Behold the Power of the Lease Option
By Charles Hopkins
Published 04/21/2006 | Real Estate
If you are an investor that sells properties using lease options you no-doubt understand why it can be an appealing avenue for those that need rental history and/or rent credits to help a challenging credit file. But, would YOU consider buying a property using a lease option? You better!
There is a reason that some of the most successful real estate investors, including Donald Trump, use the lease option technique (ok, there are actually several reasons!).
Appreciation: One of the typical advantages of controlling a property using an option is that the buyer retains the right to capture some, if not all, appreciation during the term. The longer the term, the greater the appreciation can be. In the single-family arena, where terms are usually 12-24 months, even moderate amounts of property appreciation can add up. For the buyer, especially, every percentage point of appreciation counts. And, if you're nice enough to offer (or get) a 24-month term in a market increasing at 3% annually, 6,000 on a 100,000 property is significant.
Principle Pay Down: If an option is accompanied by a lease the possibilities are greater for increased equity build up. By applying a portion of the monthly lease payment amount to the purchase price of the property one has the opportunity to widen the gap between the market value and the loan amount. Depending on whether the monthly rent amount is inline with market rates...this is free money! A 30-year amortized, 100,000 loan at 7% begins at approximately 82 per month of principle payments. A 100 per month rent credit beats that, dollar for dollar, every month for almost 3 years!
No New Loan: Possibly the most noteworthy advantage of using a lease option in the residential market is that when the Optionee begins the purchase process no "new loan" is required. The prerequisite for this may be working with the right and informed mortgage broker but is usually easily accomplished through a refinance. This can mean no additional out-of-pocket monies for closing.
No Down Payment: I know what you're thinking, "I would never offer such a thing!" You don't have to. As a real estate investor rich in tools to find motivated sellers, you could get your next home using this lease option technique with no money down. You don't have to tell the seller that an option fee may be customary!
When you add it all up the numbers are hard to resist, so don't try! If you're in the market for a new (or new to you) home, use your own strategy against you!