Steps In doing a lease option deal

Could someone please enlighten me on the process of how a lease option works? I know how the whole process works but I am a little confused on executing it.
From my understanding this is how it works:

  1. Find a motivated seller that is willing to finance untuil I can sell the property.
  2. Sign a purchase contract and deed me the property
  3. Look for an investor that has money to put down and money to pay monthly payments for 12, 24, 36 months.

My questions:

  1. Do I use a regular purchase contract and get the property deeded to me? Or do I use a different form?
  2. What if the buyer backs out of the deal after the lease agreement? Does he get his downpayment back?
  3. When do I start paying for the exisintg loan? Is there a way where I don’t have to pay for it until I can find someone to move in the property?
  4. Obviously I will be building equity on the property. Lets say the property still has a 130K loan and it is worth 140K during the purchase after a year or two the loan balance will decrease, do I get to keep the built equity? Or do I give the difference to 130K to the seller?

Pleas help!

Howdy Pinoydarv:

You are a little confused. Lease options can be done several ways except in Texas and Colorado. You can lease purchase a house and then turn around and lease purchase the house to another investor or a family that wants to live there which would be better for you. You would be responsible for the payments until you find a tenant/buyer in all situations unless you can get the seller to pay. This will take some finesse. This type of lease purchase deal is called a sandwich lease where you lease a place that you have leased. Your potential profit is from a bigger option fee and from a higher future option price. What is you get the option for $100K in one year and then sell at the price of $120K to your tenant/buyer. You would get the $20K difference. The original owner would get the difference in the loan amount. Pretty slick. Of course there are problems that could arise like the tenant walks away for whatever reason and you are stuck with a trashed out property where you may need to spend thousands to get ready to rent/sell again.

Other ways to do lease purchase are just buy the house out right with a new loan or seller finance and then do a lease/ purchase with a family. You have better control here as you are the owner.

I do not understand your # 3 assumption about finding an investor unless you want a partner to help you with the deals.

  1. Use a standard sales contract unless you get the deed and then all you need is the deed as you will own the property. Have a title search done before recording the deed in your name or you could end up owning some more debt than you realized.
  2. This is the problem with a lease purchase and why Texas has basically outlawed them. In a lot of cases the buyer has not gotten the deposit back and should have. The lessor walked away with the deposit and payments made to them and let the house get repossessed. If the tenant walks away without paying rent and trashes the property you should be able to keep the deposit/down payment, but even this is uncertain in the courts.
  3. If you buy the property you start payments 30 days after the closing. If you lease purchase and then lease purchase to another you will make the first lease payment upfront plus the deposit.
  4. Who builds equity is different as I explained a little above. I hope I helped make it clearer for you. In your example here you would keep the build of due to appreciation and the seller would get the difference in the loan balance if you leased from them and you would get the entire difference if you bought the property.

There is a great e-book on here (it is even free!). It is called Multiple streams of income by Conti/Finkel. I read it over the weekend and was very impressed at the amount of information they give on lease-options.

Maybe you should download it and read it. I know it helped answer a lot of the questions I had.

Have you ever read it Tedjr? I respect your opinion and would like to know what you think of it.

Howdy Ffpmed:

Yes I read it and really liked it. I am a bottom feeder I guess. I do cheap deals in just OK neighborhoods where my payment if less than $300 and the rent is $500 to $600. To me you need deep pockets to afford the higher end stuff. Even with my commercial building the rent is $600 per unit and my payment per unit is $300. The total building payment will be $4500 but the total rent will be $9000. No way could I afford one months payment without tenants except when I am rehabbing the deal and the payment money is included in the loan.

I guess you could apply the info they have in the book towards lower priced deals. I am in a market where there is everything from $300 rent to $2500+.

I have not done any deals yet, but I am getting the info on 2 homes so I can make an offer soon. Do you have any of the forms (lease-options etc.) that I could look at?

      Thanks,  Brian

Howdy Brian:

I have never done a lease option deal. I did many contracts for deed but these are no longer done especially here in Tx.