Lease Option vs Owner's Finance

7 Replies

I got a new lead (in Indianapolis) which the seller may be willing to do some sort of financing. I would eventually like to be the owner / landlord of the property and get tenants in to cover the cost to pay the seller as well as other expenses. The place is dated and would need some cosmetic updates. I've never done a transaction like this and I would like some advice as to what is the best option. Also, what types of contract I would need in place for the suggested option. Thanks

Tanya

    The beauty of creative financing is that there are many components so it allows a buyer to craft a good deal from one that may not appear to be that good or a great deal from one that is already good. Without knowing specifics of the deal and your circumstances it is difficult to advise you on specifics. Often, a good deal can be reached by offering the seller multiple options (3 is commonly used). The option you hope the seller takes should be a good deal for you--the others should be better.

     If the price is good and you have access to enough funds to purchase, the lowest price is often, though not always, the best option.

    If you do not have much cash, a deal where the owner carries a note for what you cannot bring to the table for the longest time at the lowest interest rate will be best. If the owner is willing to carry the note at a below market interest rate you will be in a better position.

     A deal where the payments required are less than the rent you could reasonably expect (minus the expenses--don't forget to include maintenance, management, and vacancies as expenses) can make it possible to purchase the property while capturing some cash flow.

     You state the property needs updating. Be sure you have an ownership interest (land contract or contract for deed) instead of a leasehold interest (lease with option to buy) before you put a significant amount of your funds into improving the property.

     There are a myriad of ways to structure a deal. There are many threads on BP that discuss how others have structured deals. Search for them and read through them for examples that may apply to your situation.

What's the mortgage? Is it free and clear or are they willing to sell for what they owe if you take over the payments? Either route you take, just get a couple of month agreement so that you can advertise the house to potential tenant/buyers (which are way easier to find than sellers). If they still owe on the house you can take over the deed but keep the loan in their name until your buyer can cash out in full. I wouldn't do any repairs on a house that I never owned. Just discount the price and let the buyer take care of them. Most are more than happy with that option. These are just some ideas to get you started.

Thank you Jeff and Nathan for your reply. I will definitely poke around on BP to see what others have done. I don't have a lot of cash to put down and I believe (but will triple check) that the property is free and clear. My husband was thinking of having another exit strategy that if we put some work into the property, we would have the option to sell and keep the profit. I would ideally like to keep the place to build a rental portfolio.  Thanks - Tanya

If you are thinking about selling after a while, purchase the property with a lease option. Do the repairs and do another lease option with $5,000 down to the new tenant. Pay the owner a lease amount that allows you to make money with a lease option to the new potential buyer. These are two separate contracts. One with the present owner and one with the new tenant. Then when it comes time for you to exercise the option, have a double closing with you, the present owner and the new tenant. Of course there is a lot of paper work and deal making to do but in your lease option install the clause that gives you 90 days to find a tenant before you start to make payments to the owner. 

Tanya, a lease option alone does not give you rights to make repairs or improvements. You're totally at risk if you do. If there is a mortgage you need to do a sub-to, that has risks as well. 

If it's clear of any mortgage then buy it seller financed, get the deed! Then you can own it and make improvements.

Creative financing is the use of assets, not pulling dollars off a money tree. At some point creative stuff ends and you'll need to hit the conventional side. The target is always to get the property and buyer into conventional financing or get it paid off. Keep that in mind. Good luck :)