Lets Talk Lease Option

20 Replies

Hey BP world i'm trying to wrap my head around the strategy of lease option, would anybody be so kind to role play it with me. ill be the distressed seller and you be my fairy real estate investor

{..Ring Ring}

Investor: Hey thanks for calling StressFreeandClear-NY, my name is {BP member}.... whats your name, whats your situation .

Me: hey {BP member} im Gregg, i just got a divorce my wife left me for Idris Elba so my house went from a 2 income household to 1 so i just cant afford it with my 2 dogs and my netflix account. So now I'm tryna sell my house, the bank is telling me i don't have enough equity to sell it so what are my options?

Investor: ........ (action! ) 

Low equity deals - buying as an investor

1. Sub2 - best solution

2. Wrap purchaser

3. lease option and assign

4. lease option and sublease and sub option - aka sandwich

``````````````````````````

An an investor, you want to solve problems for sellers giving 1-2 solutions.

Offer to walk through the house on a no equity deal.

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com

Hey Brain thanks for the response, but you mind following my lead of role playing? im a "home owner" i have no idea what any of that means. can you go into detail of 1. Sub2 and 3. lease option and assign?

This is what i wrote up for a client of mine. It should you help you. 

Get a Tenant in Under a Lease Option

  1. Advertise “Rent to Own. This tells a potential tenant that by renting your property, they will have an opportunity to purchase it, with some of their rent money going towards that purchase (only if they actually purchase).
  2. Multi-year lease with the option to buy. The standard for these is 3-year leases. The “optionprice” is decided upfront and put in the contract, which means should the tenant decide to exercise the option to buy, they have agreed to buy the property for a set price. I would ask for 150,000 and see what they come back at.
  3. Payment of an “option consideration” in lieu of a security deposit. The tenant puts down a non-refundable amount of money that is essentially a purchase for the right to buy the property later. The amount can vary, but i would ask for $5,000.
  4. Exercising the option. At the end of the lease period, the tenant now decides if he wants to go ahead and buy the property. This decision isn't just about whether the tenants want to buy the house or not, it may likely be more based on whether they qualify to buy or have the money to buy at that time. If they do buy, you sell the house. If they don’t buy, they have the option to renew theLease Option with the same terms and option to buy again. Or they can continue to rent the property under a normal 1-year lease with no option. Or they can move. Their choice.

Why bother with all of this? Because having tenants in under a Lease Option agreement has some serious benefits!

Benefits of Having Tenants Under Lease Options

  • Decreased Vacancy Expenses. A tenant can technically walk out of a 3-year lease as easy as he can a 1-year, but at least the 3-year lease is in place and the tenant plans to own the property later so why would he want to leave anyway?
  • Decreased Repairs Expenses. The tenant assumes he is going to own this house eventually. Why would he tear it up?
  • Non-Refundable Option Consideration. This is free money for you! You don’t have to ever give it back to the tenant. It says so in the contract. Bonus.
  • Potential for a Nice Profit on the Sale. Typically the Option Price is about 40% higher than what you bought it for. So if you sell the house in three years, with a 40% profit, on top of the monthly cash flow you received every month for those three years, uhhhh….hello profit.
  • Higher Quality Tenants. Again, not a guarantee, but most often if you are dealing with someone who truly wants to purchase a house and for whatever reason just can’t right now, chances are you are dealing with someone a bit higher on the humanity scale than your average tenant. Not to say all normal tenants are horrible or that all lease option tenants are fantastic, but the odds are in your favor for this one. Having a high-quality person as a tenant can change your life for the better.

None of these benefits are guaranteed except for the Option Consideration payment. However, you are setting yourself up for less risk when it comes to tenant quality, vacancy, and repairs.

What You Need to Be Aware Of

There is a reality that you need to know about ahead of time. That reality is that, on average, 95% of tenants don’t exercise the option to buy at the end of their term. 95% may not be the exact number, but it is in the markets I’m familiar with and represents the bigger fact which is that few tenants end up buying the house.

Then why do it at all? For the reasons I mention above, that’s why. If the tenant doesn’t buy the house, the only of those benefit I mentioned that you wouldn’t get is the 40% profit from a sale. Who cares! Less vacancy, less repairs expenses, monthly cash flow, you still own the property so you will continue to collect cash flow, and you’ve had significantly less headaches the whole time. Well worth it to me! I hate headaches.

If you know the tenants will doubtfully end up buying, is it ethical to get them in under a Lease Option? Absolutely! They truly do have the right to buy. If they don’t, how is that your fault or problem? It’s not.

The Downside

There is only one. You run the small risk that the tenant may buy your fantastic rental property. If it is a rockstar property, that could actually be a bummer for you. I do know a turnkey provider who does leaseoption properties and he actually will replace your property with one of equal value should your tenant end up buying. He can offer that because he knows so few tenants will buy, but he will for real replace the property. Outside of him though, you may actually be out your property. Oh well. At least you made bank on it!

Any other downsides you can think of to having tenants under Lease Options? Any other perks I didn’t hit?

Remember

You would still have to pay taxes and insurance. So we would have to figure out what that amount is. 

Medium mogul logo web smallPeter MacKercher, Mogul Realty | [email protected] | 314.210.4414 | http://stlmogul.com | MO Agent # 2010004223

Ok that was actually really helpful, few more questions... so when this distress seller accepts this option, he packs up and leaves, the first payment he receives is when i finally have a tenant in the home and he begins paying rent right, and that security deposit is mines?

does the tenant have to live out the lease? does the tenant ever move out b4 the lease is up? if he/she moves out or stops paying then what? 

Originally posted by @Brian Gibbons :

@Peter MacKercher 

Rent going towards a credit of either option fee or down payment is a "financing arrangement", as per SAFE Act and Dodd Frank.

It does not violate the safe act 

"A seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator"

Dodd Frank 

The main goals of the Dodd-Frank act is to have banks subjected to a number of regulations along with the possibility of being broken up if any of them are determined to be “too big to fail.

http://www.realtor.org/topics/seller-financing/the...

http://www.cnbc.com/id/47075854#.

I dont see how a lease option violates this. 

Medium mogul logo web smallPeter MacKercher, Mogul Realty | [email protected] | 314.210.4414 | http://stlmogul.com | MO Agent # 2010004223

@Gregg Alexander   There are 3 types of lease options....

Straight LO where you own the house

SLO Sandwich where you stay in the middle 

Assignment: where you assign the contract. 

The first is obvious...you own the house...enough said...

The other two are where you are making money on a house that isn't yours. 

In the scenario you are discussing an assignment might be best. 

Totally ignore that post by Peter, he is totally wrong, giving credits toward a purchase price (or an option that is ultimately credited to the price) IS a residential financing transaction. Lease Options ARE described in the SAFE Act as predatory, high risk lending. Selling 40% above market is purely predatory dealing. Saying "who cares" if the buyer can't buy puts the crown on PREDATORY DEALING, clearly he has a different attitude to rip off buyers than to set up transactions that are successful, the old "Deals on Wheels" thinking.

St. Louis is, if not the most liberal areas in Missouri it is one of most liberal, that means more consumer oriented courts, much more so than Springfield.

There is nothing more dangerous than older real estate investors doing business as was done 20 or even 10 years ago, welcome to the 21st century, things have changed and many don't keep up. They need to do some reading.

John is correct as well as Brian, John, as I understand it, gives credits toward the buyer's closing costs, that is not financing any part of the purchase price.

Let's back up on something I mentioned elsewhere too, having lease payments "begin" or "received" when a tenant is in the property. It's not that payments are not charged, but may accrue, you don't have to pay the rents but you will owe the rents. You can have a lower rent on a lease and a higher rent when income is earned. John pointed out elsewhere that not paying rents will put you in a property management position without a license and that is very true, all RE is local, but simply being paid or earning an amount from rents without an obligation to the owner for any rent will set you up as an agent.

The advantage to a owner of doing a sandwich lease is that the owner receives payments over the term without the headaches of management.

We have tried "role playing" here before, it doesn't work well, there may be a lack of knowledge to ask the right questions and L/Os are discussed at length on BP, some reading is in order rather than to repeat things again.

As Brian mentioned, beware of what you read in the forums, guru books and other media as educational materials. It is highly unlikely that any one L/O arrangement will be compliant in all 50 states and under federal requirements, have things reviewed by a local RE attorney. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Bill G.  

Thank you so much for that response.

Lease options are wonderful, just do them the right way.

See a local attorney and if assigning, use a RMLO with all tenant buyers.  And get a sales license.

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com

You're welcome, but I don't hit the ceiling anymore from posts of old methods. That link provided as a justification is rather funny, 3 posts, only 2 with more than one word, by two members that have no compliance experience, obviously. Enough said, it's an error and no one needs to be executed.

I'd say too that a RMLO would rather see a subject-to transaction to a lease than a sandwich L/O. I haven't found a RMLO in my area that has the leeway to underwrite or originate a seller financed note, much less a lease-option.

There are provisions in Dodd-Frank for "under served" areas, but there is no exception made to ignore the intent of the Act.

Last point too, saying that an option price is money that can be kept can give investors a false impression of reality, I'll point to the FL case recently posted in the forums where the option was improperly conceived and therefore deemed not to be an option but an installment sale, the error caused the optionor (seller) to cough up that option price together with other sums to be paid back. 

Deals are not done, where you know you earned your money, until the over weight lady sings at settlement and title is transferred, until then, risks exist. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Gregg Alexander  you now know the 3 guys you need to follow here when you have sub2,LO questions 

good luck to you in the future

@mark Brogan thanks well since there seems to be a bit controversial makes me want to take the extra precautions by doing my due diligence  and consulting with an attorney. 

I'm gonna habe to revisit this discussion on a later date to digest all the responses so thanks you all @Brian, @Peter, @Mark, @John, and @Bill

so LO's the option payment is applied to ONLY the end price? 2) Related i heard from a mlo, there is a limit the % a seller could give the seller at closing (fha vs conventional)

@Bill Gulley I have a lead on a motivated seller in the Kansas City  area. I am inexperienced in LO's outside of my home state of Washington.  Do you pay for good leads?