I had many people asking for all three types of lease options to be in one blog post so they could just print them off and have them handy.
So let’s first name the three types, then discuss each one over the next few e-mails.
- Straight Lease Option
- Lease Option Assignment
- Sandwich Lease Option
Straight Lease Option
A straight lease option is simply where you own the house and rather than just renting it out; you offer it as a lease purchase.
So there is no middleman, or assignment of the contract.
You sign the contract with the buyer, collect non-refundable option fee, and then, of course, the monthly payments each month. Not much to the flow or structure to be honest. This is just about as easy as it sounds actually! Obviously, there are details such as setting the numbers properly, etc., but it’s very straight forward.
- You would get a much larger upfront fee than you would if you got a deposit from a rental.
- This fee is non-refundable.
- The buyer takes much much better care of the property than a renter.
- No repairs on your part, except what is covered by your insurance such as roof, etc.
- You get to cash flow each month and get full price for your home.
- If the buyer does not exercise the option, you keep the option fee and all rents paid.
Cons: Your buyer may very well cash you out within the option period, and you would have to sell the house at the agreed upon price, so you have to be willing to sell the house.
So the straight lease option is very easy and straight forward as you can see. The only two people involved are the same as a straight rental on a house you own.
You, the seller, and the buyer.
Now, I realize this may seem pretty easy, but…well…it is! Again, there is no need to overthink lease options. Don’t worry about the details so much as the overall structure.
Lease Option Assignment. (LOA)
The Lease Option Assignment is very very likely how YOU will get started using lease options in your real estate business;
The lease option has a paperwork flow a little bit like that of a wholesale deal. You work out the numbers with the seller, then put the numbers into the contracts between the seller and your company. You market the property, and when you have a solid tenant/buyer, you ASSIGN your contract and you are paid the ASSIGNMENT FEE. Now you are out of the deal essentially.
The agreement is now between the seller and the Tenant/Buyer. So you have never taken possession of the house, or closed on it. You have not used any money or credit. This is the technique I’ve used for years and years and it’s a FANTASTIC way to generate income!
- You don’t have to use any money.
- You don’t use any credit.
- You work with NICE houses in NICE areas.
- You assign the contract and are out of the deal.
- You can expect about 4-5% of the price as an Option Fee (Assignment Fee)
- So you can easily make $7500 and more on the Assignment Fee.
- No negotiating with the seller! This alone is HUGE!!
- Work with solid buyers.
Hmm…OK…this is a tough one. The ONLY downside to an assignment I can think of is that you aren’t generating monthly cash flow and you aren’t making money on the backside.
That’s really about the only downside I think! How sweet is THAT?!
This is a very profitable strategy, but you want to have experienced before jumping into an SLO.
The Sandwich Lease Option! (SLO)
So, this is the big one. This is where YOU are staying IN the deal. So here is how it is structured. Let’s say you find an owner that is fairly motivated. Not motivated to give you the house so much, but just fairly motivated. So you negotiate with the owner on the terms between the seller and your company (you).
So, here is an example.
- You negotiate the Option Price (the sales price) of $150,000, and you know the value of the house is say..$165k.
- You TRY to get the contract with no option fee (no out of money option fee such as $3k down etc.), so you are trying to get the price as low as you can, the down payment (option fee) to as close to zero as you can. Then, the next thing to negotiate is the monthly payment you are making to the owner, and WHEN your first payment will be. Then last is how LONG the term will be.
- The next thing to negotiate is the monthly payment you are making to the owner, and WHEN your first payment will be. Then last is how LONG the term will be. So, you want the payment to be as low as possible.
So let’s say in this case you get the owner to agree to $1200 a month, with the first payment to start in say, 60 days, and the term of the lease option for say…5 years.
So let’s recap what you have on this sample deal:
- $150,000 option price
- $0 down (you will need to put something like $10 for the option consideration)
- $1200 a month starting with the first payment in 60 days
- Five-year term. Which means you have five years to cash the owner out or lose the option.
NOW, you have it locked up. Now what? Now you have to market the house as a lease purchase to the end tenant buyer.
You market it as a lease purchase with terms such as:
- $165,000 (this is based on you looking at value down the road, so I’m using this as an example)
- Option Fee (this is what you get down) $As much as you can 🙂
- On the option fee, you can set it for say 5% down or whatever you would like, but we typically get about 4-5% down as an option fee.So let’s assume you get $8,000 down. This goes into YOUR POCKET!!
Then you have the monthly payment at say… $1395 a month.So, you have:
$15k in profit on the total price
$8,000 in your pocket as the option fee
$195 a month in cash flow each month.
So the buyer pays you, you pay the seller.
- You can create cash flow, not just one pop income with an SLO
- With a home warranty, you know the repairs are taken care of, and they are the responsibility of the buyer.
- You get $$$ in your pocket as the OPTION FEE.
- You get the cash flow each month.
- If the buyer doesn’t purchase the home, you can stick a sign back in the yard and do it all over.
There is risk associated with an SLO, as you want to make the payments to the owner so as not to screw them over.
- An empty house means you are making empty house payments.
- You want to make SURE you use a servicing company like Evergreen. (This isn’t a ‘cons, a” but I did want to mention it.)
- If the buyer damages the property, you are on the hook.
- Per the law, you can NOT do an SLO in Texas.
So due to the risks of a SLO, just as with a Sub-2, I normally don’t recommend this tactic unless you have at least 6 months of solid experience under your belt.