Click to read expert articles on Lease Option and Rent to Own Strategies

Lease Buy Option Articles

Lease Options are Back: Proceed Carefully
Lease Option Should Specify Terms of the Sale
How Lease Options Saved Me from Bankruptcy
Lease Purchases: Landlord-Tenant Rules
The Ultimate Lease Option Strategy: Targeting the Tired Landlord
Investing in Real Estate
The Basics of Investing with Lease Options
Lease Options vs. Subject Tos
Selling in a Down Market

Lease Options are Back: Proceed Carefully

When real estate markets slow down, and especially when mortgage financing becomes difficult to obtain, many buyers and sellers turn to lease options as a way to achieve their short-term real estate goals, while waiting for situations to become more conducive to engaging in a straightforward purchase or sale.

In its simplest form, a lease option occurs when a tenant has an option to purchase property that he is occupying or using according to the terms of a lease. Lease options may offer advantages for both parties. Buyer-tenants may be able to occupy a property that they would like to purchase, but currently don't have sufficient down payment and/or borrowing ability. Seller-landlords are given a way to have their costs of owning the property covered, allowing them to move on somewhere else, and they usually get good tenants who are motivated to keep up the property and to remain current with the payments.

There are lots of things for both parties to think about when entering into a lease option. First and foremost is the fact that they are committing to three distinct, though related, transactions: a lease, an option to purchase, and a sale agreement. These three different agreements might be spelled out in three separate documents, with cross-references, or in one fairly complex one.

The lease part would typically be fairly standard. Certainly, it ought to have the normal provisions for a security deposit and late fees (items that are liable to be overlooked when everyone is happy, and thinking that there eventually will be a purchase). Each party should have the normal rights and protections that accompany a regular lease.

The lease term may be the same as the option period, but it need not be. One might, for example, have a three-year lease, but only a two year option period. That way, should the option not be exercised, the landlord would be able to market the property while he or she still had a tenant in it.

The option agreement will spell out how much is being paid for the option, which is usually not refundable if the option is not exercised. It will specify the length of time the option period lasts, the manner in which the option is to be exercised (usually some form of written notice), and, also, the consequences of non-exercise.

The big item, of course, is the price. This might be specified in the option agreement, or, better, it could be designated in a purchase agreement that is referenced by the option agreement. "A purchase agreement?" some might wonder. "Why should there be a purchase agreement?"

Specifying the price alone is just not enough. Suppose you give me an option to buy your property for $500,000, and that, later, I say, "Okay, I want to exercise the option. I'll give you $5,000 down, and I'll pay you $5,000 a year until it's paid off." Well, of course that won't work for you. But that's why you want not just the price, but also, the terms, spelled out in a purchase agreement at the time you give the option. Note, though, that it is not necessary for a specific price be agreed upon at the outset, as long as there will be a clear method for determining the price, e.g. by referencing the consumer price index, or some real estate valuation method.

An option to purchase is or can be an enforceable document. But if its terms are too vague or ambiguous, it can't be enforced. Both parties should want a purchase agreement to accompany the option document. Any credits that are to be given to the buyer towards down payment can also be spelled out in the purchase agreement. Typically, though not necessarily, the option money and all or part of the rent may be credited towards down payment.

Among the other things to think about: It is a very good idea to record the option agreement, or a memorandum thereof. This protects the potential buyer. All should recognize that a lender may not "allow" all the money that the seller is willing to credit towards the buyer's down payment. State law will determine whether disclosure requirements are triggered at the outset, rather than at purchase time. Finally, both parties should be aware that many mortgages provide for acceleration of the note (calling it due) if a lease option occurs.

Published: September 13, 2007
http://realtytimes.com/rtpages/20070913_leaseoptions.htm

Use of this article without permission is a violation of federal copyright laws.

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Lease Option Should Specify Terms of the Sale

By: Bob Hunt
Original Article

Lease-options are back in vogue. And that is just fine as long as the optionor (owner) and the optionee (tenant) take care to be clear about exactly what they intend with the option. "I'll rent your house now, and I get a chance to buy it later on," isn't quite enough.

This subject has been addressed here before, but it is important enough to warrant further attention. Anyone who doesn't think so should pay attention to a recent case from California's Fourth Appellate District (Sunil Patel v. Morris Liebermensch et al.).

In July of 2003, Sunil Patel and his wife rented a condominium from Morris Liebermensch. The parties also agreed that Patel would have an option to buy the unit. Liebermensch drew up a document that said, "Through the end of the year 2003, the selling price is $290,000. The selling price increases by 3 percent through the end of the year 2004 and cancels with expiration of your occupancy. Should the option to buy be exercised, $1,200.00 [the amount of the security deposit] shall be refunded to you."

In July of 2004, Patel notified Liebermensch of his desire to exercise the option at a price of $298,700 according to the terms to which they had agreed. Liebermensch responded by drafting a purchase agreement requiring that a 10 percent deposit would be placed in a specified escrow company, that the sale would be "as is," and that the escrow period would be 90 to 120 days. The lengthy escrow was needed so that Liebermensch would have time to accomplish a tax-deferred exchange.

Patel countered to some of the terms proposed. After the "as is" provision, he added language that would enable him to cancel "if not fully satisfied." He further indicated that if the escrow were to be more than 30 days, the deposit would only be $5,000. Also, if the escrow had to be more than 30 days, Liebermensch was to bear all escrow expenses.

Liebermensch did not accept Patel's changes. Negotiations ensued, but eventually broke down. They could not come to an agreement on the terms. In November of 2004, Patel filed a lawsuit seeking specific performance.

A jury found (a) that the two had entered into an option agreement giving Patel the right to purchase the property, and (b) that the terms of the option contract were "sufficiently clear to enable the parties to carry out the objective of the contract." The trial court then ordered that the contract be performed with escrow closing no later than 60 days. Liebermensch appealed.

The appellate court noted that, "To be enforceable, an option contract must contain all the material terms that would be contained in the ultimate contract of sale … . These essential contract terms include (1) the parties, (2) the term of the option, (3) the identity of the property and (4) the price and method of payment." "In addition, any other terms that are intended to be included within the bilateral purchase contract … must be included within the terms of the option." [my emphasis] The idea is, when the option is exercised, there should be nothing further to negotiate about.

Now, the court also acknowledged that sometimes terms, such as the time of payment, might be left out, but the contract could still be enforced "because the law implies a reasonable time." However, it went on to emphasize that, if there is uncertainty about some term of a contract, and "the uncertainty relates to a matter that is so important to the contract that the court cannot determine what the parties intended," then courts will refuse to enforce the uncertain agreement.

In the Patel case, there was never any agreement about the time of payment (length of escrow), and, for the parties, that was a crucial issue. They never had reached a complete agreement; hence the option contract could not be enforced. The appellate court reversed the judgment of the trial court.

There's a moral to this story, one that we have heard before. If you are going to create an option to buy, it is a good idea to draft a completed purchase agreement (though undated and unsigned) as an exhibit that will clearly specify what the terms of the potential sale will be.

Published: January 25, 2008
http://realtytimes.com/rtpages/20080125_leaseoption.htm

Use of this article without permission is a violation of federal copyright laws.

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How Lease Options Saved Me from Bankruptcy

By: Tom E. Bazley, Jr.
Original Article

In December, 1994 I was literally on the brink of bankruptcy. I had $25,000 in credit card debt, plus I was working a job that I hated. I was able to scrape together the money to take Claude Diamond's one-on-one lease purchase mentoring program.

But just three days after completing the training, I was fired from my job and lost my only source of income.

With Claude's training still fresh and his follow up support available, I was able to put together my first lease option deal within three weeks of the training. I made $3,000 on that first deal--more money than I used to make in a month at my old job.

In the 2 1/2 years since that time, I have lease optioned or bought thirty-six houses. I have a monthly cash flow of $2,400 and have profited over $150,000. Needless to say, bankruptcy is no longer a consideration.

Like all smart investors, I am always looking for new methods and techniques that will increase my profitability. So, when I saw Joe Kaiser's course on "targeting the tired landlord," I figured that was something I would be able to use.

I went through the course in one evening. Then I went out and bought a reverse directory CD ROM that Joe mentioned in the course and started sending letters to people who had houses advertised for rent. I started getting calls and, within three weeks of reading the course, I had put together two deals with "tired landlords."

The first one was with a lady who had to advertise the same property three times in less than eighteen months because her tenants kept moving. I structured a three-year lease option under these terms:

$100 option money
$550/month rent
$62,500 purchase price

It's currently rented to a young couple under the following terms:

$3,000 option consideration
$725/month rent with 50% rent credit
$75,900 purchase price

Claude taught me to always be generous with the rent credit. That's why my houses never sit vacant very long. This house will produce a profit of over $11,000--more than enough to offset the price of Joe's course; don't you think?

The second deal was with an older gentleman who had problems with his tenants moving as well. He was very happy that I was willing to sign a five-year lease with an option to purchase. Our deal is as follows:

$500 option money
$750/month rent
$83,000 purchase price

It's rented to an assistant coach of our NFL team under these terms:

$5000 option consideration
$935/month with 50% credit
$97,900 purchase price

This house will make me over $11,000. That's a long way to come in 2 1/2 years, and I owe it all to Claude Diamond and Joe Kaiser.

This article is reprinted here with permission from Creative Real Estate Online at http://www.creonline.com.

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Lease Purchases: Landlord-Tenant Rules

By: Attorney William Bronchick
Original Article

As a real estate investor working with tenants, you must be very familiar with the laws of your business. These laws apply whether you own a property and rent it, or you do a "sandwich" lease option.

An eviction proceeding, usually called a "summary proceeding" or "unlawful detainer" proceeding, is a lawsuit to obtain a court order to remove the tenant. It is not lawful to physically or constructively remove the tenant from the premises. No matter how upset you are, don't even consider changing the locks, shutting off the power or taking the front door out for "repairs."

Before you can commence the proceeding, you need to terminate the tenancy. You do this by serving notice on the tenant as required by your state law. For nonpayment of rent, the notice is typically three to five days. If the tenant has not paid the rent in full or moved out after that time, you can commence proceedings in court.

A typical summary proceeding takes anywhere from ten to thirty days, depending on the backlog of cases in your County. The proceeding is informal, much like small claims court. Once the court declares you the winner (called a judgment or order), a warrant (called a "writ" in some states) is issued.

A warrant is a legal document that directs a sheriff, marshal, constable or other local official to forcibly remove the tenant from the premises. Few tenants are actually thrown out; the official usually changes the locks and removes the tenant's personal property. In some counties, you are required to hire the movers and store the tenant's property.

Learn your landlord-tenant laws
I recommend that you learn the landlord-tenant laws and the timetable for evictions in your county. However, I also recommend that you hire an attorney to file the court proceeding.

Landlord-tenant law is not difficult to understand, but it is very technical. A minor flaw in your paperwork or procedure could mean having your case thrown out and having to start all over. So consider paying an experienced landlord-tenant attorney to do the job (make sure it is an attorney that specializes in landlord-tenant practice).

Lastly, join a local landlord's association and meet other experienced landlords. If you are not familiar with the law, you will eventually run across a "professional" tenant who will teach it to you.

Consider bribing the tenant to leave
Time is money when it comes to evictions. The longer the defaulting tenant stays in possession, the more money you lose. Consider waiving the rent owed and offering the tenant cash to leave immediately.

This may seem contradictory to the "tough landlord" attitude, but it makes financial sense. Court is the last place you want to be. If you can settle the matter quickly without litigation, do it! Do not pay any money to the tenant until he vacates, cleans the unit, hands you the keys and signs a written release of liability against you (called "general release").

Reconcile the security deposit
Whether the tenant leaves voluntarily or by legal force, you need to deal with the security deposit. Whether or not you are entitled to keep the deposit, you must comply with state law. In most states you must return the security deposit within 30 days or send a certified letter to the tenant stating why you are keeping it.

Even if you are entitled to keep the deposit, your failure to comply with proper procedure will result in a lawsuit against you for improper withholding. You can always sue the tenant in small claims court for rent owed and damages to the property, but you cannot withhold the security deposit without following the rules.

Comply with state and federal disclosure laws
A minor "detail" that most "lease option" gurus forget to mention is that if you sublease a rental unit, you are a landlord. As a landlord, you have state and federal disclosure requirements.

At the federal level, you must disclose the existence of lead-based paint hazards and give your tenant an EPA pamphlet (see www.epa.gov). State law disclosures vary greatly, from radon gas disclosures to "Megan's" law (disclosure of known sex offenders in your area).

Check with your state and county housing authority for the required disclosures. Also, keep in mind that some states might consider a lease option to be a sale for the purposes of disclosure, si you would need to disclose the same items on a lease option that you would on a sale.

About the author...
William Bronchick, J.D. is an author and attorney who regularly presents workshops and do-it-yourself seminars at real estate and landlord associations around the country. He is the president and co-founder of the Colorado Association of Real Estate Investors. Bill specializes in all forms of asset protection and is the author of several great home study courses:

This article is reprinted here with permission from Creative Real Estate Online at http://www.creonline.com.

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The Ultimate Lease Option Strategy: Targeting the Tired Landlord

By: Joe Kaiser
Original Article

I hate evictions! I used to have to evict problem tenants, and I dreaded every minute of it. I know what it's like to have rental troubles, and I know if you had been there with an offer in your hands at the moment my troubles seemed overwhelming, you would have picked up a fairly decent property. Cheap.

Why I hate evictions
Evictions are no fun. I hate the entire process. I will do almost anything to avoid having hire a crew to drag my tenant's belongings out to the curb, which is the way our evictions go.

You get that court order, hire a crew, call the locksmith, and then just sit around and wait for the sheriff to show up. Once he does, he'll walk up to the house, knock on the door, and advise the tenants that it's time to go.

If the tenants are not home, I'll unlock the door and instruct the locksmith to re-key it. In the meantime, that crew of mine begins hauling the tenant's belongings out to the curb. If they've got a pet, the sheriff calls "animal control," and they come by and pick it up.

I once evicted a tenant who owned two mastiffs--BIG dogs. They had heads as big as basketballs, and it took three guys to get them loaded into their truck. And then wouldn't you know it, a couple minutes later the tenant, all six foot eight inches of him (I kid you not) comes running up to the house screaming "Where the heck are my dogs?" Although he didn't actually say "heck," if you know what I mean.

Where was I? Hiding in the basement, praying that sheriff hadn't left early (he hadn't!).

I once loaded up a tenant's refrigerator (ouch) into the back of her boyfriend's pickup truck, just to get her out of my property, and as I watched them drive off, I realized that, hey, that was MY refrigerator! Oh sure, it's real funny now, but at that moment I wanted nothing more than to end my career as a landlord. Tenant troubles will wear you out in a heartbeat.

And then it occurred to me that if I was experiencing this sort of grief, certainly my fellow landlords going through the eviction process might be experiencing those very same sort of feelings.

Heck, they may even be inclined to make someone like me--someone who is not afraid of evictions--one heck of a deal just to get out of their problem properties.

Why I love evictions
Did I mention I love evictions? Okay, maybe not love, but I certainly don't mind them. Nope, not in the least. Because I know that every time a new eviction is filed down at my county courthouse, the odds are pretty darn good that some landlord in town is tired, fed up, or just plain sick of being in the rental business.

Now, if my little proposal should happen to show up in his mailbox at about the time he's feeling like he needs out then, bingo, I'm in. Does it work all the time? Of course not, and I really don't care. I know I might send out twenty or thirty letters and not get back a single reply.

For whatever reason, nobody in that particular group felt like getting in touch with me, and that's okay. But then again, I might get a call back from one, or even two.

Do you have an hour or two a week?
I use this particular strategy time and time again. And even when it seems like nothing else is happening, a couple of calls trickle in, and I'll put together a sweetheart deal from yet another tired landlord. It's a terrific source for motivated sellers, and the entire process takes me an hour or two a week, and that includes licking the darn stamps.

If you've got an hour or two a week, ten bucks in postage, and a real good answer for the guy on the phone who's calling you back and wants to know about your program then you ought to consider targeting the tired landlords in your community too. (I don't have a program. I'm just looking for a decent house in a decent area, something that makes good business sense.)

Do you have another two hours?
But don't stop there. Researching evictions filings at your courthouse probably isn't going to be real glamorous. Where else do you find those landlords? My guess is that the landlords in your town are probably advertising like crazy trying to get their empty rentals filled up.

Did you know that there are even rental list companies that will include the landlord's available properties in their rental lists so tenants eager to find a new home can just pay the fifty dollar fee and order up a list of properties that suits their needs? Maybe you've even purchased a list yourself way back when.

Guess what? It's time to go out and pick up that list again. I do. Don't you think you should contact those landlords as well? They're paying good money to find you, so why not call them and solve their problems with a lease option on their vacant rentals? I'll tell you why not.

It's a pain to spend hours on the phone only to and hear from yet another landlord that his property has six fruit trees. Like I care about the fruit trees. I have neither the time nor the energy to call on ads or call the property owner on the rental lists.

I do, however, have plenty of time to drop them a quick note and inquire, ever so gently, if they'll make me one heck of a deal on their empty house. You just have to know what to say in the note.

Yes, it's another couple hours and another ten or twenty bucks in postage and supplies, but once this particular system is up and running, your offers will literally be in the hands of the landlords in my community who want to deal, TODAY. And that, my friends, is what it's all about.

About the author...
Joseph M. Kaiser is a highly successful real estate investor who is a real doer. He is proud to be out, pounding the pavement nearly every single day, looking for the next bargain property to add to his investment portfolio. Joe started investing in real estate in the mid-1980s and soon found his niche in foreclosures and lease options. He is the master at tracking down motivated sellers. Joe shares his insights, secrets, and money-making systems in his highly informative courses:

This article is reprinted here with permission from Creative Real Estate Online at http://www.creonline.com.

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Investing in Real Estate

Why Soft Markets are GREAT Markets

Investing in real estate has changed in many markets in our country. If you are like me, you live in a real estate market that has gone soft. There are still some areas in the country where homes are appreciating nicely, but nothing like it was just a year or two ago. There were a lot of self-proclaimed real estate gurus that popped up during the boom times telling you how to make HUGE PROFITS in real estate. Back then, during the up cycle, investing in real estate was so easy. You could throw money at almost any piece of real estate and be practically guaranteed to make a profit. It seemed like anyone who had flipped a couple of houses and made a profit was an “expert” investor.

Times are different now. Investing in real estate takes a little more effort. Investors that haven’t weathered down cycles before are struggling because all they know are massively appreciating markets. All too many of those self-proclaimed gurus lost their shirts when the markets changed. Those ads that go “I made $256 Million in real estate in 4 weeks with no money down” are a whole lot less believable. Okay, $256 Million is an exaggeration, but you know what I mean.

So the question is, “How do we still go about investing in real estate and make profits?” Can it be done in these soft markets?

The answer to that question is quite simple. I can say without question, without hesitation, the answer is: YES! ABSOLUTELY!

I have been investing in real estate for more than 20 years. I have seen up cycles and I have seen down cycles. I have made money and been successful in both. I can tell you several things about down markets that may surprise you. First, experienced real estate investors will tell you that more money is made in down markets than in up markets. It’s true, MORE MONEY is made in DOWN markets than in up markets! Second, experienced investors PREFER to do the bulk of their investing in DOWN markets. There are a number of reasons for this but the big ones are that there are more motivated sellers in down markets and the competition (other investors) pursuing these motivated sellers is LOWER. It’s a double bonus.

Down markets produce more deals and less competition to get those deals.

One of the investing techniques I specialize in is Lease Options. Lease Options are one of the absolute best techniques for investing in real estate in down markets. I’ll say it again, because if you are looking for ways to get involved with real estate investing you need to know this, Lease Options are one of the absolute best techniques for investing in real estate in down markets.

Let’s take a look at why.

I’ve already said that down markets produce high numbers of motivated sellers. Right now in Michigan, it’s very common to see a house listed on the market in two ways, both for sale and for rent. They are listed this way because the sellers KNOW how bad it is and they want someone, anyone, to cover their mortgage payment. These double listings SCREAM “Motivated Seller!” Now, not every single one of these is going to be an excellent Lease Option deal. But you know what? That’s okay, there are plenty to choose from!

The critical part in selecting your Lease Option candidates, in an up market or a down market, is creating WIN-WIN-WIN situations. The seller must be satisfied with the deal, you must be satisfied and the end buyer must be satisfied. When investing in real estate, this is what makes us successful. How does this work?

To create a WIN for someone we must meet their core need. A motivated seller’s goal is to sell their house. Eventually they need their mortgage paid off and the deed transferred out of their name. If they are willing to rent the house as well as sell it, they are telling you that having their mortgage paid each month is more important right now than actually getting the house sold. If we can find a tenant buyer for them we are satisfying their core need of paying the mortgage each month and eventually selling the home. This is a WIN for the seller.

Our end buyer is looking for a home to own. Their current situation prevents them from getting a mortgage immediately but they plan on being able to get a mortgage soon. They want a home now. They don’t want to wait to get their house. By allowing them to lease and then purchase the house we are meeting their core need. This gives our buyer a WIN.

Before we talk about what makes a WIN for us as an investor let’s talk a little more about mortgages for our end buyer. There has been a lot of news lately about sub-prime lending woes and how lenders with riskier loans are facing high rates of foreclosure and may be going bankrupt. As a result it is getting much harder for people with poor credit to obtain a mortgage. It is also getting harder for ANYONE to obtain a mortgage with 100% financing (i.e. no money out of the buyer’s pocket). This may sound crazy, but this is actually a good thing for us when investing in real estate.

When investing in real estate by doing Lease Options it is harder for us to find quality tenant buyers when almost anyone who can fog a mirror can get a mortgage. Not only that but because it was so easy to get 100% financing most buyers save nothing and are unable or unwilling to pay much for an option fee. With the lending companies tightening their belts I expect we will see a growing population of QUALITY tenant buyers who are able to pay HIGHER option fees.

The flip side of this is that because lenders are tightening their belts your tenant buyers will need to work harder to restore their credit. It may take as much as 2 to 3 years for some tenant buyers to be able to qualify for mortgages instead of just 1 year as we had seen before.

The bottom line is when investing in real estate by using Lease Options the difficulties of the mortgage lenders are just another reason why this down market is a GREAT time for us investors.

Now let’s look at the last part of our WIN-WIN-WIN equation -- the WIN for us, the investor. For us to WIN we need to make a profit. The profit comes both from the equity spread between your option price to the seller and the buyer’s option price to you as well as any monthly cash flow in the rental payments. With Lease Options it pays to be creative. You’ll find a lot more deals and be a lot more successful investing in real estate if you practice creativity in your structuring.

The most common motivated seller we encounter is the one who has little to no equity in his home. Too many real estate investors get calls from sellers that only care about “What’s it worth?” and “What do you owe?” If the numbers are too close together, they say, “Sorry I can’t help you.” Click.

What if you pursue it a little further with a creative mind? A good question to always ask is “What are your monthly payments?” If the payments are lower than rental rates you may be able to make some monthly cash flow.

Another good question to ask is, “How soon do you need to sell the house?” You may want to ask this question a couple of times while you are talking to them. You could be surprised to find that the number grows longer each time you ask. There aren’t too many markets I can think of that stay down forever. Eventually the house should start appreciating again. If your option period to the seller is long enough you can capture appreciation to make your profit.

What about this – “Are you willing to bring money to closing to sell your house?” And if their monthly payment is higher than what you can rent the house for, “Are you willing to pay the difference between the rental amount and your monthly payment?” These two questions may seem brazen, but ask yourself, what have you got to lose? If the seller is fully leveraged on the house or their payment is higher than the rental rate you have nothing to lose, because if they aren’t willing to make concessions then you can’t help them! Certainly some of us feel awkward in asking these questions, but trust me, if you ask this question 30 times, no matter how embarrassed you might feel at the beginning, you will start to feel much more comfortable by the end.

These are just a few creative questions you might come up with to try to find terms that will allow you, as the investor, to make a profit, a WIN for you. When you add all of three of these together, meeting the seller’s need, meeting the buyer’s need and you making a profit, you have created a WIN-WIN-WIN. This is what you MUST do to be successful when investing in real estate with Lease Options.

Do you see how much BETTER it can be to find deals in down markets? Motivated Sellers are EVERYWHERE and there are FEWER investors competing with you. Combining these two factors allows you to choose your deals with greater care. Always “Cherry Pick” your deals in a soft market. This is why experienced investors, who have been in both up markets and down markets, prefer the down markets. Soft markets can provide some of the best deals when investing in real estate.

Wendy Patton is a published author, teacher, real estate investor and licensed real estate broker. Her book called Investing in Real Estate with Lease Options and Subject To Deals can be found at Barnes & Noble and Borders book stores. An autographed copy can be obtained if you purchase the book on her website at www.WendyPatton.com. She recently wrote her second book called Making Hard Cash in a Soft Real Estate Market. It can also be found in book stores and on her website.

Wendy has over 23 years of real estate investing experience. She has lease optioned hundreds of homes, and invests in rehabs, multi-family, commercial, and pre-construction. Visit her website to find out more on lease options.

About the author...

Wendy Patton is widely recognized as one of the most inspiring speakers on little or no money down real estate investing. Wendy has experience in land development, property management, rehabs, and foreclosures, but lease options are her favorite. With 20 years of experience and hundred of lease options, she is excited to teach you to achieve the same level of success and future financial freedom.

Wendy is a Licensed Real Estate Broker and Licensed Builder with her own real estate company in Southeast Michigan. She is the past President and Board Member of D.O.L.L.A.R.S.

Used by permission from Wendy Patton

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The Basics of Investing with Lease Options

For The Average Joe or Jane

Lease Options:

Lease Options are a way to purchase real estate, usually with very little, or no money down, sometimes with cash in their pocket before they own the home. Can investor end up with money in their pocket and not have to put 10-20% down to purchase real estate? Yes. This technique is used commonly today by the most successful real estate investors. Real estate investing is truly the quickest and best way to build lasting wealth. Many of the world’s wealthiest people acquire much of their success through investing in real estate.

All money made in real estate is made by controlling property. Owning a piece of property is the most obvious way to control it, however, is controlling this same piece of real estate possible without ownership? YES, it most certainly is! Control is what makes the money. A “lease option,” simply stated, is a technique that involves gaining “control” of a property, without the added burdens of ownership. This strategy gives an investor the right to lease a home, condo, land, shopping center or apartment building, and also the right to purchase it during or before the end of the lease period. An “option” is defined as a contract that gives an optionee the right to exercise a privilege – and in the case of real estate investing, it gives the optionee (the investor) the right to purchase property during a contracted period of time. It was a dying John D. Rockefeller who told all of us his secret to achieving great wealth, “Control everything, own nothing.” The most successful real estate developers today utilize lease options and options, in one form or another.

It is important to be aware that there are some risks involved with lease options, as with all forms of investing, but there are ways to minimize your exposure, and the rewards that can come when applying this technique truly out weigh the potential risks.

Options can be taken on a property without leasing it, this is called an “ option” to buy a property. If you lease the property and have an option to buy, it this is called a “lease option”. This technique can also be referred to as “rent to own” or “rent option.”

Why Lease Options Are So Lucrative – It’s All About the Terms!!

In every seminar I teach, I ask the students, “Who of you would be willing to purchase a home valued at $200,000 for $100,000?” Of course, all hands quickly shoot up. Then I continue by asking if they would still be willing to purchase the same home if the price was $150,000. Most of the hands stay up. I proceed upwards raising the price in increments by $10,000 each time. All of the hands slowly, but surely, drop. At the price of $180,000 almost all hands are down. At $190,000, usually, all hands in the room are down. The point I am trying to make to each of them is that most investors are not willing to pay close to retail price for a home (nor should they in most cases). I then re-pose the question to each of them, “How many of you would be willing to pay $200,000 for that same home 10 years from now in a market that is appreciating at 10% per year with nothing down and paying $1,000 per month?” Now all their hands go back up. I ask, “Why, now are you willing to pay more for that home that you refused to pay $180,000 - $190,000 for a few minutes ago?” Their response is in unison saying, “Because you added some attractive terms!” My response is always the same, “You didn’t ask me the terms before you all lowered your hands.” Most investors never ask the seller for any terms, they just walk away from a deal before they know if terms are possible - they base their decisions on price alone.

Terms of a lease option deal are individual facets that construct th e entire deal, such as price, length of time to pay, monthly payment, and other negotiated items with the seller. Most of the time even experienced real estate investors do not ask, “When does the seller need their price paid by?” They are willing to walk away from a possible good opportunity without exploring terms with the seller. They look at the surface but they don’t dig deeper for other possibilities. Lease options provide a creative solution that can allow you to negotiate terms that can increase your profit potential and provide a great investment opportunity. Whenever you can negotiate the terms on real estate, the value of the property goes up! Deals that were out of your reach before now might be possible – i.e. large apartment complexes, shopping centers or other commercial investments.

With lease options you may be able to pay a higher price on a property, if you can get reasonable terms. Having this tool at your disposal will allow you to open up many new possibilities and potentially make money on properties that were before completely ruled out. I am not suggesting that you pay $200,000 for a piece of real estate worth $200,000, but you can if certain market conditions and terms previously described exist. If your market is flat (not appreciating) and you have only 2 years to exercise your option to buy the property, then the price you offer should be lower. Lease options are truly all about the terms!

Using Lease Options in Commercial Real Estate – A Case Study

Here is an example of lease optioning an apartment building from my own portfolio: 42 Units in Detroit, Michigan. Normally, I don’t buy inner city properties, however, this was a “cash cow,” and I could not pass it up. I bought it from the seller for $600,000 with half of the units vacant and needing renovation. It cash flowed at 50% occupancy, so buying it with half the units vacant was not a risk. I put $14,000 down as my option fee to purchase this building! My payment to the seller was $4,600/month on a lease option, of which $1,100 per month went towards the purchase price of the building. The rents from the 20 units that were occupied were approximately $9,000/month. I did have to pay insurance, gas, and some electrical expenses per month out of the extra cash flow. This building required someone with deep pockets to accomplish the renovations needed. I wanted to make sure my interest in the property was protected prior to putting that much cash into the building. I always recommend that you do not put too much cash into something you don’t own unless you really trust the seller, or it is for a very short period of time. It is just too risky when you are not the person on the title. In this situation, we were able to work it out with the underlying mortgage company and the seller to allow me to go on title and leave their lender still in place – “subject to” the existing mortgage. This is called a “Subject To” deal – taking the deed without paying off the underlying mortgage. Now I was on title and was proceeding with all of the work to complete the building. I sold the building for $950,000. That was my goal. No, I didn’t sell it on a lease options, but I could have. This deal came together all because I asked the seller if they would accept a lease option on their building. I knew they were anxious to sell and the property that had at that time been on the market for quite a while.

As you are sitting there reading this example you might be thinking. We don’t have those types of deals in our market – that was Detroit. Yes, you do! It also doesn’t have to be a huge renovation project. I really don’t recommend that for the beginner. With that said, I would recommend finding an apartment building, shopping center or single family home that doesn’t need any work at all.

A good beginning rule of thumb is: don’t put any work into something you don’t own. Get a pretty piece of real estate. There are plenty of landlords or real estate investors that are ready to get out of this business and retire. They don’t all need the equity out of their properties now. Many of them prefer to get a monthly check and just ride the income stream of what they built up over the years.

Remember these tips:

Know the market.
Look for properties you want to own in areas that are either up and coming or appreciating. Don’t assume they don’t want to sell it now or in the future, just ask!
Find out who owns the properties you are interested in. You can find the owner of record at your city assessor’s office. Where do they send the tax bill? Write them a letter.
Hire a Private Investigator to find the owner of a property if you don’t have any luck in locating them.
Check with your local REIA group (Real Estate Investors Association) – for other real estate investors, they can be a great resource.
Keep writing the owner or working on them even if they say no today especially if you really want a particular property. One of my colleagues in Seattle bought a waterfront apartment building by writing to the owner for 14 years!

All I can say is if you don’t look for an opportunity or ask for one, you will not get anyone to say YES!

About the author...

Wendy is a Licensed Real Estate Broker and Licensed Builder with her own real estate company in Southeast Michigan. She is the past President and Board Member of D.O.L.L.A.R.S.

Used by permission from Wendy Patton

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Lease Options vs. Subject Tos

When to consider these techniques

Lease Options and Subject Tos, aka “Getting the Deed” are two very popular ways to purchase real estate with little or no money down. Acquiring investment real estate can be handled with many different approaches, but these two techniques can be implemented with little or no money down in most incidences.

A lease option is a technique which involves gaining ‘control’ of a property, but not owning it. It is the right to possess a property now and purchase that property at some future date with terms you define when you buy it.

A “Subject To” is getting the deed to a property without getting a mortgage for the home. Instead, the seller signs over the deed to his home ‘subject to’ the existing mortgage. The buyer in this case makes the mortgage payments on the old loan, but does not need to get a mortgage themselves to acquire this home.

Both of these techniques usually require little or no money down. In both of these techniques it is possible for the buyer to get money from the seller or the purchaser (or both!) in the beginning of the transaction. These techniques, when used properly, will provide for huge profits. They are both awesome, and when used hand-in-hand by investors are almost an unbeatable pair!

This short article is not meant to give details of each technique, but rather to show when you could consider either of them. If you don’t understand how to document and protect yourself in each kind of technique, then purchase a home study course or my book called ‘Investing in Real Estate with Lease Options and Subject Tos’. It can be found on my website – www.WendyPatton.com.

Why Knowing Both Techniques Means More Great Deals For You!

Unfortunately there are many people that are teaching that you should only do the Subject To – technique. They recommend never buying on an option. I can’t tell you how many times I have heard, “If I don’t get the deed, I don’t do the deal”. With over 20 year’s of experience (since 1985) doing both types of deals, I have to disagree with that statement. The more tools and techniques and ways you have to purchase property or to structure a deal, the more likely you will be able to work with a motivated seller to come to a potential solution. If you only buy “Subject To”, you’ll walk away from a LOT of great deals in your real estate career, but you must know when each technique is appropriate to use.

Finding a motivated seller is the first step to any good real estate deal. There are many types of motivated sellers, but we tend to think of motivated sellers as the ones that are financially distressed. I like to look at motivation from a much wider range. Let me explain. I like to divide motivated sellers into two groups:

Situation	VS.	Situation
Sellers that have Bad Debt		Sellers that have Good Debt
Solution		Solution
Get the Deed – NO Lease Option!		Lease Option or Get the Deed!

Sellers that have “Bad Debt” are those in financial trouble. They might be behind on a mortgage, have lost their job, acquired an illness, going through a divorce, etc. In these situations, you need to get the deed either with a Subject To or an outright purchase. Your main concern is that this type of seller will continue to have financial problems that could affect the title to “your” property if the deed is still in their name. For example, if this seller gets judgments from creditors, they can attach to any real estate the seller owns - they will have to be paid off before you can exercise your option to buy. That’s why you want to get this type of seller off of the title.

Sellers that have “Good Debt” are those NOT “in trouble” in the traditional sense, but they do have a reason motivating them to sell. Their problem is not one of financial desperation—it is usually just a change in their life. They might be transferring to a new location for a promotion, getting married (each owning their own home), building a new home, burned out landlords, etc.

Example #1: Here is an example when you MUST get the deed:

A seller calls you on the phone and says he is 2 months behind on payments. Do NOT option this home! This seller is in trouble financially and is not a good risk for an option. Anyone that is in a bad financial situation is not a good seller for an option. This is the type of seller that you must get off of the deed so that his financial situation will not affect the title to the property in the future.

Not every seller who is in financial trouble will tell you so, which is why you ALWAYS need to do research on the title before you get the deed or do an option. In this case, you will need to bring the seller’s mortgage current. Before you do, you want to make sure that he is owner of the property and there are no other liens on the property.

Example #2: Here is an example when you COULD get the deed:

A seller calls you who owes $135,000 on his home—which is worth $145,000. Since there is not much equity in this property, this type of seller might very well be willing to give you the deed. If there is high appreciation in the area, or a very low payment, you might be able to make a profit even though there’s no equity. However, be careful that you have evaluated the numbers correctly before you take the deed.

On the other hand, if the seller’s payment is too high or the market is slow, you might need to have the seller pay you to take the deed. Yes, there are sellers who will pay you to take the deed to their home. Think about it: if this seller sells conventionally—that is, though a Realtor, he would have to pay up to $10,000 in commission to sell his home. Plus, he’ll have closing costs, transfer taxes, and will probably pay points or fees on behalf of his buyer. If he’s willing to pay all this money to an agent to sell the property and wait 90-120 days to sell, why shouldn’t he just pay you to take over his payments NOW?

If the seller didn’t have the cash to give you, an option would be your best strategy. This way, the seller can pay you the $10,000 over time, or you could arrange for the seller to pay part of the monthly payment during the option period. This way, if he stops paying his portion of the payments, you have the choice of surrendering your option and simply giving the property back to him. When you have the deed, you normally can’t do this.

Example #3: Here is an example where you SHOULD lease option or lease purchase:

A doctor has a new home built for himself. His old home is worth $200,000 and he owes $125,000. He has $75,000 of equity. He is not behind on payments, and he did not need the $75,000 of his equity to buy the new home. His old home is sitting vacant and the realtor has not sold it yet. He qualified for both house payments at the bank and he can technically afford both, but who wants to make an extra house payment?

Although he is motivated to sell because he’s coming out of pocket every month to own a vacant property, this type of seller is NOT going to simply give you the deed and let you take over the mortgage. There is no way is he going to give up all of his $75,000 in equity, and no way are you going to pay that much cash out of pocket.

When you lease option this house, he gets most of his equity back—although it won’t happen until YOU sell the property. The deal might work like this: you option the property for $185,000, and make payments to the seller that equal his total mortgage payments. You SELL the property on an 18 month lease option for $218,000 with payments to match. You get cash flow + $33,000 in profit when your tenant/buyer buys the property; the seller gets his payments taken care of for a few years, then gets the bulk of his equity out. And in the meantime, he doesn’t have to worry about management, vandals, frozen pipes, and all of the other things that owners of vacant houses have to deal with.

Example #4: Here is an example where you COULD lease option or lease purchase:

A seller just inherited a property worth $120,000 from their parent’s estate. It is owned free and clear and they don’t want to be paid off. They don’t need the cash, but they would love some cash flow on this asset. This seller is not going to give you the deed. Let’s say you can lease option this property for $700 per month with $300 per month going to the purchase – or the option credit. Your real payment in this case is only $400. You can compare these numbers with doing a seller financed type of arrangement. See what works the best and make that offer first.

Let’s examine a seller financing deal:

A seller financed deal means that the seller will finance a mortgage for the buyer and the buyer pays their mortgage payment/interest to the seller versus a bank. This is primarily done when the seller owns a home free and clear and they do not have a mortgage on it themselves. It can be called a land contract, contract for deed, or private money mortgage. It will depend on how the offer is made and accepted. Let’s say you negotiate a deal with the seller for a sales price of $110,000 – if you want your payment to be $700.00 as in the above lease option example, let’s see what that really means to a seller for a seller financed deal. First in a seller financing or mortgage your payment includes taxes and insurance (unless the buyer pays them themselves). This must be subtracted from the $700. Each part of the country fluctuates, so I will use an estimate of $250 per month for taxes and insurance. This leaves $450 for the seller. Now we must subtract our principal we negotiated above the $300 per month credit. This now leaves the seller with $150 per month. If this were to be all that is left this would essentially mean the seller is receiving 1.6-1.7% interest on their money. The interest rate has to be disclosed on the loan document or seller financed deal. A very low interest rate is much harder for a seller to accept then a lease option payment of $700 per month. It is the same thing to the seller, but it is spelled out differently. They don’t do the subtraction themselves to calculate the real rate of return. If you do a seller financing deal, you must calculate and show it in writing. Compare the two and see what works the best.

Let’s examine the pros and cons of Subject To vs. Lease Options:

Subject To Pros:	Subject To Cons:
Title is in your name – full ownership	You own it and have ethical responsibility to the seller even if the market changes or you can’t sell the home. You own it! No changing your mind on this one.
Some sellers will pay you to take the deed.	You will need to get new insurance policy naming you or your company on the policy. In some instances this might trigger the ‘due on sale’ clause. You must insure it based on the title (who is the owner) or you will have no coverage.
Easier to prove ‘seasoning of title’ – when you are the title holder. Easier to refinance.	In some states mortgage brokers and realtors could be fined and/or subject to revocation of their license. It could be considered against their code of ethics to assist a person in violating a clause in a contract (due on sale clause).
If you are on the title you will have long term gains vs. short term if you hold the home for longer than 12 months.	Sellers with lots of equity will be hesitant or completely against giving the deed. Sellers who get legal advice will almost always be against giving the deed to their home. Attorneys tend to be conservative.

Lease Option Pros:	Lease Option Cons:
You don’t have to buy later – if the market drops or there is something wrong with the home. You can get out! If it goes up you can exercise and purchase the property. If the market stays flat you will have a choice of what to do.	Title is NOT in your name – seller could screw it up – must be careful to screen the seller. Only option from strong sellers, not those in trouble or headed for trouble. (unless you put the deed in a land trust)
More sellers will do an option vs. giving up a deed – especially on ‘pretty’ homes.	You will have short-term capital gains vs. long term if you are not on the title. This can be avoided if you finance it with the 12 months of payments (see the pros) and get on the title and hold it for 12 months before closing with your tenant buyer. This is a minimum of a 24 month solution.
After 12 months of payments there are many lenders that will treat a lease option as a refinance – as if you were on the deed. It would be treated like a land contract or contract for deed refinance.	Some sellers might feel like an ‘option’ is not closure on their home. Some sellers will feel better with a deed being transferred or a lease purchase (which is a guarantee vs. an option).
A way to get nicer homes. It is more likely the seller that is not behind has taken better care of their home. This type of seller is also more likely to consider a lease option vs. signing over the deed.
Seasoning of title will start when you file a memorandum of option or lien of interest. Most lenders will consider this adequate and similar to recording a deed (with the exception of FHA or possibly some other lenders).
Sellers with lots of equity are more likely to give you the right to buy the home than they are to give you the deed to their home.	Sellers with lots of equity usually want to close and get their equity out.

Warning: There are many factors to consider when making an offer with either of these techniques. What is the current market condition for real estate in your area? Are homes appreciating, depreciating, or staying flat? What is the financial condition of the seller? Are they moving up or down financially in their new home? All of these items make a huge difference on how you will structure a deal. I always say, “Strong market – make a stronger offer. Weak market – make a weaker offer”.

Do your research, but if you keep your mind open to new ways of acquiring real estate, you will indeed make more money! Try using Subject Tos and Lease Options.

About the author...

Wendy is a Licensed Real Estate Broker and Licensed Builder with her own real estate company in Southeast Michigan. She is the past President and Board Member of D.O.L.L.A.R.S.

Used by permission from Wendy Patton

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Selling in a Down Market

What Can I Do?

It’s in the news day after day about how bad the real estate market is across the country. Available supplies are rising, builders are cutting back, the sub-prime mess, prices are dropping, etc, etc. We both know that while many areas in our country are experiencing challenged real estate markets not every market does. Real estate is local, so there are some markets going down and some going up, no matter how much the news media tries to convince us otherwise.

That being said, however, there are a large number of markets right now in downward trends. If you happen to live in or own a home in a down market and you need to sell this is a time to get creative. Down markets are buyer’s markets, meaning you, as the seller, are competing for the smaller pool of buyers who have a large inventory of housing to choose from.

Mostly we hear about making sure your home is priced competitively and it is well staged (perhaps even using a professional home staging company). These things certainly can help. However, often they aren’t enough. The reason for this is that you are still competing for the same small pool of buyers as everyone else. If you really want to get your home sold you need to expand the pool of buyers. What I mean by that is that the existing pool of conventional buyers is comprised of people who want to buy now and can qualify for a mortgage now. We all know that the extreme tightening of the lending industry has made it much harder for prospective home buyers to qualify for mortgages. If you really want to sell your home you need to expand your pool of buyers to include those people who want to buy a home but can’t qualify for a standard mortgage at this time. This pool is actually much, much larger than the pool of buyers who can get a mortgage right now.

Let’s take a look at some of the more creative selling methods you can use to help your home stand out among the rest, reaching a larger pool of buyers and get sold in a down market.

Seller Carryback – aka Seller Holdback or Second Mortgage

Seller Carrybacks bridge the gap between conventional financing and more creative seller financing. In this case your home buyer can qualify for a mortgage but not for the full amount. They may be able to qualify for anywhere from 70% to 90% of the purchase price. To cover that differential the seller must give the buyer a second mortgage covering the remainder. The seller is essentially acting as a bank offering an additional mortgage. The terms of the second mortgage are entirely negotiable.

In the case of the seller carryback the sale of the property and transfer of the deed is completed. This allows the buyer to get their principal mortgage at the time you are providing the second mortgage. There are several advantages to this. By completing the sale the buyer is the new owner of the property, freeing you from the responsibility of taking care of that home. Additionally, if you have equity (beyond the amount of the second mortgage you are offering) you will get paid that equity. The disadvantages to this are that: 1. should the buyer default on their loan for some reason you would have to foreclose and 2. you must actually have equity in your home so that when the buyer purchases your home their first mortgage is enough to pay off your existing mortgage.

As I mentioned the terms of the second mortgage are entirely negotiable. That means the interest rate, the frequency of payments, the rate at which the interest compounds (yearly, monthly, daily, etc.), whether the payments are principal and interest or interest only, whether there is a balloon payment, and the duration of the loan are all factors you can set with the buyer. These terms should not be taken lightly either, as you can substantially increase your profit by negotiating favorable terms. While all of these terms may sound a bit intimidating, fear not, you don’t have to resolve them on your own. I recommend using an attorney to help you with the loan documents and terms. The small cost of using an attorney will pay for itself as the attorney will help you set favorable terms and protect you with proper documentation. I DO NOT recommend allowing the buyer’s loan officer to set up the second loan for you! Remember, they work for the buyer. They will be doing their best to make sure the terms favor the buyer and not you.

To help you understand how important it is to get favorable terms, let’s take a look at a variation in just a single term, the interest rate. All other terms being equal, let’s assume you take a seller carryback for $25,000, amortized over 30 years but with an 8 year balloon – this means the interest is based on a 30 year time table like a conventional mortgage, but the buyer will have to pay the balance after 8 years, usually by refinancing. If you set the interest rate at 8%, over the 8 year period the buyer would pay you a total of $15,364.77 in interest on the loan. If you set the interest rate at 8.5% the buyer would pay $16,381.76 in interest. That’s just over $1,000 in additional interest for just a ½% increase in interest rate.

There are a couple of important things to keep in mind when doing a seller carryback. The first is that the primary mortgage lender must be fully aware that you the seller are providing a secondary mortgage. Failing to disclose this constitutes fraud. The reason for this is that banks lend based on what they feel the borrower can handle based on the value of the property. If they are willing to loan 80% of the value of the home and permit a second mortgage for 15%, requiring the borrower to put 5% down, that is the most the bank feels this borrower can afford. If they are only willing to loan 80% of the value with NO second mortgage, it’s because they feel the borrower cannot handle the additional mortgage. If you provide that mortgage anyway, you are violating the terms of the first mortgage.

The second thing you need to keep in mind with a seller carryback is another type of fraud. It’s the forgiven loan scheme. It works like this: The buyer is approved for, let’s say, a 90% mortgage. The buyer, their loan officer, or their real estate agent, might ask you to take a 10% second mortgage, but they adjust the purchase price up to cover all or part of that 10%. They disclose to the bank that the seller will provide a 10% second mortgage, but as soon as the sale is complete you forgive that 10% second. In other words, you accepted the 10% second but had no intention of ever making the buyer pay it. What this effectively does is make the buyer’s 90% first mortgage a 100% first mortgage instead. Make no mistake, even though you are disclosing that second mortgage to the primary lender, you are still committing fraud.

Both of these types of fraud are very rare, and most likely as a seller willing to carry a second mortgage you won’t encounter someone who asks you to do it. However, I want to make sure you are aware of them because no matter how badly you need to sell your home, it’s not worth committing fraud over.

Land Contract aka Contract for Deed

Land contracts are essentially 100% seller financing. In this case your buyer will not be getting any other mortgage except the financing you are providing. Land contracts can be structured 2 different ways. You can either close on the property with the buyer and convey the deed to them and the land contract exists as financing on the property or you can set the land contract in place and the deed isn’t conveyed until the buyer pays the land contract off, either by refinancing down the road or by paying the balance in full. It is to your advantage to do the second, where you retain the deed until the buyer pays off the land contract.

You may have heard that in order to sell your home on land contract you must own it free and clear. This is not 100% true. In some cases, your existing mortgage may have a ‘Due on Sale’ clause. By conveying your home on a land contract when you do have a mortgage the bank has the right to invoke the ‘Due on Sale’ clause. However, it is VERY, VERY rare that a bank will invoke this clause as long as payments are being made. This is especially true in down markets where foreclosure rates are high.

Like a seller carryback the terms of the land contract are completely negotiable. All of the terms I mentioned in seller carrybacks apply here. I also strongly encourage you to make use of an attorney when it comes to setting the terms of the land contract and completing the paperwork. In some states title companies can assist with these documents.

As we know, traditional closings can be very costly in terms of closing costs, especially for the buyer who has to pay loan origination fees. An advantage to selling with a land contract is that most of these fees don’t apply, saving thousands of dollars in closing costs. This means that the buyer can either put this money towards a down payment, which goes directly to you, or for the buyer whose funds are more limited, they are still able to get into the house when they might not otherwise be able to do so.

A land contract results in the conveyance of the property. Because of this your buyer is actually a buyer and not a tenant. This gives you the advantage of putting someone in your home who has a buyer’s mentality not a tenant’s. They are much more likely to take care of the house and be responsible than the average tenant. The disadvantage to this is that if your buyer should stop making payments for some reason, in most states, you cannot simply evict them. You will either need to follow forfeiture procedures or foreclosure procedures, both of which cost more in time and money than a standard eviction.

On a Land Contract you can also “wrap” your mortgage. For example, if you are paying 5.5% interest, you might be able to charge 8% or more. Even without much of a higher price on your home, you have the spread between 5.5% and 8.0%. On $100,000 of a loan balance, it would mean $2500 per year in your pocket! This is 2.5% difference in interest on $100,000.

Land contracts hold a big advantage over seller carrybacks in that you are able to market your home to a much larger pool of buyers. With the seller carryback the buyer is still qualifying for a mortgage for most of the cost of the property, but with the land contract you can sell to someone who is currently unable to get a mortgage, which greatly increases your reach. Who are some of these people? Buyers who have moved from another area that are still trying to sell their old home and can’t qualify for two mortgages, someone who is going thru a divorce and their existing home is tied up, a buyer who’s credit is bruised, a buyer who’s credit isn’t established enough yet to qualify for a mortgage, just to name a few.

Lease Option/Lease Purchase

Lease options and lease purchases are probably the most creative forms of seller financing and are particularly effective for selling your home in a down market. In both, you are leasing the property to your buyer for a period of time and at the end of the lease period they can buy your home for a pre-set price. In the case of a lease option, the buyer has the right to purchase the home, although if they don’t they would forfeit their option fee. In the case of a lease purchase the buyer is obligated to buy the home at the end of the lease period. Obviously from the home seller’s perspective the lease purchase is more desirable. You must however, make sure that if you sign a lease purchase they can actually get a mortgage down the road, otherwise you will be suing them in court to buy your home (not a good experience).

Unlike the seller carryback and land contract, you are not charging interest on a loan, the tenant buyer is, instead, paying rent. One of the negotiable terms of the lease option/lease purchase contracts is whether any of the rent will apply as a credit towards the purchase price, otherwise there is no principal pay down.

With lease options and lease purchases you have a landlord-tenant relationship with your buyers until they actually purchase the house. This bears some advantages and some disadvantages. While your buyers are tenants, they do not have the typical tenant mentality. Their intention is to buy the house. As part of the lease option or lease purchase contracts they pay an option fee, which applies against the purchase price when they buy, but, it is non-refundable if they don’t. This money helps keep them motivated to become home buyers. However, because they are tenants, during the lease period you will be responsible for repairs on the house, except of course for damage done by the tenants.

One of the main advantages to having the landlord-tenant relationship during the lease period is that if the tenant stops paying rent you can evict them. The reason for this is that in lease options and lease purchases you retain ownership of the house until the buyer actually exercises the purchase agreement. While evictions are rare, they are definitely advantageous because they are much less costly and much quicker than foreclosure or forfeiture. Additionally, if you are forced to evict you still get to keep the option fee.

The terms of lease options and lease purchases are different than mortgage based seller financing. Instead of negotiating interest, amortization and the like, you are negotiating the length of the lease, the amount of the rent, the amount – if any – of the rent applied against the principal, and whether extensions will be permitted and how much the purchase price, option fee and rent will increase for an extension period.

Like land contracts you are truly offering your home to the largest possible pool of potential buyers. Offering this kind of flexibility is the most effective way to sell your home in a down market.

Mortgage Assumption

Mortgage assumptions are much more limited, but can be a useful option for selling your home in a down market. Instead of obtaining a new mortgage, the buyer assumes (takes over) your existing mortgage. Depending on how much equity you have in the property it may be necessary for the buyer to either make a down payment or for you to offer a second mortgage.

The reason that mortgage assumptions are more limited is because of the qualifying criteria that must be met. First, your existing lender must be willing to let a new buyer assume your mortgage. Most mortgages are non-assumable, however, given the challenged market conditions many areas are experiencing this may be negotiable with the lender. In order for the buyer to assume the mortgage, however, they must be able to qualify. The lender will not let just anyone assume it. If the buyer can qualify for the existing mortgage they can likely qualify for a new mortgage as well.

There are a couple of reasons a buyer might want to do a mortgage assumption versus just getting a new mortgage. First, the terms of your existing mortgage may be much better than the buyer can get on a new mortgage. Interest rates have gone up and the difference in rate between your existing mortgage and a buyer’s new mortgage may be as much as 2% higher. If you remember from our above example, just a ½% rate differential for a much smaller loan can make a difference. The other reason a buyer would want to assume a mortgage is because it can save them thousands of dollars in closing costs. The advantage of this to you, the seller, is that is means they can put more money down when buying your house, or it allows them to buy your house when they might not otherwise have been able to.

When selling your home in a down real estate market it is critical to reach as many buyers as possible. The typical pool of buyers is limited to those who can currently qualify for a mortgage. By offering creative financing solutions you are able to reach far more buyers than the conventional seller, especially using lease options, lease purchases and land contracts.

Selling in a down market can be tough. This type of creative financing differentiates you from the pack of other homes on the market. Additionally by offering seller financing you can actually receive more money on the sale of your home, either in the form of interest payments or purchase price.

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About the author...

Wendy is a Licensed Real Estate Broker and Licensed Builder with her own real estate company in Southeast Michigan. She is the past President and Board Member of D.O.L.L.A.R.S.

Used by permission from Wendy Patton

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