Provided by Jeff Beaubien @ www.Lease2Purchase.com
General definition
Simply stated, a Lease Buy Option contract combines a basic lease contract with an option to buy contract, which creates a Lease Buy Option contract.
Before I describe what a Lease Buy Option contract is in detail, I must first define a few simple basics for you.
What is a contract?
A contract is an agreement between two or more persons (individuals, businesses, organizations, or government agencies) to do, or to refrain from doing, a particular thing in exchange for something of value.
What are the key elements to a binding real estate contract?
- Offer and acceptance: Original signatures with no alterations to the contract. If the original offer is marked up and initialed by the party receiving it, then signed, this is not an offer and acceptance but a counter-offer. Any final agreement should be reduced to a final writing and signed by both parties.
- Consideration: A bargained for exchange of something of value. Money is the most common form of consideration, but a promise to perform (i.e. a promise to pay) is also satisfactory.
- In writing: A real estate contract must be in writing and it must:
- Identify the parties: The full name of the parties must be on the contract.
- Identify the property: At least the address, but preferably the legal description must be on the contract.
- Purchase price: The amount of the sales price or a reasonably ascertainable figure (an appraisal to be completed at a future date) must be on the contract.
- Signatures: A real estate contract must be signed to be enforceable.
- Legal purpose: The contract is void if it calls for illegal action.
- Competent parties: Minors, mentally impaired, drugged persons, etc. cannot enter into a contract.
- Meeting of the minds: Each side must be clear as to the essential details, rights, and obligations of the contract.
What is a Lease contract?
A lease contract is an agreement, usually written, between the owner of a property and a renter who desires to have temporary possession of the property. As a minimum, the agreement identifies the parties, the property, the term of the rental, and the amount of rent for the term.
In addition to the basics of a rental (who, what, when, how much), a housing rental may go into much more detail on these and other issues.
What is an Option contract?
An option contract is defined as "a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer."
Or, quite simply, an option contract is a type of contract that protects the individual making the offer (the offeree) from a seller's (the offeror) ability to revoke the contract.
What is a Lease Buy Option Contract?
Again, it's very easy. A Lease Buy Option contract combines a basic lease contract with an option to purchase contract, which creates a Lease Buy Option contract.
Lease Contract + Option to Purchase Contract = Lease Buy Option Contract
The tenant/buyer pays to the landlord/seller a nonrefundable option deposit that is applied to the purchase price of the home. The tenant/buyer then pays to the landlord/seller rent to compensate the landlord/seller for the tenant/buyer's use of the property.
Rent payments are usually made on a monthly basis. A portion of that monthly payment is often applied to the purchase price and/or the down payment of the home.
During the term of the lease, but before the option expires, the tenant/buyer has exclusive right to buy the home under the terms to which both parties have previously agreed.
General Features & Benefits
Without a doubt, the Lease Buy Option contract is the quickest, easiest and least expensive way to buy, sell and invest in real estate.
It replaces the typical adversarial relationship that usually exists between buyers and sellers with a win-win method of transferring real estate ownership. As a result, it is highly prized by those who know about its powerful features and benefits.
Specifically (if you're the buyer), you will have minimum cash out of pocket, credit problems are okay, faster equity growth, increased buying power, time to kick the tires and peace of mind.
Specifically (if you're the seller), you will have a top sales price -- even if demand is low, positive cash flow, the largest market of buyers, minimum risk, no commissions or fees, no maintenance, no landlording and (my favorite) a non-refundable option deposit.
Landlord/Seller Features & Benefits
If you don't need much cash up front ($5,000 - $20,000), the best way to get your full asking price and a higher than average monthly rent for your home is to offer it for sale on a Lease Buy Option. Since you're offering a huge value and attractive financing to assist the tenant/buyer, they tend to be willing to pay a higher sales price and higher than average rent. Tenant/buyers can easily understand the concept of trading price for time and value.
When you Lease Buy Option your home, you receive a non-refundable option deposit. This amount can be as much (or as little) as you wish. You will receive a majority of your profits at closing when, and if, the tenant/buyer exercises their option to buy. You also win if the tenant/buyer defaults or allows the option to expire since the option deposit is non-refundable. You can begin the whole process over again by collecting another option deposit from a different tenant/buyer.
The earnings potential for the landlord/seller is tremendous since a well-negotiated deal will reap profits at every stage of the game.
Here are some features and benefits for the landlord/seller:
- Top sales price, even if demand is low: You attract more buyers who are willing to pay a premium because of the exclusive financing terms and value you're offering.
- Higher than usual rent: Since you are flexible on your financing terms and are offering a tremendous value, you can demand a higher than usual rent.
- Positive cash flow: Since you can demand a higher than usual rent, your positive cash flow will increase.
- Non-refundable option money: When a tenant/buyer executes (signs) a Lease Buy Option contract, you receive a non-refundable option deposit that is yours to keep should they default or decide not to buy.
- Save thousands in fees: Since you are selling your home by owner, you will avoid paying a 5-10% realtor commission which quickly adds up to thousands of dollars. You will also save on advertising costs because your home will be sold a lot faster.
- Highest quality tenants, minimum risk: Because you are renting to tenants who have a vested interest in your home, they think like homeowners and tend to take good care of it.
- No maintenance, no landlording headaches: Tenants who have a vested interest and believe they are a homeowner may feel a "pride of ownership" that encourages them to pay on time, perform routine maintenance and make improvements to your home.
- Tax shelter is held intact: Because you remain on the deed until the option is exercised, you maintain all of the tax benefits of ownership.
- Largest market of buyers: You are marketing your home not only to traditional buyers, but also to renters and investors. These three groups make up over 95% of people whom buy real estate.
- No vacancies: When you advertise your home as a Lease Buy Option your phone will literally ring off the hook. Typical turnover time is days or weeks instead of months or even years.
- Peace of mind: It is safer than conventional rentals because of the quality of the tenants and their vested interest in your home. It also means that someone is living on-site who will watch and guard your home against fire, theft, vandalism, etc.
Tenant/Buyer Features & Benefits
If you are in the market to buy a home, you are probably aware of the advantages home ownership provides (tax shelter, appreciation, security, etc). If you are actively seeking homes for sale on a Lease Buy Option agreement, you are either (1) a very smart renter, (2) a very smart real estate investor, (3) not ready to make a commitment, (4) cannot yet purchase a home through conventional means or (5) any combination of the aforementioned.
The Lease Buy Option contract provides you with many features and benefits, but perhaps the most powerful one is the rate at which you accumulate equity. Compare any lender's loan amortization schedule to that of a Lease Buy Option contract and you'll quickly see that the Lease Buy Option contract wins hands-down -- every time. Moreover, the buying power of a Lease Buy Option contract can quickly and easily land you a home that you could only dream of buying the conventional way.
Here are some features and benefits for the tenant/buyer:
- Faster equity growth: Equity accumulates much faster (five times or more!) than with conventional financing through a bank or lender.
- Rent money is working towards purchase: Every month a portion of your rental payment (typically $100-$500) is credited towards your down payment or off of the sales price.
- Option money is credited towards purchase: When you sign a Lease Buy Option contract, you will pay the seller an option deposit. This money is your vested interest in the home and will be fully (100%) credited to you when you buy the home.
- Minimum cash out of pocket: When you purchase a home the conventional way, you must pay at least 5% down plus closing costs and prepaid fees. When you buy with a Lease Buy Option, you only pay first month's rent and a small option deposit. This will save you between 25% and 85% every time you buy a home.
- Frequently no down payment at close: Since you have given the seller an option deposit and you have been receiving monthly rent credits, there will frequently be very little or nothing left to pay for a down payment at closing.
- Profits from appreciation: Since the sales price is locked in before closing (as specified in your agreement), any increase in property value will mean that your equity (what you owe minus what it's worth) is increasing in the home.
- Possible sale for a profit: If you are allowed to sell (assign) your option (it will be in your agreement), you may sell it to a third party for a profit.
- Increased buying power: When you buy a Lease Buy Option home, you can put down as little as first month's rent and a $1 option deposit. Compare that to a typical bank or lender who requires 5-30% down plus closing costs and prepaids.
- Credit problems okay: Qualification restrictions simply do not exist. You will be approved at the sole discretion of the landlord/seller.
- No lengthy escrows or mortgage approvals: Your approval will be based solely at the discretion of the landlord/seller instead of a lender who can take up to a month (or longer) to render a decision.
- Control of the home: You will be put in full legal control of the home for a specified period of time without actually having to own it.
- No taxes, less liability: Since you do not own the home (yet), you will not have to pay property taxes and your liability exposure will be dramatically reduced.
- Quick move in time: You can typically take possession of the home in a week or less, instead of conventional move in times of one to three months, after your offer was accepted.
- Maximum leverage: You are spending very little (or zero) money to control a potentially very expensive, and very profitable, piece of real estate.
- Time: Before you actually buy the home, you will have 3-24 months (depending on your agreement) to repair your credit, find the best interest rates, investigate the home and research the neighborhood and/or schools.
- Minimal maintenance: Large maintenance problems or any maintenance problems that exceed a certain amount of money can be delegated to the landlord/seller.
- Privacy: Your name will not be on the deed or in the public records until you exercise your option to buy.
- Peace of mind: You will have full control of the home and can maintain or improve it however you wish.
Investor Features & Benefits
As an investor, you will receive the exact same features and benefits as the landlord/seller or the tenant/buyer, depending on which role you take in the transaction.
Furthermore, as an investor you're probably aware of the principles of leverage (the use of borrowed funds to improve ones capacity and to increase the rate of return on an investment). With the Lease Buy Option contract, you can buy (control) properties for literally no money down without using a lender or going through a lengthy loan approval process.
Additionally, the Lease Buy Option contract is so quick and easy to use, you can significantly increase your productivity and, as a result, your cash flow.
Realtor Features & Benefits
As a realtor, it would benefit you to add the Lease Buy Option contract to your toolbox of income producing techniques.
Imagine opening your doors to a world of buyers and sellers that nobody else in your office, or town, has even considered. In fact, almost every buyer and seller you meet is a potential Lease Buy Option candidate.
This can provide a special market niche for you. And having a special niche is what separates the top producers from the mediocre ones.
Never lose another deal because your seller is overpriced or because your buyer can't get financing. A Lease Buy Option requires less than half the work of selling a home the conventional way, so you will be much more productive -- and wealthy!
Furthermore, some of the most successful professionals in the world, including insurance agents, movie stars, musicians, and authors all benefit from a little-known financial secret about the best kind of income you can earn...
Residual income.
What do these financial geniuses know that you don't? Simply put, they know that residual income provides for a steady cash flow that is paid at a date after your work has been completed. Imagine the income you'll receive from lining up one or two quick and easy deals every month for the next twelve months.
Other immediate income producing possibilities include:
- Consulting on an hourly basis
- Paying a referral fee to someone for lining up these opportunities for you
- Charging an up front fee for your services instead of waiting for the residual income
The possibilities are endless.
What's more important, you are in a position to make the Lease Buy Option known to a select group of potential clients who would not qualify to purchase in any other way. They will remember the opportunity you have given them and reward you with future business.
At minimum, you have a fiduciary responsibility to determine whether a Lease Buy Option agreement could help them solve their real estate problems. It may be exactly what they need -- and trust me -- they will thank you for it!
Provided by Jeff Beaubien @ www.Lease2Purchase.com
