Top Dollar Exits, For Bad Real Estate Buys!

A few years ago, I had over 300 rental properties; I was over-buying more properties than I could manage. Things were out of control. The following is a Lease with Option to Buy Program; I put together to sell most of those rental properties. “This Lease with an Option to Buy Program” resulted in the following:

1. Long term tenants who pay above market rent
2. Tenants who are showing pride in ownership, and making improvements to the property
3. Sales that would not of happened otherwise, at above market prices

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 otherwise know as Lease Options:

This is a tool that you will absolutely want to include in your "toolbox" of investment strategies- especially homeowners in slow moving markets or investors purchasing property for re-sale.

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.

Rent and lease mean the same thing; a lease is simply a rental agreement that is for a set period of time whereas people often refer to month-to-month situations as rentals.

BENEFITS of doing Lease Options-

Let's look at what that you can expect when you offer your property on a Lease with Option to Buy:

    More interested tenants
    More qualified tenants
    Higher monthly income from your property
    Higher sales prices
    Reduced maintenance expenses

1. If you place an ad for your property offering a lease with Option to buy, you can generally expect five times the number of responses to the “Rent to Own” add than you get from a regular "For Rent" ad.   More People are looking for an opportunity to own their own home, than just continue to rent.

2. The tenants that you get calls from will be people who are more responsible and serious about taking care of “their future home”. 

3. Traditionally, with a lease option, you will receive a monthly payment towards the option fee in addition to the monthly rent, thereby increasing your monthly cash flow.

4. Since you are working with people who often aren't immediately able to purchase a home outright, you are providing them with the opportunity to own property where they couldn't otherwise.

What is an 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 Optionor (The one who gives the Option) and the Buyer is known as the Optionee (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, you will need all of the documents you would normally use to set up a simple rental/lease. (Rental Agreement, You can visit our web site for free rental agreement at: http://mrleaseoption.com/

In addition, you will need an Option agreement, and you want to be sure that you're using one that protects you as the Optionor, as many option forms available favor the Optionee. 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.

How to STRUCTURE a Lease Option-

Over the years, we have found 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 agreement.

2. Get as much option fee as you can up front, the more the perspective tenants pay up front, the greater their risk will be if they don't follow through. We will take a note and payments combined with cash as option fee. The option fee is non refundable in the event the tenant defaults. The note keeps the tenant at risk.  The option fee is credited towards the sale price, if they close.

3.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 by you if the tenants default in any of the terms of the rental/lease.

5. Work with a mortgage loan officer to qualify your perspective tenants. Have the loan officer advise you on how long it will take to have the tenant "mortgage ready", then set your lease option term accordingly.

6. When pricing your property, you 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.

7. Make the tenant responsible for repairs and maintenance to the property; make sure your rental agreement states they are responsible for the cost of such repairs and renovations. (Check state and local laws for rules)
 
As you can see, options create opportunity though creating larger profits, decreasing management and repairs, and selling your property at top dollar.

Copyright 2006

Mark Maupin   248-939-6232

Contact information: www.mrleaseoption.com  www.megaeveningevent.com   www.detroitinvestmenthomes.com