Lease options in real estate (AKA “Rent to own” in real estate) are a popular form of zero-down investing and can be used in a variety of different strategies. Although the overall concept of lease option investing is simple. there are many different ways to implement lease options. Here is simple explanation of lease option investing:
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What is a lease option? A lease option is the privilege to lease AND/OR buy a home during or before a lease ends. Essentially, a person rents the property from you with an option to buy the property sometime in the future. Instead of renting out an investment, you lease option it to a tenant.
Lease – The privilege to lease a home + Option – The “option” to buy a home = Lease Option!
The parts of a lease option:
!. There’s an option consideration that’s paid upfront (which can be credited toward the down payment)
2. Specified time period and price from which the tenant can buy
3. Month lease amount that the tenant must pay
3. (Optional) There can be monthly credit each month that goes toward the down payment
Different Types of Lease Options:
Regular Lease Option: Essentially, you don’t want to manage a property anymore and lease option it to a tenant.
Fix and Flip Scenario: You lease option a property FROM an investor, fix it up, and buy it for the lease optioned price.
Sandwich Lease Option – This is when you lease the option the property from an owner and lease option it back out to the tenant.
SUB2 Sandwich Lease Variation – Same as above but instead of lease optioning, you would do a subject-to deal. Click here to find out more about subject-to deals.
Why do people use lease options? They are great for investors that don’t want to manage a property anymore. They are also great for the tenant because they can save up for a house if they have bad credit. Most of the time investors credit a certain amount each month to the down-payment.
Ways to make money in lease options:
Front end – This is the “option consideration”.
Middle – Cash-flow and mortgage paydown
Back-End: Sale of the house
Tenant buys: This is what you want! The tenant builds his/her credit gets a loan and uses the down payments from the “credits” each month to obtain a loan!
Extend the contract: If you still see hope that the tenant could end up purchasing the house, extend the contract. Most investors want some type of compensation for this, another option consideration and/or an increase in price.
Sell the property
Find a new tenant: Sometimes people change their minds and the option agreement does not have to be exercised.