Lease Options

Lease Option is a Powerful form of Seller Financing

A lease-option, also sometimes known as “rent-to-buy” is a great way to purchase or sell a keeper property and generate cashflow. In effect you are renting you property and giving your “buyer” an option to purchase at a later date. In the meantime, you have all the benefits of property ownership, but without the usual risks associated with owning property.

The reason why lease options work is because the primary focus of most buyers is the monthly payment – not the actual price of the house, interest rates, closing costs, the condition of the house, etc. If you go to a car dealer to buy a new or used car, have you noticed how they don’t want to talk about the price of the car? They just want to know how much money you can put down and what you can pay each month. Their entire focus is on the monthly payment. Lease options work in the same way.

Components of a Lease Option

A lease option is both a lease on a property with a separate option to purchase. A lease option has four distinct parts: -

1. Lease. You as “buyer” are actually leasing or renting the property. Once you have control of the property, you can begin any rehab that the property may need. Any work you do to improve the property should add to the resale value.

   As an optionee, or a buyer, of a lease option, make sure you have full rights to sublease the property. This way you can lease option or rent the property to generate cashflow for yourself.

2. Option Price. This is the price you agree to pay the seller, if you decide to purchase the property during the term of the lease.

   You have the right to purchase the property at the option price and you maintain that right for the length of the option period, regardless of future property price increases.

3. Option Expiration Date. This is the date when the option to buy expires and becomes invalid. This date can vary and needs to be negotiated between parties.

   As a buyer you want the longest option period you can get. This will give you time to rehab the property and/or generate the maximum cashflow during that period of time.

4. Option Fee. The buyer pays a negotiable option fee to the seller, which may be anywhere from $1 to several thousand dollars depending on the property.

   Note that this fee is a non-refundable. This fee buys you time to decide whether or not you want to purchase the property. If the option expires and you do not exercise the option (purchase the property), then the seller keeps the option fee.

The option part of the agreement gives you the right, but not the obligation to purchase the property at a predetermined price within a specified time period. The optionor, the person granting the option, on the other hand, is obligated to sell the property at the agreed upon option price.

One of the big buyer incentives of a lease option deal is that a part of each monthly payment is applied toward reducing the option price of the property.

This way, they are effectively building equity in the property while they are renting.This is big a plus over just renting a property.

A Typical Lease Option

Here is an example of a typical lease option: -

So, if the Optionee exercises the option to purchase their purchase price would be $161,700. We will have made a contract profit of at least ($161,700 – $137,000) = $24,700 at the end of the option period. We of course will have made positive cashflow each month from the Optionee’s monthly payments.

Certain lenders look upon lease options favorably and consider a person that is lease optioning a property to be basically an “owner”.

It demonstrates that the Optionee has a track record of making payments.

In certain instances, some lenders will even refinance the property for the Optionee. A refinance is a much simpler and more attractive option for a lot of lenders.