Control without Ownship- Lease options
Buying Real Estate with Lease Options
Rockefeller’s business strategy is exactly the same strategy you want to use when buying real estate with lease options!
When you seek control rather than ownership, you become a lot less concerned with the purchase price.
Your Unique Position When Buying Real Estate with Lease Options
You become much more interested in the “terms” of the lease. You still need to be conscious of the price (but less so). More of your attention is on terms such as the initial cost of the lease option (option fee), how long you’ll have control, and your monthly cost (rent) to maintain control.
Because you are less concerned with the purchase price, you can profit nicely from houses costing very near the full retail value. This vastly opens you to the larger market that isn’t available to most investors who are all chasing a few highly discounted distressed sales.
When buying real estate with lease options, the meat is in the middle. You are that meat in the middle. The seller and the end buyer are the bread and butter. Having bread, butter, and meat in the game makes it a win/win/win for all three.
Building rapport with the seller is key to making a deal.
Learn What the Seller Wants From the Deal
Here is a basic deal directly out of my files that any investor can easily put together. Of course, the numbers will vary depending on your specific location and situation but the basic deal looks like this. I ran an advertisement looking for a home in a decent neighborhood. The advert read:
Company looking for 3 – 4 homes in the [name neighborhood] area for a long-term lease. Call 222-333-4444.
A homeowner answered the advertisement. Her Realtor® listing had expired without an offer for her asking price of $189,000. Several other sellers answered my ad but Barb was the most promising because she had an interest in selling as well as being open to a long-term lease. It only took a short conversation to determine that her definition of a “win” was completing the sale at nothing less than $185,000.
Look at all of the sale terms to put the deal in your “win” column.
Clearly, this was very close to the full market value of the house. That meant I had to look at other terms of the sale to put the deal in my “win” column. Most other investors would have instantly walked away because there wasn’t any meat on the bone for them. But when buying real estate with lease options you have much more flexibility to earn a handsome profit.
Letting Barb do most of the talking, I also learned that she had physical ailments preventing her from doing the upkeep and repairs on her own home. For her next home, she wanted a tenant/landlord relationship that required the landlord to maintain the property. She had found a home on a lake that she could get into for $1,000 cash. That is all the cash she needed from the deal to lease the house she wanted to live in. Completely making her happy required that I assume all maintenance for the house I would lease from her.
Learn how much cash the seller really needs from the deal.
Next, I determined that it would cost me another $3,000 to replace the carpet and paint the interior of the house. This would attract a quality tenant with the near term ability to purchase the home. I would be in the home for $4,000 ($1,000 to the seller and $3,000 in repairs). Of course, Barb was very pleased that I would immediately spruce up the house (happy seller). I would have control for about 2% percent of the $185,000 purchase price (win-win).
I needed to look at the rest of the scenario and possible terms of the deal. Annual appreciation was expected to be between 6% and 7%. That meant I could expect the value to increase more than $11,000 in the first year. That more than covered my initial $4,000 cost. Now, I knew I had at least a win/win deal but I needed to bring in a tenant/buyer to complete the win/win/win formula.
How Buying Real Estate on Lease Options Becomes Win-Win-Win.
Finalizing the Profitable Terms
After buying real estate on lease options, finding high-quality tenants is a breeze. The same day that I signed terms with Barb, I ran another ad looking for a tenant. Alexa was one of the first people to respond to the ad. She was interested because the ad didn’t specify no pets and she needed a place with a yard that allowed her two dogs. Allowing pets is often the key to finding tenants willing to put down a big deposit. When they have enough for a deposit, you turn that into their nonrefundable option fee (instead of a refundable deposit).
Alexa had $10,000 saved towards purchasing a home. But she still had a little work to do on her poor credit and mortgage brokers weren’t yet ready to talk seriously with her. By me accepting the $10,000 as a purchase option fee, Alexa was able to get into a home with her dogs and be on the road to purchasing a home.
This created the final piece for the win/win/win formula.
As soon as the deal was in place, I walked away with $6,000 in my pocket. Here’s how my numbers worked out:
Option fee to seller (Barb) -$1,000
Improvements -$3,000
Option fee from tenant/buyer (Alexa) +$10,000
Left in my pocket +$6,000
I also shifted the maintenance requirements to Alexa. Going forward, I had to pay Barb $1,100 a month in rent but I was collecting $1,450 from Alexa. That left $350 in my pocket each month until Alexa exercised her purchase option.
Alexa’s purchase option price was $225,000 with an escalation clause of 6% (appreciation) if she didn’t complete the purchase within 18 months. After accounting for my upfront costs, positive rent cash, selling price, and related transaction costs, I cleared $43,300 from the entire deal. All by controlling the property without owning it!
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