All Topics / Creative Investing / How to Make Money With Lease Options

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  • Profile photo of WallaceHobbsWallaceHobbs
    Member
    @wallacehobbs
    Join Date: 2005
    Post Count: 2

    In my Day to Day Real Estate Investing Career I have noticed I get a lot of questions about Lease Options.

    Folks say, Wallace, give me the detailS Exactly how these Work and How I can make money doing them. Be careful for what you ask for. Here goes.

    Leases and options are not widely understood. They are just Control without ownership. Each of these are very powerful. When you pair the two together, they will open up a lot of money making possibilities.

    Leases control use and possession. Option on the other hand control the right to purchase. You buy with lease options and you can sell with lease options and you can assign you options positions. You can even do any of this for a Fee for others.

    The First place you should consider applying lease options is in your current rental program. You must understand something: Straight rental will give the advantage to your tenants. Your position is weak. You should use a Lease Option to make it so you are now in a position of strength and not your tenants.

    Don’t just RENT your properties, use a RENT TO OWN. This is simply what a lease option really is. Does that make sense? The only difference is your dealing with people who want to have the American Dream: Home Ownership, but need help. Lease Options will give them the chance to own and its a soft sale.

    What you will ask your owner/tenants for is a 3% to 5% of your Sales price of the home up front, and it is non-refundable. It is what is called an option Consideration. You will apply this to their cash down payment at closing with they buy the house in either One year or Two years, depending on how long you make your lease option.

    The Lease and the option can be for a One or Two Year period. These are two separate documents. The option is conditioned upon all terms of the lease agreement being met. The lease payments are the market rate.

    The selling price on the property is at retail with the buyer paying the closing cost. You can be flexible here.

    A rental credit can be added to help make the deal work. I suggest to allow $200 a month to reduce the purchase price for every month the rent is paid on time.

    The Demand for RENT TO OWN homes is Strong! When you run an AD in your local paper you will be swamped with calls. Have a voice mail box set up! I will ask people how much they have saved up for a down payment and how much money can they afford to pay a month in rent before I give out any information.

    What’s nice about this is that Bad Credit is not a problem for them. Cash Qualifies them. As long as they have a few thousand dollars in a non-refundable money and can afford the monthly payments you can work with them.

    Selling or renting on a lease options PAYS you in several ways:

    UP FRONT CASH IN YOUR POCKET: This is the money form the non-refundable option consideration. Even if it is only $2000.00 is sure beats a refundable deposit with is the biggest cause for tenants fighting with a landlord. This can be huge for you. Lets say you have 25 houses and you collect $2000.00 on each one, that’s $50,000.00. Not too bad, right.

    YOUR MONTHLY POSITIVE CASH FLOW: Cash flow is KING. I alway try to get at least $200 a month on each house and hopefully more. Don’t forget your RENT TO OWN tenants have an incentive to pay on time (to get that $200 a month rent credit towards the down payment). Another thing is you make them responsible for all minor repairs. Hey, they are buying the house and that’s part of ownership.

    PROFIT WHEN YOU SALE THE PROPERTY: Lets say at the end of a One or Two year lease Option that 1/2 of these make it to closing, for whatever reason. Don’t worry if this does happen. You will already have made money. If they don’t close then just do another lease option again and get up-front money and cash flow again! Of course you goal is to get all of them to close for your tennant buyers.

    Lets face it. Most of these people can not buy a house. They have bad credit, bankruptcy, Divorce, self employed etc. You may be the only one willing to give them a chance to own a home.

    The tenants will have to do their part. They must get themselves ready to qualify for a loan. The money you make here is from the difference you paid for the property and what you set your sales price at. You will get a higher price and have lower cost, pay no Real Estate Agents a commission, their is no holding cost and you pay no closing cost.

    This is absolutely the best way for a beginner to get started as a Real Estate Investor.

    Until Next time, Happy Investing.[biggrin]

    Wallace Hobbs
    Real Estate Investor
    215-896-0048
    [email protected]
    http://WWW.RealEstateWins.com

    Profile photo of MarucoMaruco
    Member
    @maruco
    Join Date: 2005
    Post Count: 48

    I am very interested in “Lease Option” and I actually tried to close the deal in Logan area, QLD.
    I put an ad and received about 20 calls, but nobody had any money aside for an option fee.
    Anyway, my question is that how to make tenants to pay for the repairs while they are just renting the place with an option to buy later?
    I have read Mr. Rick Otton’s “rent 2 own” manual, and currently reading Mr. Steve Mcknight’s “The wrap kit”, and both of them said the repairs are the owner’s responsibility. Only when they get onto “vendor’s finance”, we could redisburse the repair costs if we arranged it in that way in the contract.
    Well, if I could make them pay for the repairs, it is better, so I’d like to know how to arrange it in the contract.
    Thank you.

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi Maruco

    I operate in NSw but I believe the Residential Tenancies Act in NSW and Qld are pretty similar.

    If you try to off load the maintenance responsibilities of a residential property, onto the tennant, you will be probably be found to be in breach of the Residential Tenancies Act, if you are taken to court or the Residential Tennancies Tribunal. This breach can, of course, put you in hot water to say the least.

    My advice, for what it’s worth, is don’t try it. Instead work out a figure you think will cover maintenance for the period of the lease and add it to the rent. It’s not exact but I think it’s about the best you can do with a lease option.

    I hope this helps.

    Cheers, Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

    Profile photo of hmackayhmackay
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    @hmackay
    Join Date: 2004
    Post Count: 197

    Wallace,

    Great info.very interesting

    Would u be able to provide some real figures etc.

    Thanks,

    hrm

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Maruco

    In Qld you should try a License to Occupy rather than a Lease Option.

    Some deaf changes would get around some of the issues you raised.

    Cheers Richard
    [email protected]
    http://www.yourstatefinance.com

    IP funding and US property finance
    our speciality

    Richard Taylor | Australia's leading private lender

    Profile photo of vivasashvivasash
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    @vivasash
    Join Date: 2005
    Post Count: 6

    Hi Wallace,
    Thats a great post! I totally agree! Thanks for the great info…!

    Sash

    Viva Las Vegas!
    [email protected]

    Profile photo of XeniaXenia
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    @xenia
    Join Date: 2002
    Post Count: 1,231

    Hi Wallace,

    Thanks for taking the time to write that fully comprehensive and informative post. You have just summarised all the waffle in various rent to own packs and lease option e-books into one easy to read post.

    I have never done a lease option (but planning to soon), just a quick question that these gurus don’t seem to address, what happens if all your equity is tied up in 20 lease options (or how ever many your equity can buy) and you have to wait 3 years for the options to be exercised before you have some back end profit coming in? This is my only concern! That because we can’t sell out quickly, if a good deal comes up, we would not be able to quickly sell something and get into a better deal.

    I would be interested in seeing your response to this???

    Xenia

    We buy properties in all conditions. Can offer Immediate Cash Settlements, No Real Estate Agents Required
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    phone 0412 437 582

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Xenia

    That is a legitimate problem. The only way around it is not to tie all your equity up in lease options. keep some buy and holds as well.

    You will also probaably find that a small portion of the tenants leave the properties within the first year. So that could give you some room for equity extraction.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of vernonvernon
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    @vernon
    Join Date: 2005
    Post Count: 33

    This is a great discussion. I have some questions:

    1) Must the owner that is offering the property for lease option have paid up the property in full?

    2) Related to Q1, can a mortgaged property by put up for lease option?

    3) How do I find out how to do lease option in WA?

    Thanks

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi Vernon

    The term lease option can be confusing. A “lease option” isn’t a stand alone document. It’s usually a normal residential lease, accompanied by an option to purchase which, for good legal reasons, are completely separate documents.

    You can read more about lease options on this site at:
    https://www.propertyinvesting.com/strategies/lease-options.html

    If your mortgage provider will allow you to rent out your property, you can normally structure a lease option on that property.

    A couple of Australian based resources for learning the business of lease options are:
    http://www.financiallyfree.com.au/leaseoption.htm
    and
    http://www.rickotton.com/lease.htm
    I’m sure there are more.

    I hope this helps.

    Cheers, Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

    Profile photo of billyraybillyray
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    @billyray
    Join Date: 2005
    Post Count: 10

    HI all

    Has anyone done a lease option outside of the state they reside in? I’d like to try this with an investment property, but I wont be able to meet with the individual prospective “tenants”, as I live in another state. It would all need to be done by correspondance.

    Can this strategy be achieved long distance or does the isolation create greater risks?

    Cheers
    Billyray

    That just happens to be my limosine right outside

    Profile photo of CeliviaCelivia
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    @celivia
    Join Date: 2003
    Post Count: 886

    “Most of these people can not buy a house. They have bad credit, bankruptcy, Divorce, self employed etc. You may be the only one willing to give them a chance to own a home.”

    Great to see such good samaritans on this forum.

    But…I wonder what will happen to these desperate people if they won’t be able to close the deal… this will probably be the ONLY chance they’ll ever have to own a property.

    DO you just say: “Don’t worry, I’ve made MY money?”
    What happens to that win/win ideal now?

    So the option holders will lose their initial ‘option consideration’ or premium, as others call it, because it is non-refundable money.
    But what about these extra payments every week/month they hand in towards their purchase. Is this refundable money or will they lose these credits as well?

    Celivia

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Bill

    I have done 3 outside of my state. Used a real estate agent to find tenants etc.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of TerrywTerryw
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    @terryw
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    Post Count: 16,213
    Originally posted by Celivia:

    “Most of these people can not buy a house. They have bad credit, bankruptcy, Divorce, self employed etc. You may be the only one willing to give them a chance to own a home.”

    Great to see such good samaritans on this forum.

    But…I wonder what will happen to these desperate people if they won’t be able to close the deal… this will probably be the ONLY chance they’ll ever have to own a property.

    DO you just say: “Don’t worry, I’ve made MY money?”
    What happens to that win/win ideal now?

    So the option holders will lose their initial ‘option consideration’ or premium, as others call it, because it is non-refundable money.
    But what about these extra payments every week/month they hand in towards their purchase. Is this refundable money or will they lose these credits as well?

    Celivia

    Celivia

    I’ve got one of those tenants now in my lease optioned property. The lady had some problems and is now on a disability pension. She is still paying the rent, but will be unable to cash me out in the near future. The proeprty is still going up in value, I am still making money, and she will eventually be able to cash me out, or just live there for 25 years and get to buy it from me for $1.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

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