Lease Options Offer Multiple Profit Opportunities
By Jordan Taylor
Mention "real estate investing strategies" and the first thing that
typically comes to mind is buying and selling. But a strategy often
overlooked and underutilized is the option - and the smart use of
options can generate some fast and impressive profits.
An option gives the buyer the right but not the obligation to buy - but
the seller is obligated to sell. Combine the option with a lease, and
you have an excellent tool to use when you have a motivated seller with
little or no equity in the property, or one who doesn't have time to
wait for the traditional sales process to run its course. Instead of
buying, you lease the property with an option to buy. That gives you
control of the property and lets it generate cash for you - but you
don't have to own it.
The rate of residential foreclosures in on the rise in many parts of the
country. A pending foreclosure for any reason is just one of many
situations where lease option strategies can be used. Other situations
include sellers seeking debt relief or facing personal situations such
as a divorce.
"Lease options are a great way to get started investing in real estate,
especially if you have little or no cash," says Michael Van Horn, an
advanced trainer with Wealth Intelligence Academy. "Options let you
control property without having to buy it, and you can profit at every
step of the process."
Why do people use lease options instead of an outright sale?
Owner/sellers are likely to consider a lease option when they need to
get rid of the property but do not have enough equity to sell
immediately through traditional methods. For example, if the property
has mortgages of up to 95 and even 100 percent of its market value, the
seller would have to come up with cash to pay a real estate agent's
commission. On the other side, buyers who have flawed credit, who may
need time to come up with a down payment, or who want to "test drive"
the house or the neighborhood are all candidates for a lease/option
deal.
One of the most common option strategies is the sandwich lease option,
which works like this: You lease a property with an option to buy in
three years. You find a tenant/buyer who leases the property from you
with an option to buy in two years. When the tenant/buyer is ready to
close, you exercise your option, buy the property and sell it to the
tenant/buyer.
There are, of course, possible variations. You can use different time
frames. You can assign your option to the tenant/buyer or to another
investor. You can buy the property instead of leasing it, and then sell
it with a lease option arrangement instead of putting a traditional
tenant in the house.
"Tenant/buyers are much more attractive than traditional renters," says
Van Horn. "You can set up your lease so that the tenant/buyer takes care
of a lot of the routine maintenance. Also, because tenant/buyers expect
to eventually own the property, they are much more likely to take good
care of it and make their payments on time."
Van Horn recommends focusing your lease option efforts on desirable
neighborhoods generally, working-, middle-, and upper-income areas.
These are the areas where potential tenant/buyers want to own homes.
Also, remember that lease options can work on multi-unit buildings as
well as single-family homes. "If someone wants to get rid of a small
apartment building and is having trouble finding a buyer, he may be
willing to lease option it to you," Van Horn says. "You get into the
property for a smaller-than-normal down payment and you benefit from the
cash flow while you're working on the financing over a year or two or
more."
Laws regarding real estate options vary by state and it's a good idea to
check with a real estate attorney in your state to be sure are in full
compliance with all applicable regulations when you put together a lease
option transaction.
Jordan Taylor is the editor of Millionaire Mentor Newsletter, which is published
by Whitney Education Group, Inc. To sign up for a free subscription, visit
http://www.russwhitney.com More information about lease option
training can be found at http://www.wiacademy.com
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