Re: lease option - Posted by Russ Sims
Posted by Russ Sims on December 29, 1999 at 24:18:11:
Mike: A lease/option is really nothing more than a rent-to-own. So the scenario would envolve a homeowner renting you their home, and giving you an “option” to buy it at some point.Usually a portion of your rent is applied to the purchase price of the home, so that the longer you rent, the more the price of the home goes down.Many investors (myself included!) love lease options because they are a powerful way to purchase property for little or nothing down.When I say purchase property, I use the term loosely because you don’t own the home for the term of the lease. However you do CONTROL the home, in that you can sub-lease/option it out to the tenant/buyer of your choice (provided the homeonwer agrees to let you do so). Here’s an example: Mr. Smith is selling a house. You approach Mr. Smith and ask if you can make his mortgage payments for him until you can buy the house.Mr. Smith doesn’t have much equity in the home because he’s only lived there for 2 years. Now he must move due to a job transfer. He doesn’t give a darn about getting cash. He just wants his $800 mortgage payment off his back. You come along and agree to make that payment for him, and you agree on a selling price that’s good for the term of the lease,let’s say $100,000.You get the home for zero down (you don’t really think Mr. Smith expects you to pay to solve his problems, do you?)and then you set about finding a tenant/buyer. To your surprise, you find someone in less than 2 weeks!The t/b you find pays you $3000 (called an option fee which will apply towards purchase) and agrees to your lease amount of $950 per month. They also agree to pay your selling price of $110,000. Look at what you’ve done! You’ve created a valuable commodity out of thin air! For your efforts (and maybe you have,oh, 10 hours into this deal) you collect $3000 up front, you sit back and collect a monthly cash flow of $150.00 (950-800)and you walk away with a $7000 check at the closing with your t/b.This will be what they call a simultaneous close, because you are buying from the seller and selling to your buyer in one transaction. You briefly take title to the home before relinquishing it to your t/b.
This form of investing does not make you a landlord, at least not in the traditional sense of the word, because the t/b agrees to do all maintenance and repairs.If they don’t you can take it out of their option fee. If they don’t pay their rent, you can retain the the $3000 option fee and revoke their purchase option.This motivates the tenant to behave.This form of lease/option investing is called a sandwich lease.It is a very powerful investment tool!