CASH FLOW DAD
Selling on Terms
What is a Lease Option?
(Lease Option - Rent To Own - Lease Purchase)
Simply defined, a lease-option is a lease agreement, combined with a purchase agreement. Through a lease-option agreement, a buyer leases a property (usually for 1-3 years) and then has the right (or option) to purchase the property on or before the end of that agreement.
Features and benefits for the seller:
- Top sales price, even if demand is low: You attract more buyers who are willing to pay a premium because of the exclusive financing terms and value you’re offering
- Higher than usual rent: Since you are flexible on your financing terms and are offering a tremendous value, you can demand a higher than usual rent
- Positive cash flow: Since you can demand a higher than usual rent, your positive cash flow will increase
- Non-refundable option money: When a tenant/buyer executes (signs) a Lease 2 Purchase contract, you receive a non-refundable option deposit that is yours to keep should they default or decide not to buy
- Save thousands in fees: Since you are selling your home by owner, you will avoid paying a 5-10% realtor commission which quickly adds up to thousands of dollars. You will also save on advertising costs because your home will be sold a lot faster.
- Highest quality tenants, minimum risk: Because you are renting to tenants who have a vested interest in your home, they think like homeowners and tend to take good care of it
- No maintenance, no landlording headaches: Tenants who have a vested interest and believe they are a homeowner may feel “pride of ownership” that encourages them to pay on time, perform routine maintenance and make improvements to your home
- Tax shelter is held intact: Because you remain on the deed until the option is exercised, you maintain all of the tax benefits of ownership
- Largest market of buyers: You are marketing your home not only to traditional buyers, but also to renters and investors. These three groups make up over 95% of people whom buy real estate.
- No vacancies: When you advertise your home as a Lease 2 Purchase your phone will literally ring off the hook. Typical turnover time is days or weeks instead of months or even years.
- Peace of mind: It is safer than conventional rentals because of the quality of the tenants and their vested interest in your home. It also means that someone is living on-site who will watch and guard your home against fire, theft, vandalism, etc.
Features and benefits for the Tenant/Buyer:
- Faster equity growth: Equity accumulates much faster (five times or more) than with conventional financing through a bank or lender
- Rent money is working towards purchase: Every month a portion of your rental payment (typically $100), if agreed upon, is credited towards the sales price
- Option money is credited towards purchase: When you sign a Lease 2 Purchase contract, you will pay the seller an option deposit. This money is your vested interest in the home and will be credited (based on a %) towards the sale price when you buy the home
- Minimum cash out of pocket: When you purchase a home the conventional way, you must pay anywhere from 5 to 30% down plus closing costs and prepaid fees. When you buy with a Lease 2 Purchase, your down payment is typically 3-5%. This will save you between 25% and 85% every time you buy a home.
- Frequently no down payment at close: Since you have given the seller an option deposit and you may or may not have been receiving monthly rent credits, there will frequently be very little or nothing left to pay for a down payment at closing.
- Profits from appreciation: Since the sales price is locked in before closing (as specified in your agreement), any increase in property value will mean that your equity (what you owe minus what it’s worth) is increasing in the home
- Increased buying power: When you buy a Lease 2 Purchase home, you can put down as little as 3-5% as an option deposit. Compare that to a typical bank or lender who requires 5-30% down plus closing costs and prepaids.
- Credit problems okay: Qualification restrictions simply do not exist. You will be approved at the sole discretion of the landlord/seller (employment history and monthly income reviewed).
- No lengthy escrows or mortgage approvals: Your approval will be based solely at the discretion of the landlord/seller instead of a lender who can take up to a month (or longer) to render a decision
- Control of the home: You will be put in full legal control of the home for a specified period of time without actually having to own it
- No taxes, less liability: Since you do not own the home (yet), you will not have to pay property taxes and your liability exposure will be dramatically reduced
- Quick move in time: You can typically take possession of the home in a week or less, instead of conventional move in times of one to three months, after your offer was accepted
- Maximum leverage: You are spending very little money to control a potentially very expensive, and very profitable, piece of real estate
- Time: Before you actually buy the home, you will have 12 to 24 months (depending on your agreement) to repair your credit, find the best interest rates, investigate the home and research the neighborhood and/or schools
- Minimal maintenance: Large maintenance problems or any maintenance problems that exceed a certain amount of money ($500) can be delegated to the landlord/seller
- Privacy: Your name will not be on the deed or in the public records until you exercise your option to buy
- Peace of mind: You will have full control of the home and can maintain or improve it however you wish
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