Using Lease Options to Buy Property

Purchasing property through the use of Lease Options has been a common low risk, low cost Buying Method of investors for many years.

Here's how it works. Searching the For Sale ads, you find a home being offered as a Lease Option. This means that in addition to renting the home just like a regular tenant, you will also have an option contract. Normally these contracts are for 2-3 years, and the future price of the home is set at approximately 3-5% annual appreciation. You give the owner consideration of $3000-5000 for the right to buy in the agreed upon time period. Every month, part of your rent (which is normally higher than fair market rents) goes towards the down payment. If exercised, so will the original consideration.

Now, you can either live in the home yourself and/or sublease it to a tenant, and then exercise the option within the time period specified. Or you can try to lease option it to a tenant/buyer (they sign a lease option with you), with a time period less than your original timeframe. Their rent must be higher than your rent, however, or you'll have negative cash flow. Many buyers will do this because they either have poor credit, lack of job history, or some other reason they can't buy a home through traditional means.

With any type of option, the thing to be careful about is if you DO NOT exercise it within the time period agreed upon, you will lose your money! So be careful before purchasing a property this way that the consideration you put down is an amount that if you lose it you won't be financially devastated.

Lease options aren't the only type of options available. Here's another strategy. You locate a piece of property that you think you would like to purchase, or perhaps an investor or partner of yours might want. But you don't have the money to buy it right now. Or maybe you need to perform some due diligence on the property before deciding if you really want to buy it.

However, you want to tie up the property so the owner doesn't sell it out from underneath you. Also, you'd like to lock in a price now while the seller has no other prospects.

So here's what you do. You offer the seller an Option to Buy their property. You set the term within which you will exercise and purchase the property, and you decide what the price of the property will be at that future date. In order for the seller to tie up his property in this manner (keep in mind, if he accepts an option from you, he CANNOT sell it to anyone else during the period), you must give him what's called consideration.

What is Consideration? It is a fee of sorts. Similar to an earnest money deposit when you make a traditional offer on property. The consideration can be any amount the parties agree to, sometimes even as little as $1. Or, the consideration could be an item you own, or a service you provide.

For instance, let's say you've located a multi-unit apartment building that you really want to buy, but you won't be able to get the funds together for a year. So you offer the seller an one year option contract for an agreed to price. As consideration, you will manage the property at no cost to him for the next year.

Not only have you tied up the property for the next year at no cost to yourself other than labor, but now you have unlimited access to the building, its tenants and more than likely it's financials. Talk about due diligence! Believe it or not, this kind of thing is done all the time.

What happens next? You'll have some time to investigate any of your concerns about the building, area, etc. You also have time to go out and find another investor to buy it from you (you now CONTROL the property since you own the option), at a price higher than the option price you negotiated.

For example, let's say you and the seller agreed to a price of $339K for the multi-unit building, but you notice that the rents are severely under market, they have inoperable laundry machines, and with some small upgrades to the property, you could easily increase income and lower expenses, thus increasing the value of the property. So you find an investor, make your proposal, and they agree to buy it from you for $359K. You've made $20,000 just by finding a property with potential and finding an investor who will buy it.

Sounds too good to be true. Maybe, but it's happening all across the country every day.

Lease Options are just one more creative way of purchasing property for little or no money down!