I'm finding some lease options that don't make sense

Hello all,

I recently moved to the Bay Area (Concord, CA specifically) and while searching for places to rent, I came across quite a few lease option listings on craigslist. A lot of these lease options don’t make sense. Apparently, these properties were pre-foreclosures and real estate investors probably did subject-tos on these properties and then turned around and advertised lease options on these properties.

Problem is, these properties are severely underwater on their mortgages. The selling price on the lease options is the same as the mortgage principal (plus profit for investor?) which means it is well above market value. Why would investors do these subject-to deals in the first place knowing that they would have to offer lease options at highly inflated selling prices, just to cover the mortgage? The monthly lease is roughly the same as the market rent for similar properties.

Why would any buyer even consider lease options at highly inflated selling prices? What is the incentive for them? I realize that the lease options would be a good deal for buyers with poor credit who wouldn’t even be able to buy properties at market value anyway. Nevertheless, why would these buyers accept the inflated selling prices? Please help me understand the incentive structure (for the seller, investor, and buyer) for these lease options on underwater properties. Thank you!

You always price your final price at a future valuation as long as there is room for it, without being way over. That is where the investor is going to make money. By the time it’s time for the lessee to actually buy the property, the market will have changed however the DP amount comes off the top anyway. The mo lease pmnt SHOULD be in line with rents in the area, even higher because they lessee is building towards ownership, more pride in the property, etc. As far as the damaged credit L/O’er, that is one of the prime reasons for creative real estate. especially S2 and L/O.

The incentive for the buyer is no credit check, no purchase money (loan) qual now, ability to have equitable interest, strong posibility of ownership at end of lease to name a few.

welcome the the real world of creative real estate investing!


Thanks for your input. I am already familiar with the incentive structure of L/O and S2 when it comes to properties that are not underwater or that are not substantially underwater. I understand the attractiveness of L/O for buyers with very bad credit and for investors who are looking to profit from the appreciation.

But the properties with the L/O that I was referring to are substantially underwater. For example, I found this property in Concord whose market value is between $150K to $200K but the mortgage principal is over $370K. There is a lease option on this property with monthly lease amount that is just a little below market. It would take YEARS for the property to appreciate beyond the mortgage principal. While the attractiveness of this L/O to a bad-credit buyer is obvious (he/she would be renting a place to live in, no matter what), I don’t see the attractiveness of the property to the investor. Wouldn’t the investor be stuck with the property for at least 5 years? I thought one of the attractiveness of the L/O strategy was the ability for the investor to get out with the profit within a few years as the buyer secures financing to buy the property outright. Let me know why such a severely underwater property would be even considered by an investor such as myself in the first place. Thanks.

The investor is very likely into that property for zero out of his own pocket. He has nothing at risk, so any money coming is is all gravy.

Bad money managers only look at the monthly payment. They never look at the total price. That’s why the TV ads for junk are always “only 3 payments of $19.95” and do not give the price of the object. You tell the tenant that his payment is $1400 a month and he doesn’t even seem to realize that there is a total price to be paid, nor does he realize that he will never ever be able to qualify for the mortgage to exercise his option. That would involve thinking ahead more than 24 hours and tenants don’t do that.

You are obviously smart enough not to purchase such a bad deal. Instead, find the very best bargain on a rental, live below your means, and put the difference in monthly payment into the bank and save up your down payment money.

It shouldn’t be considered if that is the case (200K value, 370K mortgage). Maybe the investors were lease optioning it before the big price drop, and then the tenant of course didn’t exercise, and now they are looking for a new one. As an investor, if you’re doing a sandwich lease or CA, then there’s no worries about being stuck with the place. Typically a LO is offered slightly above market (5-10%) for it being flexible in terms, and then take into account some inflation if any. Maybe some people there are hoping for a great bounce back, which I doubt will be the case.