Effectively Using Lease Options
By Charles Hopkins
Published 04/21/2006 | Real Estate
Really, if you think about it, buying a property and renting it out is nothing new in the world of real estate investing. The practice has been going around much longer than any of the real estate gurus that created these "get rich" real estate courses!
So why is everyone making such a big hoopla about doing lease options?
No Money Down Deals
One of the many reasons that lease options are so popular, is the possibility of creating a No, or Low Down payment to purchase the home. This is done by working directly with the seller of the house, and hammering out a deal between you and the seller.
That means, no banks, no credit checks and no qualifying! Of course, not every seller is going to be open to the idea of flexible terms for you, so it would be a good idea to work with motivated sellers.
Working With Motivated Sellers
Although these deals are more difficult to find, they are out there and they exist. You just have to know where to find these deals. Many of these deals can result in no down deals if you offer the seller something that they desire. One such item is the sales price. Offer to pay maximum dollar before repairs to entice the seller to offer you good terms for buying the property.
While other investors come by and offer them low-ball insulting offers, you might get the nod for coming out and offering a better deal.
Remember, these people are in distress some how, and if you put together a fair offer for both parties, you may get the property at a really good price.
Giving To Get What You Want
Nobody likes to be sold. Don't make your seller feel like they've been ripped off! Creative negotiating is the key to securing a great deal. There's no need to strip the seller of their dignity by insulting them with a totally one-sided offer. Make the seller feel like they are getting something out of the deal and you'll close more profitable deals faster with less problems.
While you are negotiating with the seller, find out just what they need to get rid of the property and go from there. Most sellers in distress don't have a lot of time or options and may offer you a very good deal.
Also take in consideration the condition of their property. You cannot pay full price if the house is in need of repairs. A good suggestion would be to only look at houses that are cosmetically damaged, and not structurally damaged.
Needing a new roof or new plumbing installed is different than just cleaning up the yard and putting a fresh coat of paint on. Actually, the more cosmetically unpleasing the property is, the better your negotiating leverage is. You'd be surprise the amount of discount you can get from an unpleasant looking property!
To ensure the property has no major problems, bring along a handyman and have them hand you estimate for getting everything done. Once he does, simply hand that to the seller and show them how much it's going to cost to get this property back into a livable place. If the seller can't or won't fix the problem areas, ask them to add the cost into the final sales price to make it fair for both parties.
Important Tips When Buying With Lease Options
When purchasing property via "For Sale By Owners" (in other words, no real estate agents), always buy the property on a Land contract or a Contract for Deed. Both of these contracts are used when selling property between two parties without a real estate agent. Sit down with a real estate attorney and have them go over the details with you for a land contract.
If the seller offers a lease option to you, turn the offer down. Here's why. A lease is another word for renting their property, which means you don't own it.
If you are simply a renter of the property, the seller only needs to get a court order of eviction and your out of the property. If however you are the owner of the property, the seller will most certainly have to induce what is called a judicial foreclosure. The difference is probably 10,000 dollars or more in attorney fees, court fees and between 8-12 months time for processing.
A judicial foreclosure is very costly and time consuming for the seller, and would probably force him to negotiate more favorably towards you. All the while, the property is in a period of Stay, of course you are still required to pay the seller and follow through with your end of the contract. However nothing can be put into action until after the foreclosure is completed. Wow, that's a very important point.
Know that this has happen and the people ended up staying in the home mortgage free! They didn't fulfill their end of the contract by paying the seller their monthly mortgage payment like they should have, yet the seller couldn't do anything until the pending foreclosure had been resolved. Not even get the buyer to pay their monthly mortgage payment to them!
These are the extreme's. But it would be in your best interest to see that you are considered an owner then a renter.
Important Tips When You Lease Your Property
For the very same reasons listed above, when you look to sell your property, you first do it as a lease. If the buyer/renter insist on having an option contained within the lease contract, you write the option on a separate contract. If there was ever a dispute, you may gain an advantage in court since the original lease is basically a renter's agreement.
The option that you have your attorney write up, simply will include that the option is not an option unless terms of the lease agreement is met. Always make the option contain wording that has the renter fully complete the lease agreement first. A good term for a lease agreement is 24- 36 months. The option would be null and void if the renter moves out before the lease agreement is up or is late on any rental payment within that time.
By doing so, if your renter violates any portion of the lease, you simply file for an eviction and your tenant will need to evacuate the property within the time stated by the eviction notice given by a judge. No judicial foreclosures, no lengthy waiting periods and the defaulted tenant is removed in less than 45 days!
Also ensure that your contract has some type of clarification as to the sales price. Specifically the property should be priced at the market during the time of the sale, not fixed at the time of the lease agreement started. You also want to make sure that you stipulate that as a renter, the renter cannot sub-lease out the property and by doing so would violate their lease agreement. You don't want another investor in there trying to profit off of your deal.
If there is any violation of the lease agreement you can let the renter/buyer know that you may take them to eviction court if the violations aren't corrected.
Time To Cash Out Your Option
If the lease agreement is fulfilled as stated in your contract, then go ahead and offer your leaser the chance to own the property outright. Of course, they will have to qualify with a bank and get the whole sales price paid off. By doing this, you would have the funds to pay off your contract with the original seller, and pocketing the difference from your buyer.
Remind the buyer/renter that the sales price is based on what the price is at the present time, and not when they had initially started their lease. A tactic of negotiating for the buyer/renter is that the price should be set back to the price when the house was originally rented to them. You can let the buyer/renter know that you will offer them a 5% to 10% discount on the current sales price for being a good tenant.
With any of the strategies listed here, it is always wise to consult a real estate attorney to find out your legal options of any part of the deal.
Happy Property Investing!