lease option - Posted by mike

Posted by Russ Sims on December 30, 1999 at 12:53:15:

Good question about the closing costs.Yes, there will be 2 sets of closing costs to figure in. The above example was predicated on being able to defer closing costs to the seller and your buyer. One way to avoid them entirely is to “assign” the deal to your tenant/buyer. In this case the t/b pays you an assignment fee of say, $3000.00 and then steps into your shoes. Your contract with the seller must give you the right to do this, and it must stipulate that after assignment, you are released from all liability. This is a quick way to get in, get it, and get out. You don’t make as much money but you also have fewer responsibilities…

I’m new at this so I don’t have a long track record to give you averages from, but in 7 months I’ve done 9 of these…average gross profit per deal is probably 10-15K. This is IF the t/b exercises their option. Each of these deals has generated $2-4K in UP FRONT profit.

lease option - Posted by mike

Posted by mike on December 28, 1999 at 23:28:43:

Can anyone explain to me in simple language what a lease option is and how it works?I am a newby and am looking for some direction.Thanx

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!

Re: lease option - Posted by Dave R

Posted by Dave R on December 28, 1999 at 23:50:15:


Think of it as “rent to own”. In other words you rent(lease) the property for an agreed upon amount of time, and at the end of the lease you have the option to purchase the property for a locked in price (this price is agreed upon in advance between landlord and tenant).

Usaully there is a rent credit involved, say 50-100% will be applied toward the down payment. Also a non-refundable sum of money may be payed up front which also gets applied to the downpayment if the option is exercised.

Any other quetions feel free to ask.

Dave R

Re: lease option - Posted by Jim Kracht

Posted by Jim Kracht on December 29, 1999 at 01:02:50:

Russ, Thank you for such a clear example, I just ask do owners really let the investor do this and what is the best way to find owners that will allow it?

Re: lease option - Posted by Russ Sims

Posted by Russ Sims on December 29, 1999 at 11:28:17:

Jim: While it may seem somewhat far fetched to expect a homeowner to let you lease their home out, in practice it’s not that difficult. It’s a matter of finding a motivated seller and telling them that you are trying to find someone who will purchase their home eventually. I stay away from the word “tenant” and stick to the word “buyer”. When the homeowner realizes that you will be trying to put a qualified buyer into the home, you’re less likely to encounter objections.

What’s the best way to find these home sellers? The bulk of my deals comes from my “I buy houses” ad in the daily paper. You can also look for for-sale-by-owner properties where you suspect that the owner has little equity. Sometimes the ads are dead givaways; they’ll say “JOB TRANSFER; MUST SELL” or “NEWER HOME FOR SALE”…These are good indicators of motivated sellers with little equity.

Re: lease option - Posted by Jim Kracht

Posted by Jim Kracht on December 30, 1999 at 24:52:00:

Russ, Thanks for responding to these basic questions. Where can I find a sample lease option, and find out what is required here in Texas as far as recording the signed l/o, I am sure there are courses available,what is the most cost effective program? I realize this may be subjective information. I need to do something to generate a couple thousand dollars for a very important project, so anything you can recomend is greatly appreciated. I realize this may not be the place to receive this info, if email would be better my address is, Thanks so much in advance.

Re: lease option - Posted by ANT-NJ

Posted by ANT-NJ on December 29, 1999 at 13:25:48:

Russ…I got a question…What happens with the closing costs at simulateous close? Are there 2 sets of the them or really just one deal going on? How many of these deals do you do a year and what is average profit over the course of the deal?