Real Estate Investment Strategies – Leasing Options

If you are taking a step forward in your career in the real estate investment industry, you may have already discovered the difficulty of obtaining the financing necessary to finance the purchase of your first property, especially through more conventional channels. Yes, it is true that the credit crisis we are experiencing today may have led to some stricter practices from lenders, but at the same time it has also opened the way for the creative investor to control a property without using any of their own money. Let’s analyze this a little more.

Tightening credit markets have reduced the number of buyers who will qualify to buy a home, while at the same time the fallout from foreclosures has also left a large number of former homeowners wondering where they will reside next. The end result of this financial tsunami is a significant number of people looking for a place to live.

Do you see an opportunity where you can be of help? Your purpose as a real estate investor is to see solutions where others see obstacles. What I see is a lot of homeowners with unwanted properties and a lot of potential buyers looking for a place to live, hmmmm.

But how do we put the two sides together if the seller is in some sort of personal/financial hardship, the buyer can’t qualify for a mortgage, and heck, I know I don’t have any money, now what?

This, my friend, is where you make a lot of money and use some of that innate investor creativity! Let’s break out our Lease Option Toolkit and explore in detail how we can be of assistance and create a win/win/win real estate transaction.

So let’s set up a scenario and see how this might work: You get a call from a landlord who has seen one of your “We Buy Houses” signs, let’s call him Bob. He is moving to another state due to a job transfer. His house was listed for 4 months and did not sell. Now Bob needs to go and he needs a solution pretty quickly: he has given up on his agent selling the house and he doesn’t want to have 2 mortgages.

The lease option is an agreement that allows you, the investor, to take control of the property without buying it. In essence, you will have an agreement in place with Bob for an agreed option payment, monthly rental amount, and a purchase price at the end of the lease. All of these figures will vary depending on what the seller needs to cover the cost of the property and, from their perspective, what the local market supports. Your upfront option payment that you pay Bob for the right to exercise his option to purchase the property will be subtracted from the final purchase price and, if possible, a percentage of your monthly rent will be credited to your principal purchase price . . As you can see, these figures will require some negotiation. The lease option agreement you sign with Bob will be for 2-5 years and naturally you would prefer your option payment, rent and purchase price to be as low as possible and still make sense to Bob. , the seller.

But he won’t be living there, and he’s disclosed that to his seller! Now let’s find someone who wants to live in Bob’s house…

The tenant/buyer: Mary contacted you through one of your postcards. In fact, she is interested in buying a home and would like more information about her credit repair program. She is currently renting an apartment near her workplace for the past 3 years. Although she has saved some money in hopes of buying a home, her FICO score still reflects a splurge on credit card debt accumulated a few years ago. Low FICO scores and strict credit policies have prevented Mary from qualifying for a mortgage today.

He meets with Mary and goes over the many benefits of the lease option and also puts her in touch with her mortgage broker to get started on the credit repair program. The terms of her agreement on the lease option with Mary will be higher than the terms he has established with Bob, the seller. I normally make the Option payment 3-5% of the final purchase price and it is non-refundable. I am not crediting any part of the monthly rent because the buyer tenant can claim an equitable interest in the property. As for the final price, I check the tenant’s qualifying potential (anticipated impact of a successful credit repair) with my mortgage broker and the current market price of the property. These three variables, the option payment, the monthly rent, and the purchase price are negotiated to a point that makes sense to the buyer. Why would you want to put someone in a property you can’t afford?

On the other hand, if the buyer chooses not to exercise the purchase option at the end of the lease, they have the right to keep their non-refundable payment option and then find another buyer tenant. You can continue this process until one of your buying tenants decides to exercise their option to purchase the property.

Here’s a scenario that works for everyone involved: Bob, the seller, has someone else pay the principal on his mortgage (and maybe enough to put a little in his pocket) while receiving the tax benefits of home ownership. living place; the buyer improves his credit score as he “test drives” a property he will soon be qualified to purchase; and the investor maintains a positive monthly cash flow while he makes a nice profit on the option payment and final purchase.

Due to his ability to see past the hurdle, he was able to negotiate a winning real estate solution for all sides of the transaction! If it hadn’t been for her involvement, Bob might have had to pay two mortgages and Mary might have continued to pay rent when she really wanted to buy!

Leasing is just one of the tools you will have at your disposal when seeking a solution to an otherwise difficult real estate problem. Stay tuned as we discuss another real estate tool you’ll find helpful in solving common real estate problems: Options…