The traditional lease option strategy being touted by many real estate “guru” charlatans, are flawed. The strategy they teach is nothing more than a sublease/option strategy were investors’ lease a property and then sublease it to a so-called tenant buyer. This is quite the misnomer as the correct term should be sublease/option strategy (not a lease option) This strategy has many drawbacks and pitfalls.
In this blog post I will show you how to structure a lease and an option so you can use it with low risk, low cost lease, and option to profit in single family houses.
What is the Risk In Doing Lease Options?
When you do a lease option, I believe the reward versus risk is to high. There are many things that go wrong that the “gurus’” do not tell you.
- The Tenant/ buyer fails to make payments and must be evicted.
- The tenant / cannot be evicted because he has an equitable interest in the proprety. In this case, he has to be foreclosed on.
- The tenant buyers are malicious, pigs, dirty, and destroy the house.
- The owner refused to sell
- The property is damages by, fire, wind, storm, etc and the tenant must be relocated
You are a fancy landlord now!
When I did lease options (sublease /options) I became a fancy landlord. I did not know anything about being a landlord and as I result had multiple problems and lost a lot of money. I recommend that you start by getting up to speed on your states resident rental house laws. If you are ignorant in property management fundamentals, it more than likely is going to be a recipe for disaster for you.
Do not think that hiring a property manager is going to solve this problem either. You end up managing the manager, and the cost to have a property management company involved eat up your profit so fast it’s not funny.
The Sublease / Option Strategy is NOT financially feasible.
In most cases, there is not enough profit to make them worthwhile. In a typical scenario, you may receive a $1,000 option fee and a monthly cash flow on paper of $100 above the lease payment. The only problem is that most people do not factor in the cost of running a business. It takes time to manage properties. I soon realized I was working for minimum wage. When you factor in other expenses like eviction, foreclosure, vacancy, these expenses will add up quite quickly. My advise to you before you do any lease/option or even own buy and hold property for cash flow…Have MAJOR reserves. Things go wrong.
What about the "Due on Sale" clause?
It happens! I was hit twice with the loan being called due and payable within 30 days. Most gurus say it never happens if you make payments on time every month. I know otherwise. A lender CAN call the mortgage/deed of trust to be in default because of a lease option ( not often – but it does) If you do not know what a due on sale code is, please refer to Section 591.2 (b) of Title 12, Banks and Banking, of the Code of Federal Regulations.
YOU CAN MAKE MONEY IF YOU DO IT MY WAY!
The best way to structure a lease option, is similar in methodology to a wholesaling. The term being used is a "cooperative lease option”. In concept, you will be wholesaling lease options. The seller and you "cooperate" to make the deal work. In a cooperative lease option the seller sells their home to you, the investor, on a lease option and then you flip the deal to an end tenant buyer for a fee, usually the option fee.
This way , you are selling the lease option contract and not the property. It is just like any wholesale deal where an investor flips or assigns the contract to another person for a fee. Do you see the difference, you make your profit an you are gone. In the sandwich lease option you stay in the deal until the very end and have many risks along the way.
How much can you make?
The typical option / or selling fee is usually around 3% of the purchase price can be negotiated. Let the market tell you what you can get. Always ask, how much money do you have access to get this house?
Things to remember
1. Work with a mortgage broker, so the tenants can work on getting the house purchased eventually.
2. Use a separate lease / option contract
a ) two year lease agreement
b) two year option agreement
c) Fixed purchase price at current property value or below.
d) Rental rate 10% above market
e) One year extension clause in option agreement
f) One year extension clause in lease agreement
4. Record separate option and lease in public records
5. Require all Lease payment be made to a LICENSED loan-servicing company.
6. Insure personal property with a Renters Insurance policy
That's it. Easy and Profitable Fast
Find out more about my Cooperative Lease Option strategy, along with the software that automatically finds motivated sellers and hungry buyers to do 100's of deals a year at http://www.JVFacilitationProfits.com