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Lease Option, Rent To Own, Rent To Buy, Lease To Own, and Rent with Option to Buy Are All Saying The Same | ||
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Lessons learned on exit strategies from rental properties and hard to sell real estate: Experiencing over 300 rental properties; equates over-buying. It was upsetting times at the Building and Safety Department for the City of Pontiac. Things were out of control with rental properties. With the help of an associate, Shirley Foote, a great Real Estate Broker, together making a Lease with Option to Buy Program, which was utilized to sell most of these rental properties. The Lease with Option to Buy Program resulted in the following: 1. Long-term tenants pay above market rent 2. Tenants who are taking pride in ownership, making improvements to the property 3. Sales that would not of happened otherwise, at above market prices. Using this exit strategy many times, it removed the overwhelming situation. Your tenants might not necessarily know the meaning of Lease with Option to Buy, but they do know the term, Rent to Own! RENT TO OWN Own rental property, or purchasing property for re-sale, there is a tool that will absolutely help in the "toolbox" of investment strategies-Lease with Option to Buy The basic overview of Options and how they can be used to increase profits and produce quicker cash flow for investment properties. First, let's clear up some "slang" terms often used with these that create confusion: Rent to Own, Lease Option, Lease with Option to Purchase all mean the same thing in general usage .Rent and lease mean the same thing; a lease is simply a rental agreement that is for a set period of time (e.g. twelve months required rental period) whereas people often refer to month-to-month situations as rentals. Benefits of doing Lease Options: More interested tenants; More qualified tenants; Higher monthly income from property; Higher sales prices; Reduced maintenance expenses. 1. Place an ad for property offering a lease with Option to buy, generally expect five times the number of responses than a regular "For Rent" ad. There are a lot of people looking for an opportunity to own their home rather than just continue to rent. 2. The tenants that call will be people inherently more responsible and serious about owning their next home, they are interested in owning a property. 3. Traditionally, with a lease option on a home, one will receive a monthly payment towards the option fee (the fee being paid to grant the option) in addition to the monthly rent, thereby increasing your monthly cash flow. 4. Since working with people who often aren't immediately able to purchase a home outright for various reasons, (usually credit or time on the job) it’s providing them the opportunity to own when they couldn't otherwise. People looking to buy with a lease option are generally willing to pay a slightly higher sales price, often 15% higher. What is Lease Option? An option is a grant of the right to purchase property, at set price and terms, from the owner of the property. The person who receives the option can (but is not required to) purchase the property during a set period of time agreed to by both parties when they enter the option. An option is different from an agreement to sell (Purchase Agreement) in that with a Purchase Agreement, the buyer agrees to buy and the seller agrees to sell. Under an option, the seller agrees to sell, but the buyer does not agree to buy, they simply have the option of buying during the option period. Note: In an Option, the Seller is the Option or (The one who gives the Option) and the Buyer is known as the Optioned (The one who receives the Option. What is needed to Set up a Lease with Option to Buy? To set up a Lease with Option to Purchase with a tenant, one will need all of the documents that would normally use to set up a simple rental/lease. (Rental Agreement, check-in/check-out list, Lead Base Paint Disclosure and pamphlet, Smoke Detector Agreement and any other agreements normally used). In addition, one will need an Option agreement, be sure to use one that protects as the Option or, as many option forms available favor the Optioned. Attached to the Option will be a Purchase Agreement, which will spell out the terms of the sale that the tenant may purchase under, in the future. NOTE: It is important that both parties just initial the Purchase Agreement on the top or bottom corner to acknowledge that the terms have been agreed to but it is not yet a binding Purchase Agreement. One will want to be sure to use an Option form that is non recordable, on the public records so that the tenant doesn't unnecessarily cloud the title to your property. How to Structure a Lease Option- Through experience, it is found that the following to be a good guideline for structuring Lease Options: 1. Charge market rent. Don't give discounts on rent just because the tenants are also paying you a monthly option fee or they are planning on buying the house; the option is separate from the rental. 2. Get as much option fee up front, the more the perspective tenants pay up front, the greater their risk will be if they don't follow through. Credit the option fee towards the sale price if they close. 3. In Michigan, one can only collect equal to 1-1/2times the amount of the rental rent as security deposit up front when renting, plus one may have to give it back if the tenants move. When doing an option, don't charge a security deposit; apply the funds the tenant would have paid to the option fee, which is non refundable. 4. Make your option cancelable if the tenants default in any of the terms of the rental/lease. (We have this incorporated into all agreements) 5. Work with a mortgage loan officer to qualify perspective tenants. Have the loan officer advise on how long it will take to have the tenant "mortgage ready", then set lease option term accordingly. 6. When pricing property, one will be able to get more than market price, but remember the property will have to appraise for the purchase price when they qualify for the mortgage. 15% or higher is a good range, figuring their option fee being deducted and appreciation. An excellent explanation of "why pay more" is the example of car insurance, you get some accidents and tickets, and then end up paying more. Just the same, credit scores affect the cost of financing and the availability of sellers to work with. 7. Make the tenant responsible for repairs and maintenance to the property; make sure the rental agreement states they are responsible for the cost of such repairs and renovations. (Keep in mind under Michigan law, owners are still ultimately responsible to perform repairs when renting property, but often tenants will perform or arrange needed repairs and even if they don't, one can charge the tenants for the repairs.) No matter what investment plan or strategy, options can be used to produce better profits and less "management intense" rental situations, as well as one of the best solutions to sell your rental property at top dollar. It can truly work as one of the best "win/win" situations in real estate investment. To learn more, visit our website at www.MrLeaseOption.com to see our class schedule and find out when our next Option Seminar will be held. Check out our products list. Disclaimer: Real estate investing by nature is risky. Win, lose or break even, we cannot guarantee a profit or loss. This entity does not provide legal, accounting or contracting advice
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