Lease Option Program

Introduction

“You have to learn the rules of the game. And, then you have

to play better than anyone else”.

Albert Einstein

The financial recession of 2008-12 created a different real estate environment for real estate investors.  As a matter of fact, the number of people who can qualify for financing is now less than 30%.  Banks have tightened up on credit qualifications making it more difficult to qualify for standard mortgages.  In addition, thanks to the “Dodd-Frank Act” banks must now conform to more rigid banking and loan standards.  As you know, the HUD FHA loan program now requires sales to be “seasoned” for three months before they can be contracted to sell.  This move by HUD creates a waiting period for buyers costing more in carrying costs for investors. 

So, What is the Answer?

It is time to play a different game!

Lease Option Program

Highlights of the program:

Locate good candidates--discounted homes matching fix & flip eligibility

This step is no different than any other real estate deal where the real estate investor finds discounted financially stressed homes to buy and renovate for retail sale.    

Build a loan package to present to private lenders for long term financing

The loan package needs to include an analysis of the home based on leasing to a tenant.  Part of the loan package should show comparable listing and sales comps proving after repair market value and current lease rates in the area. 

Find a good tenant who wants to be an owner in the next 2 years or less

This step requires a marketing and screening process to weed-out unwanted and less desirable tenants. (See next step below)  The tenant should be financially able to put up a non-refundable option (money) in order to enter into a contract. 

Hire a licensed professional real estate management firm. 

Finding a good qualifying tenant requires a thorough investigation and screening process.  In addition, the management firm will not only manage the property but also works with the tenant to obtain permanent financing in the near future.

Sell the home to the tenant in two years or less  

This is where you “cash-out” on the deal.  By this time, you have been receiving monthly cash flow and now you complete the sale of the property.  The lender is paid and your reward provides an excellent return for your efforts.  

Benefits of Lease Options:

Very little out of pocket capital required

Private lenders should not only finance the cost to purchase but also the renovation costs to rehab the property.

Good solid tenants who pay on-time

If you find a tenant who is interested in owning the property and willing to provide a non-refundable option, they are invested because they have skin in the game.  Consequently, they will be more apt to take care of the property and pay rent on time. 

No minor maintenance issues from tenants

The lease option agreement should state that the tenant is responsible for all minor repairs under $500.00.  This will keep you from having to repair toilets or any other minor repairs during your ownership.  In addition, it gives the tenant a taste of home ownership while they are renting. 

Tenants have time to clean up their credit and qualify for a loan

During the lease period, the real estate manager can work with the tenant to obtain financing from a lender by assisting to clean up credit, reporting on-time rent payments to credit bureaus, acquire a secure credit card, and open a checking account. 

Increase the overall return on your investment and recapitalize your assets

After two years or less, you should be able to sell the property to your tenants for a premium agreed upon in the lease option.  Once sold, the profits can be reinvested into other real estate investments.  The overall return on your investment is higher because of the monthly cash flow and the appreciation of the property. 

No retail sales commissions and expensive closing costs

You are not initially retailing your property, therefore; no upfront 6% commissions and 3% closing costs to absorb.  You will pay a small commission on the lease agreement and monthly management, then a smaller commission, usually only 3%, commission for the sale on the back-end.  The majority of closing costs are paid by the tenant-buyer.