Wholesaling Lease Options for Real Estate Investing
As a real estate investor, it’s important to understand the options available for finding and funding investment opportunities. Often the various strategies for real estate investing are used in combination for creative financing solutions, like wholesaling lease options. Especially as a real estate investing woman, understanding all the available options is key to continued long-term success.
What is Wholesaling Lease Options?
A wholesaling lease option uses two real estate investing techniques in combination to finance a deal. The two methods are wholesaling and lease options. The idea with wholesaling lease options is to think outside of the box when searching for ways to finance a property and make a profit.
Real estate wholesaling is when the investor creates a contract with the seller and then works to find a buyer to take over the contract. The investor never takes possession of the property. Instead, the investor works as a “go-between” to market the property on behalf of the seller. Once a buyer is identified, the contract is transferred to the buyer. The investor makes a profit by finding a buyer at a higher price than the amount contracted with the seller.
A lease option is a type of real estate deal where the buyer leases the property with the option to purchase the property at a specific price by a specific date. This gives a buyer, who may not be able to secure financing, the option to lease at the beginning of the contract and then later purchase the property. This works like a rent to own strategy. However, for the best investment, the buyer should be in a position to purchase the property within six months to two years.
With wholesaling lease options, these two separate strategies are used together. The seller contracts with an investor who then locates a buyer for the property. However, a lease option is added to the contract. When the buyer is located, instead of purchasing the property, the buyer leases with the intent to purchase later.
The investor makes money by collecting a higher monthly lease payment than is due to the seller. Also, the purchase amount agreed to with the buyer should be higher than what is contracted with the seller. This is where profit comes from in wholesaling lease option deals.
Why Use a Wholesaling Lease Option?
A lease option is most often used because the buyer is unable to secure financing to purchase the property at the current time. However, the buyer will likely be able to purchase within a short time period.
For the seller, a wholesaling lease option may work well in a strong or weak real estate market. The main benefit for the seller is that a real estate investor is doing the groundwork to find a buyer. When the seller is facing foreclosure or dealing with an empty property they must pay for, this option works to quickly locate a tenant and start receiving rent. The added benefit is, within a set time period, the property should transfer ownership to the new buyer.
For robust real estate markets, wholesaling lease options allows sellers to receive a fair market price even if they’re facing a deadline, like with a foreclosure. In a strong market, the buyer may need a larger down payment or a higher credit rate to secure financing. The lease option provides a way to move into a desired property while having additional time to secure financing to purchase the property.
When the market has a downturn, wholesaling lease options give sellers a way to find a tenant with the promise of a purchase so that the property doesn’t just sit on the market. It’s a good solution to avoid foreclosure or vacancy. While adding the lease option means the property isn’t sold as quickly, it does produce immediate income.
How to Make Wholesaling Lease Options Work as Part of Your Business Plan
The key to any real estate investing strategy is to understand the details for how to make it work. Otherwise, you risk losing money. Be smart with all of your real estate investment deals.
Here’s an outline of the process for working a wholesaling lease option as part of your real estate investing strategy.
- 1.Locate a seller who is motivated to sell under a Lease Option to Buy
- 2.Enter a contract with the seller under a “Option to Buy” agreement
- 3.Find a buyer in the financial position to buy within six months to two years that has the money for a down payment and wants a Lease Option to Buy agreement
- 4.Sign the “Lease Option to Buy” contract with the new tenant/buyer
- 5.Provide an “Assignment of Lease Option” contract for the seller
- 6.Keep your portion of the deposit and monthly lease payment from the buyer (as agreed to with the seller)
- 7.When the buyer is ready to purchase the property, pay off the seller the agreed amount and retain the difference from the purchase price
- 8.Transfer property ownership to the buyer
Invest in Smart Real Estate Financing Strategies
The key with profitable real estate investing is to find creative ways to work deals in order to make money. Creative financing options open the door to more real estate investing opportunities.
With wholesaling lease options, a real estate investor can produce monthly income in the short-term with the promise of transfer of ownership in the long-term. This is a win for the seller, investor and buyer.