Lease Option Profit Model
Selling Fast with Lease Options
Sell More Real Estate Faster with Lease Options…In Any Market!
With so much uncertainty, volatility and tightening guidelines in the mortgage lending industry, retail buyers are having a tough time getting financing to buy new homes. Lease Options are hands-down the best way to effectively sell properties you own to people who cannot qualify for traditional bank financing.
What is a Lease Option and How Does it Work?
A Lease Option can really be thought of as a Rent to own program. This transaction occurs when an investor-buyer purchases a property from a distressed seller using a lease purchase agreement, with the intent of selling the property to another buyer/tenant at some specific time in the future for a pre-defined price. Normally, the investor-buyer structures the transaction in such a way that all closing costs, loan reinstatements, rehab, cash paid to seller, and profit in the form of a fee is paid with the new buyers option fee or deposit. The Lease Option Profit Model can also be used in a situation where the investor wishes to buy the property and own it outright, and lease the property to someone other than the original owner.
The Lease Agreement is linked to a Purchase Option Agreement, which defines the price, terms and conditions upon which the lease-option buyer shall have the right to exercise their option and close on the sale of the house. Those conditions are typically that the lease-option buyer successfully completes the lease without defaulting. When the Option is exercised, the Lease-Option buyer will have the right to purchase the property as a traditional sale transaction at a pre-determined price (fixed when the purchase option agreement was executed).
Lease Options are relatively simple requiring only 2 documents to execute. You can be new to real estate investing and do lease options, or you can be an experienced rehabber who is just looking for a way to increase your profits and sell more properties. Either way, it will help if you have some familiarity with real estate contracts and other legal agreements.
Although not required, we recommend getting a lawyer to assist with the documentation on a Lease Option (At least for your first). This is important because improperly executed documentation could cause problems in the event the lease-option buyer defaults and you have to evict them.
The problem some Lease-Option Sellers run into when their lease-option buyer defaults and they have to be evicted, is that there have been cases where judges have ruled specific lease option agreements as a form of financing. The Lease must remain distinctly separate from the Purchase Option, and the wording must be just right to avoid this interpretation. When the two agreements are bundled together, it can happen that your transaction might fall under mortgage foreclosure laws instead of tenant eviction laws. While both bodies of law vary from state to state, in most municipalities, evictions tend to happen a lot faster than foreclosures. To be safe get a good attorney to develop or look over your paperwork and assure it complies with the appropriate tenant eviction laws in your state.
Lease Option Agreements are one of the best ways to sell property and generate cash flow when bank financing is hard to come by. Granted, if you need to get all your cash back out of a property right away, a lease option will work. However, if you are having trouble getting it sold, you will need to take the necessary steps to minimize your losses and eliminate the costs associated with holding the property until you can get rid of it. The Lease Option Strategy works on both those objectives, with added bonus:
- The Lease Option allows you to offer your home for sale to a wider audience of buyers since bank financing will not be required.
- You will generate cash flow from rental income without the typical hassles of rental tenants. Lease-Option buyers tend to take better care of your property since they consider it their own, even while they are renting
- You get to jump start your cash flow by collecting lease-option fees, typically 3 to 5% of your agreed upon option price. That option fee means cash in your pocket today, but it is not taxed as income until the buyer actually buys or quits the option and moves on.
Another “hidden” benefit to a Lease Option is that most lease option buyers will change their minds about keeping the property and move out before the lease is completed. That means you get to keep the non-refundable option fee, and then you raise your price and do it all over again. Can you see why the Lease Option Profit Model is a very popular one among investors?