Lease Purchase - The Workings of the Contract

Buyers and sellers are free to write almost any clause they want to into a lease purchase agreement as long as they stay within their state laws. It's always a good idea to have a real estate attorney involved with your first several lease purchase agreements.

With a lease purchase, the seller and the future buyer typically agree on the future price of the house. One option is to set the price at today's market value with an inflation or market escalation clause tied to a reliable and specific index. It's common for the purchase price to be about 10% above market value.

Lease purchase offers the seller the highest sales price, a high option payment, the highest rent, and the least expenses. Lease purchase is the way to go.

The next major step in setting up a lease purchase agreement is establishing the cost of the option. Some sellers include the option price in the down payment if the buyer exercises the purchase option. Most don't. The option price in a lease purchase is substantial. This is how the buyer gets skin in the game and is a major motivator to completing the entire lease purchase.

Lease Purchase Benefits for the Buyer

The buyer in a lease purchase arrangement gets to 'test drive' the house, the neighborhood, and the school district. Depending how the contract is written, the buyer may have the price locked in for years in a rising market. This isn't a bad thing for the seller because the more value the buyer has in the property, the more motivated they become to complete the lease purchase process. If the market falls to far the buyer will walk away.

Although the option money doesn't usually apply towards the down payment, a portion of the rent normally does. This benefits both the buyer and the seller. In today's world, many people find it almost impossible to save money towards a down payment. Having part of the rent go towards the down payment is a way of forcing a buyer to make it happen. For the seller in a lease purchase, applying a portion of the rent towards the down payment is no big deal because the rent is set above market value. It's all upside for the seller. If the buyer doesn't execute the purchase, the seller keeps all of the above market rent. If the seller does go through with the lease purchase, the seller has sold the house at an above market price and collected the option money up front.

While technically the buyer is required to make the purchase in a lease purchase agreement, it's important for the seller to be reasonable. If the buyer walks away, it's likely because they can't afford to make the purchase or can't qualify for a loan. The seller may feel they want to compel the buyer to complete the purchase but it's probably unreasonable to do so. It's better to accept that you've made a bundle in option money and high rent and just start the lease purchase process over again with a new buyer and new option money.

Learn from my more than 20 years of experience in the real estate investing business including specialized lease purchase training at wendypatton.com.

So, I went looking at short sales. Homes that the owner is underwater with the mortgage and is asking the bank to take less than what is owed as full repayment of the mortgage.

Reasons Short Sales Have Potential as Option Homes

Short sales often cost banks less than foreclosures. Clearly, the less you can buy houses for the more you can earn converting them into option homes. It took banks some time to realize it's beneficial for them to allow short sales more often than foreclosing on the properties. One reason you can acquire short sales to convert to option homes is that the bank never takes possession of a short sale. They don't have to pay property taxes or maintain it. Now couple that with the fact that the seller won't receive a penny from the sale and you have a formula to buy short sales at a very low cost to turn into
option homes.

Option homes are one of, if not the best, ways to maximize your real estate investing dollars

Some short sale negotiators I know tell me that recently they've had 80% to 90% of their short sale offers accepted. All of this should be telling you that it's time to look at short sales as a source for option homes investing.

Tips for Converting Short Sales Into Option Homes

First of all, don't get bogged down doing the short sale negotiation. You're in the option homes business not the short sale business. Every new short sale requires that the sellers be educated in the process and requirements. Then the seller has to be handheld to collect the needed documentation. And then multiple negotiations happen with the bank. You need to stick with the option homes side of the business and let someone else deal with the short sale.

Not all short sale offers will be accepted, so you want to structure your purchase offers in a way that maximizes the profit and cash flow for your option homes. One way you do this is by requiring the inspection be performed only after the bank accepts your offer. No point in sinking money into the option homes deal until you know your offer will be accepted.

Same thing with any earnest money deposit you make. To maximize the cash available for other option homes deals, you want to put in the minimum cash you can at the front end of a short sale. Even with minimum in, it's reasonable to require that the check not be deposited until the bank accepts the short sale offer.

Now it's time for you to take action by making a few short sale offers to grow your option homes business. But first, you will want to take advantage of these other free resources.

See my article and quick video on Getting Your Real Estate License for Real Estate Investing. Also, take advantage of my Free Book Offer and Video Training for finding motivated sellers to make the most of your option homes investing. There is valuable content in all of these resources I'm providing to you free. By taking advantage of them, your options homes business will prosper.

I hope you enjoy reading my blogs about option homes as much as I enjoy bring information about options homes to you. Please visit often and leave comments below.

Real estate markets across the country are suffering right now. Sellers can't sell and buyers can't get mortgages. Real estate agents are finding it difficult earning a living. Gone are the days of expecting it to sell with minimal effort. It's time to get creative by learning what is a lease option!

What is a Lease Option?
Lease options are a way to buy and sell homes without an immediate conventional mortgage. It puts buyers who can't qualify for a mortgage right now into a home right away while they improve their credit and build up a down payment. It gives sellers the ability to beat their competition, which there is a whole lot of these days. Sellers will reach a much larger pool of potential buyers. They can expect to sell their home quicker and for a better price. For many sellers it's the ONLY way they will sell their home in this market.

The challenge for Realtors, buyers, and sellers alike is having an education about what is a lease option.

A lease option works like this: The buyer and seller agree to an option that giving buyers the right to purchase within a set period of time. During this option period, the buyer leases the home. By the end of the option, the buyer either purchases the home or forfeits their option fee. While the option is valid, the seller cannot sell to anyone else. In a nutshell, that answers what is a lease option.

Advantages for Sellers When They Understand What is a Lease Option?

This is what sellers need to understand when the question of what is a lease option is addressed.

1. Allows them to beat their competition.
2. Sellers collect rent while the house would otherwise sit vacant.
3. They will most likely receive a higher purchase price.
4. The can sell their home in a down market when few traditional sellers are able to.
5. Allows the seller to actually sell their home instead of just renting it.

Advantages for Agents When They Understand What is a Lease Option?
This is what agents need to understand when the question of what is a lease option is addressed.

Selling on a lease option isn't as ideal as a conventional sale where you get your entire commission up front but it's a whole lot better than:

1. Turning away potential buyers who can't currently qualify for a mortgage and you can't explain what is a lease option.
2. Having your seller rent their home because it won't sell and you only get a tiny rental commission. Knowing what is a lease option changes the game.
3. Losing a listing because the seller blames you for their home not selling.

Once you know what is a lease option, you still receive your full commission - part of it upfront out of the tenant-buyer's option fee and the remainder when they purchase the home.

Obviously selling on a lease option is not the first choice for sellers or agents. Whenever possible we want to sell to conventional buyers. However, when that isn't working this is a great alternative.

For more information about what is a lease option, check out my book, Rent-to-Sell, a step by step hands-on guide to selling your home as a rent to own.  To Find out more about finding motivated sellers you can get my free ebook on my facebook page:  Wendy's Page.

Some banks are beginning to rent houses until they can sell them. However, they are using property management companies rather than allowing lease options. The reason being is the banks are not staffed to manage property and certainly don't have staff trained to manage lease options that involves dozens of real estate investors. The fact remains a cash purchase is your best real estate option for acquiring REO.

Cash purchase is the best real estate option for REO

Cash Purchase Is Your Best Real Estate Option for REO

This real estate option is a challenge for the beginning investor short on cash. However, depending on your location, many of these properties are selling well below market value and offer a big upside if you can exercise a cash purchase real estate option.

This real estate option is such an opportunity that if don't have cash but can obtain financing or find a partner with cash, I recommend pursuing a cash purchase. Once you own, you can than maximize your cash flow and long term profit by offering a lease option.

You'll maximize your cash flow and profits by offering a lease option because there are so many people wanting to buy but can't obtain financing. When you offer financing assistance as a real estate option to buy, you dramatically increase your potential buyers market to include those willing to pay above market value for the opportunity to own through a lease option.

Another Real Estate Option for Agents

Some agents might want to explore starting a property management side business. If you can contract with a bank or two to rent and liquidate REO, it will be a big boost to your business. A property management contract for REO gives you a major insider advantage to the best REO deals the bank has without needing to make cash purchases.

After you establish a track record with the bank, you could even broach the subject of allowing you exclusive rights to begin offering lease options controlled by your business. Remember, banks aren't going with this real estate option because they don't have staff trained to management and don't want leases options with dozens of investors. Being the single contact for lease options and being the only investor contracting with potential end buyers could open this lucrative opportunity for your business.

What are you seeing in your REO market? Lower inventory right now? Write a comment or ask a question. It's always a pleasure to hear from readers.

Typically buyers won’t try to negotiate price.  They often accept your asking price (which includes a rent-to-own premium) because of the flexibility they receive by doing rent-to-own.  However, should a buyer try to negotiate on price (and they will if they read my book, Rent-to-Buy) there are a couple of ways to counter them.

1.         You want to emphasize the flexibility they are receiving by being able to rent the home before they buy it.  This type of flexibility justifiably commands a greater price than a comparable home being sold conventionally.

2.         You want to emphasize the rarity of what you are offering.  Simply put, a buyer who is buying a rent-to-own home has very few choices in homes.  There aren’t that many out there.  This rarity also makes the home more valuable.

2.         Option Fee

More than any other term buyers will likely try to negotiate a smaller option fee.  In some cases they’ll do this because they don’t have enough money saved, in other cases they’ll do it simply because they don’t want to part with the money.

Obviously the more option fee you receive the better because it means the buyer is less likely to walk away from their money.  When a tenant-buyer tries to negotiate a lower option fee you can counter it by:

1.         Pointing out that the option fee counts as a down payment when they are trying to qualify for a mortgage and the larger the option fee the better it will look to the lender.

2.         (If the tenant-buyer has poor credit) Explain that you are taking a risk by letting someone who can’t currently qualify for a mortgage move into your home and that the option fee is your security against that risk.  Tell them that the option fee conveys their seriousness about the home.

3.         Closing cost contributions

Typically at the beginning of the option period tenant-buyers won’t ask for or won’t know they need to ask for help with closing costs.  This usually comes up at the point when they are applying for a mortgage and discover that they need to pay them.

This is when either their real estate agent or their mortgage broker will tell them that they can ask the seller (you) to help pay closing costs.  The way this is usually handled is that the purchase price is increased to offset all of or part of the closing costs.  Assuming that the home will appraise for enough to cover this.

You may have done this when you bought the home yourself, it’s a very common practice.  By increasing the purchase price to cover closing costs, it’s mostly a wash for you as the seller.  It does end up costing you a little bit with increased taxes, commissions, title fees and so forth based on the slightly higher selling price (maybe a couple hundred dollars depending on the cost of your home).

I recommend granting this concession if you can because it gets your buyers to buy your home.  The cost to you is pretty small so it’s worth it to get your home sold.  If you suspect that your home won’t appraise for enough to cover the closing costs because property values are going down in your market, you may want to encourage the tenant-buyer early during the rental period to start saving some money to cover their closing costs when they get a mortgage, this way you are less likely to have to add them into the purchase price.

2. Structuring the Deals through Realtors
Tell the agent how you found out about them – butters them up a bit – and let them know that you are willing to give a presentation. Suggest that the Realtor fax you a potential listing. If you have already developed a relationship with the Realtor, you can always “dig” a little during the phone conversation to see if they have a property that is a good candidate for a lease option that they might have overlooked.
A. Proposal – used to put together a mock-up offer to a Realtor that they can then present to the home owner or seller. It will put down the overall terms in writing without the specifics. This saves a lot of paperwork because you only fill out the other paperwork when you have an agreement on the proposal.
B. Letter to get into the brokerage office – I tell the broker what I do and don’t be anxious on the proposals – make it low pressure. When you’re first starting out, you‘ll want more deals to go through because there’s a great excitement in the newness of the game. Don’t get too wrapped up in a deal happening, because a lot of them don’t happen. I probably get about 40% of the proposals I put out- which means that 60% come up empty.

3. Unwanted Buyers
A Realtor will get a pre-approval letter from a mortgage company before they show a home to a prospective buyer. Otherwise they’d be wasting valuable time and energy with a lot of people who are looky-loos and not serious buyers. The Realtors don’t want to waste their time with those buyers, but those are the buyers I want and I need the names from the Realtors. So I send the Realtors a “Garbage letter” which basically says, “Don’t throw those names and numbers in the garbage! I can help the buyers get into a home with lease options. I offer a $1000 finders fee for every name that ends up in a deal.” This is another incentive to Realtors to work with me. I’m not out to steal their business – I’m here to help them and to offer a unique service to buyers with financial history difficulties. I want to help them move their inventory, so I am interested in the buyers they can’t help in traditional methods.

Working with Realtors is key in any lease option deal.  For more information about Generating Leads through Realtors check out my book Investing in Real Estate with Lease Options and Subject-to Deals.

Whenever possible, you want to be the one selecting the location for your negotiations. Buying a home is almost always an emotion-based process. Once you find a home you like, you become emotionally attached to it. Emotional attachment can cause you to make unwise decisions when making an offer, handling negotiations, and so forth. Once you’ve fallen in love with a house and visualized it being your home, you’ll start to do WHATEVER it takes to make sure it becomes your home.

For instance, if you are making an offer to the sellers and are staring out the window at that swimming pool you fell in love with, how strong do you think you’ll negotiate? The answer is: not very. You’ll do whatever it takes to get the home because your emotions are controlling your negotiations.

You might be better off meeting with the seller on neutral ground to make your offer. This will help you keep your mind focused on buying the rent-to-own home without being so emotionally attached to it.

If you are working with a real estate agent, you won’t be meeting with the seller in person to make your offer. Your offer will be submitted through the agent. This way you don’t have to worry about the location of negotiation.

• What strategies work best right now in today's market
• How to maximize your profit potential when using these investing strategies.
• Strategies you'll be able to implement the very next day!

The training offered at this event will be, without question, some of the best you have ever been a part of at any real estate event. You'll walk away with the ideas and concepts that can put tens of thousands of dollars in your pocket! This Boot Camp will also be saturated with strategies and concepts that work in today's market. As most of you know, I specialize in Lease Options and Subject To's. Both of these strategies will be covered in detail during the Boot Camp!

And, given the current real estate market's condition, this couldn't be a more perfect time to attend the “Soft Market Investing” Boot Camp.

The first Boot Camp was held June 26-29 and was sold out! Hurry up and Register….Seats are filling up fast!!

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