lease option

9 Replies

Can anybody give me a thorough explanation on how this works?

Dear ED,

read the forums, begin with one titled "What annoys you about BP" or something close to that. Then start using the search function and read until you can ask a specific question. Best of luck :)

@James Presley  

A Primer in Lease Options

On the Seller Side: 

If you are selling on lease option

You want to underwrite the buyer-renter as to the ability to repay, and use a mortgage loan originator (MLO).  The MLO will use the Dodd Frank and Safe Act laws to make sure the renter-buyer has a reasonable chance to get the mortgage.

Benefits: You as the seller usually (not guaranteed) to get a more serious renter to pay on time, and there is usually an option fee of 3% or so, in line with a FHA down payment. According to Section 1234 of the IRS code, all option payments are income tax deferred until either the option is either 1) expired or 2) fully exercised. If the renter-buyer does not exercise, usually the fee is non refundable (you could offer a portion returned to the renter-buyer).

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On the Buyer Side:

If you are buying-controlling on a lease option

If you are renting now, you can rent more house per dollar than owning (sometimes).

If you need time to get qualified as far as paying down debt, or needing to boost your FICO score, leasing first then buying would be a good choice.

My advice is to see a MLO (Mortgage Loan Originator) and see what needs improvement, get that in writing, and prospect for home sellers that need to sell.

Benefits: You as a renter buyer can pay market rent and enjoy the benefits of a great neighborhood, and have the landlord pay taxes and maintenance.

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As a Real Estate Investor, Using Lease Options when buying

First of all, learn how to buy-control on terms, such as sub2, installment sales on free and clear houses, wraps, master leases and lease options.

Be a transaction engineer, not a one trick pony.

I believe it is better to be licensed than not as a Transaction Engineer.  So get a sales license.

Offer the home seller 1 low cash offer and 1-2 term offers.  

So offer a low cash offer plus sub2 offer and lease option offer, for example.

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As a Real Estate Investor, Using Lease Options when selling

Find "just missed financed" home buyers. Start a meetup.com group for rent to own home buyers. Tell the RTO Prospects if they have a good income, 3% down, and are willing to see a MLO, they can qualify for a 12 to 24 month Lease 2 Own Home Plan.

How You Make Money

a. Full Market Rent

b. No Vacancies

c. Conscientious Tenants

d. full price on sale of home with no contingencies in 12 to 24 months

Strategies:

  • Lease Option Assignments - Wholesaling Lease Options - Cooperative Lease Option (all the same thing)
  • Sandwich Lease Options (lease option from seller and sublease and sub option to renter-buyer)
  • Master Leases
  • Master Lease Options

Sorry to revive the thread...

@Brian Gibbons  

I like the term transaction engineer a lot... What do you use to differentiate your offers in the sub2 vs Lease option when presenting them?  I understand the gained advantage in the sub2 by holding the deed and more flexibility in selling, vs being limited by your option price, and that in most cases you'd rather have the seller choose the sub2 instead of the lease option.  And that in the lease option a goal is to get your monthly payment down to the mortgage amount (or close to, and probably pay the mortgage company directly), but how to do you incentivize the seller when he's deciding between the two?  Would you offer equity up front in the sub2 deal as opposed to a non-existent or low option price in the lease option?  Or maybe your lease-option terms still levy a responsibility on the seller for major repairs?

Putting myself in a seller position... if you present both and are going to cover my mortgage and it's still in my name either way, why would I sign you the deed when I could just have you sign an extended lease?

Here is a video

http://reiskills.wistia.com/medias/nwyvd7rjk9

It talks about Option 1 vs Option 2

@Christopher Morin  

A couple of things: 

Do not do a sub2 unless you want to own it and you could get financing for it later (new loan conventional or with partners)

In Florida, do not do lease option assignments unless you are licensed or have licensed agents in your LLC working with you. FL Real Estate Board looks at assigning lease options as brokering.

Brian, good to know and thanks for the insight. I assume you mean licensed as a MLO and not a realtor?  The concern would be that you are selling a buyer who you haven't properly qualified as able to make his payments?  Because of Dodd Frank and also the truth in lending act? Still learning. 

Don't get Dodd-Frank matters with a financed option price, which is a financing contract, mixed up with a lease-option where the option price is paid as a lump sum that would not constitute financing and therefore not necessarily a Dodd-Frank issue.

A lease-option, the owner remains responsible for maintenance due to tax code requirements for a residential lease. Just saw a post by a newbie in another thread saying a lease-option reduces your repair costs, it can in commercial but not residential.

Folks are also getting loan classifications mixed up with RE Commission requirements, while an investor may buy a property and it may be a commercial purpose for that investor buyer, it doesn't mean anything as far as a RE Commission in defining brokerage or license requirements. And, in some instances, simply having a business purpose may not totally swing the loan classification to a commercial classification with a residential property.

All real estate is local, meaning how rules and regulations or laws are interpreted will be by what is usual, customary and accepted in that local jurisdiction, that judge in your courthouse will tell you what is to be followed. To understand that, talk to a local RE attorney who knows of that judge who can tell you how s/he is likely to react in your strategy, no one on the internet can tell you what is acceptable locally.

There can be an exception as to L/Os where Dodd-Frank may come into play under predatory dealings in related Acts, the SAFE Act addresses lease-options and predatory dealing, basically doing an option under terms that can not be met by the buyer or where the likelihood of them being qualified is unlikely in the time frame allowed. This area has to do with the expectation of financing rather than the current ability to pay. If the option is not financing, there is no need to go into the ability to pay as a lending requirement but there is as to expectations of future financing.

There ya go, got my 18,001st post, LOL.......on for another 1,000!  :)

ooooo I love that post @Bill G. 

1. Pay the option price in a lump sum it is not Dodd Frank (although I still use a RMLO on all Residential Lease Options (assignments or sandwiches).

2. Obey local residential landlord tenant laws in Residential Lease Options.  No repairs for tenants.

Here is a story for this comment:

All real estate is local, meaning how rules and regulations or laws are interpreted will be by what is usual, customary and accepted in that local jurisdiction, that judge in your courthouse will tell you what is to be followed. To understand that, talk to a local RE attorney who knows of that judge who can tell you how s/he is likely to react in your strategy, no one on the internet can tell you what is acceptable locally.

I was interviewing an attorney in NC for a REI Student of mine recently, and I wanted to know what the local attitude of lease with option was locally in the Raliegh area.

She said the local attitude was the judges hated lease options there, and the local laws were not conducive to evicting non paying lease w option tenants, and it was pro tenant, anti landlord - seller.  Their lease with option laws were similar to contract for deed purchases.  No eviction, needed to foreclose.

She recommended that sub2s purchases were better, with an exit to rent and give a ROFR instead of an option.

3. All real estate is LOCAL.

4. Expectations of future financing is as important as the ATR Rule with the cfpb.

Bill welcome to the 18000 club.  At the rate I am going, I will never get there til the year 2020.


Yes Brian, then you did good by calling, I bet she gave her opinion after you suggested incorporating a ROFR, I've never heard of an attorney suggest that on their own as they are very limited.

Probably what is accepted everywhere is the locally accepted sale contract with the default provisions omitted or reduced limiting liability or the obligation to act, which may then amount to an option arrangement.

Judges have tremendous leeway in civil matters, we have courts of law and courts of equity, many think what is written must be followed, but what and how things are written can be read between the lines.

Saying too much in a contract can be as bad as not saying enough, simple, straight forward, comprehensive, fair, keeping covenants level on the scales or equal between the parties is key. It's the last aspect that many investor contracts fail in meeting I'd say, they are slanted in favor of the investor. Too much of a slant may get that matter kicked out and ignored, and it will show any other reader the intent and the additional knowledge the investor may have in an attempt to evade aspects of generally accepted responsibilities.

That's why I don't share contracts, I don't know what is customary in Colorado Springs or Newark. Besides possible issues of practicing law without a license, you take on liability of providing a contract, if the contract fails and a loss is suffered due to that failure, someone can hold out their hand to be indemnified. Hold harmless agreements may not hold water and they must have consideration as well for letting someone off the hook to be effective.

Why I always suggest a local attorney being involved the first time to pass these tests, after that, your contracts can be used again reducing the costs of your attorney over time. It's a cost of doing business in RE. :)   

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