Questions + Purchase Option Pittfalls

General Real Estate Investing
1

I have been reading about REI for a few months now, and I decided this is the best way to start investing for me. If I understand correctly I find a Motivated Seller who is open to the purchase option. I then sign them up for a 2-5 year term, and find a Tennant Buyer and rent it out to them with the option to buy at any time during the lease period. When they buy, I get all the built up equity as well as the monthly cash flow, and then use the rest to cashout the original owner. Here are my questions…

If the Tennant has the option to buy anytime during the 3year (or whatever it is) lease, then I only make the monthly cashflow for the time they are renting. If this is true, then If I set a purchase price on a 200k house at 230k with a 3 year lease, and they decide to buy 6 months in do they still have to pay the 230k price? Also, is there a way to setup a contract so thet have the option to buy AT THE END of 3 years. So I am guaranteed the 3 years of monthly cashflow, as well as the equity built up over the 3 years at the time of purchase?

What happens when the Tennant Defaults? If they dont make payment, I understand I must make the payment, but what if they dont make payment AND will not leave the property or stall saying they will get the money? This can become a long drawn out process that I pay for in the end. Does anyone structure their contracts in a special way so as to avoid all these pitfalls?

If at the end of my original lease with the buyer (lets say 6 years), and I have rented out the property to two prospects for 3 yeasrs each, but both decided not to excercise their option to buy, what do I do with the house? I know I can give it back, but what other options are there?

What happens if I set the future price for the house for 230k, and the market drops? is the buyer still required to pay the amount specified in the contract, or is there some kind of legal action that can be taken against me to make me lower the price?

Sorry for all the questions, Hopefully I get a lot of well informed responses. I am in California as well if that matters.

PS: I am using the Peter Conti Protege Course if anyone is interested. I have not started yet. I have set a start date of July 5th :slight_smile:

2

Howdy BIGTYME:

I will try to help best I can. If tenant wants to buy and give you $30,000 in even as little as a few days after the lease option starts TAKE THE MONEY. The option is usually written to give them the option within a certain time and not actually at the end of the term only.

If tenant defaults they default. There is no way to structure the contract that will keep the tenant from defaulting. They can guarantee money as damages if they default but that is it. You will more than likely get to keep their option fee but that could be subject to court order. It can become a long drawn out process especially in Sunny Ca.

If at the end of the option you have not closed the sale with the buyer you have no other rights and the owner can sell the house. If you still have time before the end of the option period you could sell the house for cash to another buyer or get a loan and buy the property outright.

If the market drops the buyer has the right to walk away just like you do. The are not forced to buy under the option just like you. There is no legal action to make you lower the option amount. If the market drops you may want to allow them a lower price to make the deal happen and you may be able to do the same with your seller.

You want it all to be smooth. A default or a decline in the market are just a two of the potential pitfalls. The tenant buyer could also damage the property and then default and not leave also. All these reasons are good reason for you to get a good price when you get the option and have some built in equity where you can still make money if any of these ugly things happen. Not fun to work for free which can happen if you buy at retail hoping to get retail in the future. Commissions and closing costs will eat up your profit.

Hope this helps LOL

3

Has anyone ever made a nice amount of money doing Purchase Options? I dont mean like 100k, I mean has anyone ever earned wealth through strictly purchase options. Build up a net worth, etc… Maybe in the millions? Anyone who has or has heard of it let me know. THanks…!