Lease option 1-2 yrs vs. immediate OWC?


I found this forum via Google, and have found it quite interesting so far. I will ask a few questions that I am still fairly unsure of, so pardon me if I’ve ask questions that have been covered many times before.

I see most of the info covered here from the seller perspective, but I would like to ask a few questions from a buyers perspective. So in no particular order, here they are:

Are there any significant differences between an immediate OWC deal, versus a lease option in which I will be carried at the end of the 12 or 24 month lease?

On a lease option, am I paying the PITI?

Do I realize any year end tax benefits from either?

Lastly, if I have a lease option and the owner goes bankrupt, what happens? (Or it burns down, etc?)

What rights do I have to be protected if the market appreciates so rapidly that the agreed upon lease end price is lower than market prices? I’ve heard unconfirmed rumors that the seller may potentially look for any small excuse to cancel the deal, and sell at current market value.

Thanks in advance for your replies, and I apologize for the lenght of my very first post! :slight_smile:

Howdy New2RE:

With the lease option you have the ability not to buy the property. You have the ability but not the obligation. This is the main difference. You can set up the PITI deal any may you choose that is agreeable with the seller as well. Most will let you pay PITI and escrow the taxes or pay them yourself. This is pretty much negotiable.

If you pay the taxes etc you should get the benefits. Get this all understood before the deal is finalized.

If the owner goes BK the trustee and judge will go out of their way to protect your interests over and above the sellers. I am still involved in a chapter seven case for 5 years now where I owned the equity in 30 some contracts for deed and some of the buyers are still paying on the contracts and some defaulted and some paid them off with new loans but they were not forced to leave or give up equity by the court unless in default for not paying.

If it burns down get the insurance to rebuild.

Other things to be careful of are liens and judgments against the seller both before and during the lease option period. Any trouble there may cloud title to your purchase. You would be able to deduct the costs from the sales price but there may not be enough equity.

Hope some of this helps LOL

Thanks for the reply Ted. I’m just trying to educate myself as much as possible. Any opinions on the purchase price being lower than the actual market value at option exercising time?

Howdy New2RE:

I had it happen once with a 5 year contract for deed. The sellers tried every way possible to get us out of the house. We had to hire a lawyer and almost went to court. The sellers attorney made several mistakes in the notices and the sellers had also tried to collect and force us out before hiring an attorney and made some really big mistakes which involved usury charges on our late payments. They agreed to work with us and let us get caught up on the late payments and did finally deed us the house.

It had gone up in value over $30,000 and they had lost money when they bought it for their daughter and the market had collapsed just after they closed. They had also paid $6000 to sell it to another buyer and they did not perform. We got it for a grand down and bailed out the Realtor who had sold it previously.

Hello New2RE,

To answer some of your questions to the following;

  1. On a lease option, this is a NO, you are not on the title, so the IRS would
    look at you funny if you tried to deduct anything on it!

  2. On this question, you need to do a few things to protect yourself on this issue. First you need to do a title check, Remember, this is a public record, make sure there is no judgements or anything else on the title. Secondly, you want to get the L/O contract Notorized and Recorded, what this does is legally ties up the title, meaning if the seller gets into trouble, nothing will leagally get attached to the title!

  3. Re: IF it burns down, what you need to do is protect yourself, You need to talk to the seller in adding you to their Insurance Policy as an Additional Insured. That way if something does happen to the house, Person etc and the insurance company does not rebuild, You could than get back your equity in the house!

  4. Well, he has this OPTION as well. Remember this is why you want to buy the proberty PRIOR to your lease option is up. So this doesn’t happen. You are in a contract with the seller for a term of X amount of years, BUY IT PRIOR to the end of the contract!!!

Hope this helped alittle…

Good Luck!!!


That’s the beauty of a L/O for the buyer. If the property depreciates significantly, you can go back to the owner and renegotiate, or simply not exercise the option to buy (in which case the property reverts to the original owner.)

I’ve found that owners are fairly understanding in such cases, and tend to renegotiate the sale price rather than lose the deal entirely, if the spread is sufficient to absorb the loss.

You profit if property appreciates. Since the sale price is locked in when you sign the option agreement, appreciation translates to equity when you exercise the option.

You are protected if the property depreciates. If the owner doesn’t have the spread to renegotiate the sale price, you are not under obligation to purchase.

How can it get any better!?