Lease Options

by | Aug 1, 2018

There is a hybrid approach to cashing in that works well in a tight money market. A tight money market is a market in which borrowing money is a little tougher than usual. The basic concept is that of a Lease with an option to buy. This is actually two different disciplines. Also, notice I did not say “Rent to Own”. NEVER do a rent to own.

When you rent to own, you are earmarking a certain portion of the rent to be counted as part of the purchase price of the house. This gives the tenant an equitable interest in the house which is a loose form of at least one of the seven rights of ownership. What this means to you is that if the tenant stops paying rent or you have to evict them for any reason you will not be able to.

The way the law works in these matters is that you will have to foreclose on the tenant because of their equitable interest in the property. An eviction may take about one month. A foreclosure will take at least a year or more, though it depends on the state. What matters is that you put yourself in a very risky position with a rent to own. A lease option is not as risky.

A lease option is really two transactions. One transaction is to rent the property to a tenant. This is strictly a lease standing on its own two feet. The option is really an options document where you, the optionor, are giving the optionee (your tenant) the right to purchase the property at a later date.

They have to purchase this option from you for a fee. The option fee is non-refundable. If they don’t exercise their option by a certain date you can either extend the option period for another fee or not extend it and they simply remain as tenants if that is what you want. If they do not pay their rent you can evict them because the option fee they paid you does not count towards the purchase price of the house. They just purchased the right to purchase the house at a later date. The fee they pay covers your risk from removing the property from the market for the option period.

The price is usually locked in so you have the risk of not realizing any appreciation in that period of time. You also assume the risk of normal wear and tear on your property. And if that’s not enough, you are doing the tenant the favor of giving them time to get their finances in order enough to secure the loan to pay you off.

During this time you will be their biggest creditor. One of the big advantages to this is that if they don’t end up buying, you keep the option fee and can try to lease option again. I have had houses I lease-optioned three times before they sold. I came out the winner not just because I got to keep the option fee but also because I charged more rent on a lease option – and generally, renters will take better care of the property because their intention is to buy.

So even when a sale doesn’t go the through – a situation most non-investors see as a failure – you still win!

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