Yesterday, I talked about 5 advantages to lease option investing.  To be fair, today I'm going to look at some of the risks associated with lease option investing and how to manage them.

The biggest risk in lease option investing is the possibility of the seller having a problem financially, either paying their mortgage or property taxes or some other event that results in a lien against the home.  This can be a problem because it can prevent the seller from selling the home when it comes time to close the deal.  So how do you manage this risk?  First, check to make sure the seller is solid, always pull title work on the home.  Second, record a memorandum of option.  Third, get a signed bank authorization from the seller so you can contact their lender directly to verify payments are being made - or insist on making the payments yourself and sending verification to the seller.

There is also the risk of the tenant buyer you place in the home not paying their rent.  If this happens you need to take the proper steps to evict, don't dawdle on this, get the process started right away.  The buyer can always catch up, but you can't make up for lost time if you delay by listening to sob stories from the buyer.  You can manage this risk by doing proper tenant-buyer screening.  Don't go by gut feeling, do the proper screening to make sure you are putting a solid tenant into the property.

Like any kind of real estate investing there are always some risks involved, but the big advantage you have with lease option investing is that you don't have to close on the deal.  It's an option, meaning you have the option to buy, not the obligation.

Here are 5 great advantages to lease option investing:

1. Little to no money down investing.  Whether you are buying from owners directly or through Realtors, there is little to no money down required to buy a lease option
2. Little to no risk.  If you're buying a house on a lease option, you also maintain the right not to buy it.  This, to me, is the best benefit of lease option investing.  If the market goes up you can buy; if it goes down you can try to renegotiate or you don't have to buy.
3. No qualifying.  In most cases with lease options you will never have anyone ask you for your income or credit information.  This is done by building rapport with the seller or the Realtor.
4. You can buy them with your IRA.  This is a little more advanced concept but you can buy lease options with your self-directed IRA.  This allows you to get your profits tax free!  You need the right type of IRA and the right IRA management company.  I use Equity Trust.
5. The seller will love you.  The seller will be thrilled that you helped them with their situation.  The won't be able to thank you enough if you looked for a solution that was a win-win.

These are some of the reasons that I love doing lease option investing.