Does anyone know about doing lease options, I am new to investing and would like to learn more about it.
Lease options are a great way to get into a property with little or no money down.
The price is agreed on at the start of the lease so if there is appreciation you still pay the option price at the end of the term and get advantage of the equity.
Some sellers will increase the option price of the house to capitalize on future equity. this is ok if there is still some left for you.
If you intend to re-rent at a higher rate, you must a have a sublet clause in your lease.
If the seller is putting some of the rent towards the purchase price check with your lender if that is ok. I found out from one lender that they would only allow monies that were ABOVE fair market rent be applied towards the down payment.
This is because they don’t want the seller to inflate the price to include a ‘pseudo’ down payment that never really happened.
I had a VERY good experience with a lease option and if set up correctly can be very profitable.
Hope this helps
Regards,
Jeff
Thanks for the reply. I am in the process of looking for lease option deals now.
Lease option is the way to go!! It worked incredible for me, lock in the contract with a 2 year gap, and you should have enough equity build-up, plus ask for a % of the rent to come back to you at the end of the option, Ho yeaa and one more thing dont ever be late since this voids your contract immediatly.
Thanks for the reply, I am looking to flip lease options to investors. If you have any info on how to make that happen, it will be very appreciated.
You may want to reconsider flipping to a note investor. Here are some reasons as to why you may want to reconsider: Discounting of Note, Simulataneous Closing (You buy from Seller, You resell to End buyer, and You than sell note to the Note Investor), Property should have 60% equity, and the list goes on.
It would be better to Lease option/Purchase with Seller (at least 3 yrs) and then sublease/purchase it to a sub buyer (1 yr). This will allow yourself the opportunity to sit on the property and allow it to build equity for the 3 yrs. Remember that you’ve already locked in your purchase price with Seller, therefore in 3 yrs the property will have appreciated in value and you now have a house that is worth $170000 that you can buy for $100000.
Thanks for reply
Is it possible to tell seller, you will lease/option purchase from them in three years and sublease to someone else without even living in the property?
A real estate broker told me to stay away from lease/purchasing for myself and subleasing to purchase to someone else because of problems that may occur. I really didn’t see anything wrong if you have all of these things in writing correct?
Any responses would help.
Most sellers interested in letting you lease option from them are very motivated and they don’t care about the sub lease part as long as their getting their mortgage paid and their asking price.
Christopher
When you lease option a home, you are responsible for maintenance and repairs, property management and collections, the possibility of tenant default, vacancies, etc.
With a NARS land trust, the tenant is responsible for maintenance and repairs; the Trustee collects the monthly payments and makes the mortgage payments; if the Tenant is late, the Trustee sends out the notices.
You are NOT on title or on any loan, but you control the property without the pitfalls of lease options. I’ve done dozens of lease options since 1980 and even wrote a book about the benefits of them way back when.
This is 2005 and the NARS land trust simply eliminates the pitfalls. My own home as well as my other properties are all in trust.
2 important things:
If you are subletting the property make sure you have 2 contracts. One is for the lease and one for the option to purchase. Do not mention anything about option to purchase on the lease.
Is it possible to tell seller, you will lease/option purchase from them in three years and sublease to someone else without even living in the property?
Is possible. It’s called a Sandwich Lease.
To make more money in the deal. Negotiate a 2 to 4 year lease with the seller then sublet it to a tenant/buyer in one year increments. Profit center:
Upfront non refundable option consideration money
Positive Cash Flow
Backend Profits
Lease options are NOT the way to go.
When you lease option a home, you are responsible for maintenance and repairs, property management and collections, the possibility of tenant default, vacancies, etc. (Posted by: Gary Mialocq)
I am sorry, but lease options is what i have been doing for the past 7 years. To avoid landlordling problems you will have a clause that passes that responsability to the tenant/buyer you put in the home. If mayor repairs are needed (leaky roof), that is the responsability of the seller since you are a tenant and the homes needs to be habitable. Big repairs goes to sellers, minor repairs go to tenant/buyer. This business runs on autopilot.
Seller doesnt wantto fix… I have a clause that if i fix i will be compensated on a 2 for 1 basis! Neat! My contracts re that powerful!
To avoid or minimize the risk of tenant defaults. I suggest you do the following:
- Get enough option consideration. This creates an interest from the buyer and they do not want to throw that away.
- Give generous rent credit: I give around 50 - 100% depending on the deal and the spread that I am working.
Have a clause stating that if they dont pay on or before the 1st of the month. They will loose that rent credit for that month. This encourages on time payments.
I am strict when it comes to Lease Purchases. I place the strength where it needs to be and I do not play around. I train this people from day 1.
Payment on my hand on or before the 1st. Second day is late. No rent credit. 3rd day late and eviction starts!
this is a business and so you must treat it like a business. Get powerful contracts to protect you. Do not allow your tenant/buyers to assign the contract.
There are also other techniques within the Lease Purchase.
Sandwich lease:
Assignment: Take the contract and sell it for a fee to a third party. Even with a tenant in the home.
Cooperative Assignments: Works with non motivated sellers.
Pure Option: An option absent a lease. Works wonders for sellers who need to cash out and willing to give you a nice wholesale deal. Take the contract and sell it to a third for a fee.
To your success,
Diana Fontanez
Lease Purchase Specialist and Consultant
These are nice items but the lease option offers no protection against creditors, judgments, marital disputes, bankruptcy, etc. NONE. The trust offers complete protection.
Your strategy sounds so perfect like the perfect man i am waiting to marry! This perfect guy will never cheat on me, pay my bills, be submissive, listen to me cry and cry also.
When the babies cry at night he will wake up and feed them, change the diapers and do my nails! The perfect man!
What are the cons of your strategy if there is any. 
The only con I have encountered is the fact that some people automatically shut off to any concept deeper than 80/20 financing. It is not easy to explain but I’ve become pretty good at it.
The NARS Land Trust is actually a marriage since you’ve brought romance into it; a marriage of the land trust with the Triple Net Lease.
The advantage of a triple net lease is that the Lessee (Resident Beneficiary) has responsibility for maintenance and repairs, but also shares in future appreciation as well as enjoying the tax and interest writeoff benefits. Happy tenants make a happy landlord. I’m a happy landlord because I always have a positive cash flow and I never have to become involved in property management and collections.
The trust won’t cheat on you and will most likely pay your bills. I don’t know about the submissive part. Best of luck to you and the next time you are ready to place a lease option you may want to try the trust. I’ll be happy to help.
Gary (and others),
Can you please explain how the trust works. What I am thinking of doing is buying SFH below market value and doing a lease option (or maybe a trust) to have is positive cashflow and turn it over within a year or two.
Does this make more sense then renting it out? I like the idea of not being involved in the property management. Also is LO or trust legal in NYS? Where can I find laws regarding this?
Thanks again,
Herschel
I do not know about NYS.
In Indiana We use Land Trust. When you take possession of the property “Sub To” by having the owner put it in a Land Trust and assigning the beneficial rights over to you. They move out and if there is not to much equity, you have them pay you to take the house. One lump sum or pay the next few mortgage payments. ;D
Then you L/O the house with a nice big fat { Non Refundable Option Consideration }No longer than three years. One extra day is considered by law a land contract. “BAD”
You have it in the lease that they are responsible for everything up to 4 or 5 thousand.
Make them feel like the owners you want them to be.
But understand that if the hot water heater goes out three weeks after they move in and they call. FIX IT.
You have to sleep at night. Take the high road. Just don’t stand in it and get run over. :help:
Join your local REI club and read read read.
;D
Bruce
P.S. Have a good Mortgage Broker that specialises in credit repair on your team.
Bruce,
Thanks for the explanation. Does it make sense to buy a property with a mortgage and then LO/trust it to a tenant to sell it in a few years? or do the LO/trust only work if you LO it from someone else (I think this would be a sandwich).
You guys rock!!!
Herschel
You take over the home or Get The Deed “Subject To” the existing mortgage. Have the owner put the property in a land trust. Then sign over the beneficial rights to you. {Signing over the rights to the profit to you}
Then you L/O to someone with bruised credit at what you think the price will be in three years. That is why you need that Mortgage Broker.
;D
Bruce
Paramedic,
To follow up on this subject, Bruce posted, “We use Land Trust. When you take possession of the property “Sub To” by having the owner put it in a Land Trust and assigning the beneficial rights over to you. . . You have it in the lease that they (tenants) are responsible for everything up to 4 or 5 thousand. Make them feel like the owners you want them to be. But understand that if the hot water heater goes out three weeks after they move in and they call. FIX IT.”
This is where you have a choice. With the NARS trust, there is no lease option but a Triple Net Lease whereby the tenant takes complete responsibility for maintenance and repairs (if the hot water heater goes out three weeks after they move in THEY have to fix it.) The tenant is made a beneficiary of the trust and as such the IRS allows them to write off mortgage interest and property taxes and they can share in future appreciation if you choose. You don’t have to make them feel like owners … they ARE owners… of the trust, not the realty. That is one difference.
Another difference is that you do not have any rent collection responsibilities with the NARS Trust. We always appoint a non-profit corporation to take title and act as Trustee. The Trustee collects the rent payments, pays the mortgage and sends you your positive cash flow check each month.
Should the tenant default it is a simple eviction process, no foreclosure. Also, with the NARS trust, in three years when the tenant wants to buy you out, he/she is able to REFINANCE the property NOT seek out a purchase loan. It is a big advantage. I am closing on a house in California this week where my tenant was able to do just that. That feature is not available in a lease option.
There are many ways you can proceed and get the job done. Hope this explanation is of some value to you in understanding the differences between the two types of trust. Good luck.
I beg to disagree. Land Contracts and Lease Options can be refinanced. As a mater of fact, I’ve been told that this can be done after 12 months. Talk to a mortgage broker. And your “buyer” under a land contract can deduct the interest. So, I wouldn’t call this an advantage of a NARS trust.