REI ETUTOR

Lease Options

Lease Option Contracts

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What is a Lease Option Contract?

A contract to lease a property +

An option to purchase the property

Benefits

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How do I benefit?

Little to no cash out of pocket.

Obtain control of the property.

Immediate profit with monthly cash flow.

Low risk.

Benefits

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How does the homeowner benefit?Obtain higher sales price than cash offer.Positive cash flow.No commissions.No maintenance.No land lordingTax benefits until day of sale.

Legality

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Are lease options legal?

Yes!

Check with your local attorney to see if there are any specific laws you must abide by for a lease-option contract.

Success

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Will this really work in my area?

Yes!

Risks

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Potential RisksEquitable title claimProtecting your option

Ex: Seller backs out, dies, disappears, etc.Due-On-Sale Clause

Non-issue

Equitable Claim

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What is an equitable claim?Tenant argues lease/option agreement is

equivalent of an installment contract.Buyer “owns” property even though no

passing of title.Landlord is lender.

Equitable Claim

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Risks with an equitable claim argumentForeclosure process takes must longer than

an eviction.Result

Costly monthly payments Additional court costs

Change of court venue

Equitable Claim

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There is light at the end of the tunnel.Tenant rarely wins.

Why?Court must interpret lease/option for

something it is not.

Equitable Claim

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Protect YourselfHave a local attorney draft the lease-option

contract.Avoid lease option contracts of more than 3

yearsAvoid tenant improvements during the leaseAvoid creating large amounts of equity

between purchase price and market value.Avoid large down payments.

Protecting Your Option

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How do you protect your option?Record the option in the public records.Create an escrow where an attorney or title

company holds the deed.

Due-On-Sale Clause

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What is the due-on-sale clause?A provision in the mortgage that states the

mortgage must be paid in full upon the sale of the property or conveyance of interest.

Is this an issue?No! We have never seen a bank enforce the

due-on-sale clause.Why would the bank call a performing loan due?

This would only hurt themThe due-on-sale clause is a contractual right, not

a law.

Lease Option

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Option DepositLarge enough so tenant does not walk away.Large enough to cover damages in case

tenant does walk away.Average $5,000+/-Range $3,000 to $15,000 depending on the

neighborhood, market, and price of home.

Lease Option

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How to make moneySpread on your rent payment

Ex: Your payment is $900, tenant payment is $1,150 Monthly profit of $250

Option priceHow much profit?

Your choice!

Lease Option

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Monthly CreditTo give or not to give

Your decisionIf credit, charge above and beyond normal

tenant payment. If tenant payment is $1,150, anything above is a credit

towards purchase price.

Repairs

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Who is responsible for repairs?Major repairs

InvestorMinor Repairs

Tenant

Goal is to avoid tenant improvements

Attracting Sellers

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What type of sellers?Motivated but not anxiousLooking for higher sales priceLooking for tax benefits

Slightly upside down

Attracting Buyers

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What types of buyersAll walks of lifeUsually in process of reestablishing creditPreapprove to see if they can get mortgage in

2 years

Lease Option

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Where to find themCraigslistLocal ClassifiedsYards SignsCreation of a buyers list (See Module on

Buyers List)

Conclusion

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REMEMBEREvery Offer Does Not Result In A Deal But

Every Deal Is The Result Of An Offer