We bought the house and it went smoothly. I am a success story with Lease Options.

Which, for an owner occupant would now be in violation of the Dodd-Frank Act. And even then, lenders will not credit amounts that are not in excess of fair market rents as equity toward a purchase.

Gerry, you'd be one of the few, congats on your deal. Even the ones that end up closing is not what I'd call "smoothly" accomplished.

Donald, there is tons of information here on Lease-Options, just be careful who you listen to in general. :)

Lease Option Articles

http://www.biggerpockets.com/articles/category/lease-options

Sub2 is a way to buy without a bank too and resell, rent or rent to own

http://www.biggerpockets.com/forums/12/topics/93968-building-a-rental-portfolio-with-subject-to-lease-options

Sandwiches are risky, lots of pitfalls.

Lease option assignments are easier, less risk, still need to be careful.

Re: Dodd Frank, use a lease and a straight option without rent credits.

Re taxation, the IRS could consider the lease option a disguised installment sale if certain aspects of the lease option were omitted or not performed.

To avoid a re charachterization of the lease option,

1. The rent should be at or near fair rental value. Breece Veneer & Panel Co., 232 F .2d 319.
Get a written opinion of the rental value from a qualified real estate professional.

2. Keep rent credits toward the option price to a minimum.
Generally, 20% or less is considered reasonable. (this is IRS not Dodd Frank).

3. The option price should be at or near fair market value.
Get a written opinion of the market value from a qualified real estate professional.
Breece Veneer & Panel Co., Ibid.

4. Try not to tie-in substantial lessee improvements with the option exercise.

5. Do not pass legal (or equitable) title to the optionee\lessee\buyer.

6. Demonstrate that you intend to do a lease-option and that you believe the rent and option price to be reasonable. See Benton, 197 F.2d, 745; Lester, 32 TC, 711.

Use arm's length lease-option documents along with the counsel of qualified professionals.


@Gerry that was smooth

@Bill Gulley Can you elaborate more on what was in violation with my deal. My agent who has a very good track record for many years set up the deal. Is there something I can read that would explain in more detail the violation. Just trying to make sure not to make the same 'mistake' again.

Originally posted by @Gerry W. :
@Bill Gulley Can you elaborate more on what was in violation with my deal. My agent who has a very good track record for many years set up the deal. Is there something I can read that would explain in more detail the violation. Just trying to make sure not to make the same 'mistake' again.

Hi, I see you're new here, welcome!

Yes, pretty big deal for the L/O seller financing guys, search here on BP "Dodd-Frank" you'll find tons of info and links to the Consumer Financial Protection Board, who you can also google and see the new regulations.

Good luck :)

@Brian&@Bill I'm not sure I'm asking this question the right way but will gave it a shot, how do you qualify a deal as a LO?

Originally posted by @Donald Baptiste :
@Brian&@Bill I'm not sure I'm asking this question the right way but will gave it a shot, how do you qualify a deal as a LO?

When "buying" on a lease option (mis nomer, you are "controling without ownership")

  1. Sandwich, you are in the middle, there are pitfalls, not for the rookie. When subleasing and suboptioning, you have to pay the seller, and if the TBer needs to be evicted, etc, you still need to pay. I would rather buy on sub2 and RTO than a sandwich.
  2. Lease Option assignment, where you lease option then assign, cleaner, you are flipping contracts, not houses.

When "selling" on a lease option (mis nomer, you are "controling without ownership")

Selling on Lease w Option, 1 lease and 1 option, no rent credits due to Dodd Frank, usually you buy for cash or a creative manner like a wrap or sub2, then exit on a lease option.

How you qualify a deal? Are you the seller qualifying the tenant buyer?

I look for strong income, reasonable FICO, some fixable issue like DTI just over 43%.

@John Jackson has done like 500 of these so he might want to add something here.

@Brian Gibbons has done a ton of these but let me ask @Donald Baptiste are you just trying to make some money or get into a house for yourself?

I take it make money...then lock it up with a LO and assign it.

@Donald Baptiste @Brian Gibbons has some amazing info above...

I think it comes down to if you are trying to get into the house yourself or just lock up a property then make money.

If the later, the the LO assignment is the way to go.

hey Brian thank u so much I'm soaking it all up I have more questions than answers so I'm taking it one day at a time.

@John I'm trying to make some money

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