This article is the seventh in a series of seventeen articles that will give readers insights into how real estate investors are able to do transactions with little or no money, no credit and little or no risk. In this part of the series we will discuss the technique that is called a Lease-Option Contract. Slot Game Online.
The lease-option contract is actually two contracts in one or two separate contracts where one is a lease and the other is an option to purchase the property. Terms of the option contract should at least include the length of time to exercise the option, the exercise or "strike" price, any extensions available to the buyer, and the amount or cost of the non-refundable option consideration (this is not a deposit). The lease part of the lease-option contract is simply a locally applicable lease that has embedded language that if the terms of the lease are not adhered to, the tenant (Optionee) forfeits his rights under the option contracts. The owner (Optionor) can evict the tenant under the terms of the lease. Slot Game Online.
The benefit to an investor could be that he leases a property to live in, as he has to have somewhere to live, and either exercises the option a year later, resells the property to an end-buyer using one of the closing techniques in this series of articles, or he walks away having rented a property for a year (terms can vary considerably and multiple years may be available from the Optionor. Slot Game Online.
The much more powerful method of using lease options is do what is commonly referred to as sandwich or butterfly lease options. In this scenario, an investor gets a property under a lease option contract and re-lease options the property to a perspective end-buyer. The complete transaction looks like:
1. Seller (A) leases and options the property to an investor (B). As an example, the rent could be $800 a month and the non-refundable option consideration should be $100 and a purchase or strike price of $150,000.
2. Investor (B) re-lease options the property to an end-buyer (C) who wants to live in the property for $1,300 a month and with a non-refundable option consideration of $5,000 and a purchase price of $175,000.
This is a classic A to B and then B to C transaction, similar to what happens in short sale closings where investors are taking a profit out of the differential spread they made by finding a buyer at a higher price than they paid. The investor has the ability to give the end-buyer a credit of say, $150 each month at closing, if his rent is paid by the first each month and the investor should have the Seller pay for repairs over $2,000 and the end-buyer pay for repairs less than $2,000 so the investor has no property maintenance expenses. Slot Game Online.
Only a few options exist when the option comes due in a year:
1. The option and lease can be extended by the Seller and the investor.
2. The option is exercised and the investor will have made a $500 per month profit differential between what he paid the Seller and what he received from the end-buyer or $6,000 annually. In addition, the investor will make $25,000 on the price differential the Seller gets and the end-buyer pays for a total profit of $25,000 + $6,000 = $31,000 on a $100 investment.
3. The end-buyer defaults on the agreement and the investor can't re-lease option or extend the length of the option. In this case the investor would lose his $100 option consideration with the Seller, gain $6,000 on the rent differential and keep the end-buyer's option consideration of $5,000 for a total profit of $5,000 - $100 + $6,000 = $10,900 on an investment of $100.
In summary, the Seller should have equity in the property for this transaction or allow a subject to assume their mortgage payments. Some attorneys disagree with me but my experience shows that having a single lease option contract combination is harder to defend in a court action; having two documents, a lease and an option contract is simpler to use to evict an unruly tenant (end-buyer). So in the above example, the investor would get a single contract from the Seller but give the end-buyer a separate lease and option agreement. Some states are regulating the use of lease options and their terms where a homeowner in foreclosure is a party to the transaction. Always seek legal advice before trying lease, lease-option and option contracts on your own. Slot Game Online.
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