Why Lease Options?
Do you think there might be a person who wants to buy a property but can’t get qualified to buy it right now because of their credit or money issues?
Do you think some realtors have clients who would like to get into a property but can’t get them qualified?
Do you think that sellers may not be able to sell their property for the price they want or need?
Do you think some people are in a situation where they can no longer make the payments on their mortgage and may lose their house to foreclosure?
Do you think some people become tired landlords?
In all of these situations, a lease option may be the perfect strategy to use.
Lease options can also be called rent-to-own properties. For this blog, we will interchange those terms. We also use the acronyms of LO or RTO and will use them throughout this blog.
- Purchase option (buying property from a seller) and Sale option (selling property to a buyer). These options are generally short-term. They grant the freedom to buy or sell for an agreed-upon price at some specific future time.
- Lease (rent to own) option (right, no obligation to buy). Very similar to a purchase/sale option with additional freedom for the tenant to lease or use the property during the option period.
As we discuss both of these types, we will discuss how we can do lease options with no money or credit. A-LO may be a better alternative to traditional rental properties if you have cash and credit.
LO is relatively new to residential properties. LO has been used in commercial property for years. LO has been used in the automotive sales industry as well.
There are two components of LO. The optioner and the optionee. The optioner is the person selling the property or the “option.” The optionee is the purchaser of the property or the “option.” On a sandwich lease option, you as the investor will be doing both sides of the option.
Who needs a Lease Option?
There are many reasons people need to have a lease option.
From the Optioner’s (seller’s point of view).
- Behind on payments
- Can’t sell
- Tired Landlords
- Inherited property
- Financial issues.
From the Optionee (purchaser’s point of view)
- Credit issues
- Lack of a down payment
- New immigrant
- Other financial issues like divorce, downsizing, or medical problems.
Let’s break these down.
Behind on payments: When a homeowner is behind on payments, their options of getting their house sold or catching up on their payments may be very slim. A lease option can solve both of these problems. We will discuss this later in the Sandwich lease option.
Can’t Sell: When a market or property makes selling the property difficult, a LO allows the seller to get monthly payments on their property with a pre-determined sell price at a pre-determined price point in the future.
Tired Landlords: When a homeowner becomes a landlord on a property, they realize that it is not easy. If we can take over their “problem” by doing a LO, we can also solve their problem while helping them make money.
Inherited Property: Many times, people inherit properties from family members. Just because a family member has property doesn’t mean a relative wants it, even if they don’t have to pay for it. Not everyone is cut out to be a property owner. Many people will feel it is a burden rather than a benefit. These new owners can quickly become tired landlords and will need or want to sell the property.
Financial Issues: Property owners can become financially unstable for many different reasons. It may even be beyond their control. The property can become a way for someone to cure their financial issues. If we can take over their monthly payment “burden,” we can create a win-win scenario for the homeowner.
Optionee (Purchaser/Tenant Buyer):
Credit Issues: Owning a home is a dream for many people. Unfortunately, having bad credit can keep someone from realizing this dream. Through LO, we can help someone become a ‘homeowner in training.’ A tenant buyer is a tenant with the option to buy the property in the future. The tenant-buyer can live in the house they will eventually buy. Throughout this time, the investor and the tenant-buyer can get the tenant-buyer qualified and improve their credit.
Lack of down payment: Getting a mortgage is not only about having good credit. Many lenders require the borrower to have “skin in the game.” This down payment can be a significant amount of money that many people aren’t prepared for when getting a mortgage to buy a house. It is not uncommon for people to live paycheck to paycheck and not save money for a down payment. A-LO can get a tenant-buyer into the property they want as a tenant while saving money for a down payment to become the property owner.
Self-employed people: Self-employed People enjoy the benefits of having write-offs to lower their taxable income. These write-offs are a double-edged sword when it comes to qualifying for a mortgage to buy a house. A lender will want to see proof of income to get the mortgage. When you use valid expenses as write-offs against your income, your taxable income goes down. Lower income means a lower tax burden and means you won’t qualify for as big of a mortgage. A-LO can help a self-employed person get into the place they want to live as a tenant with the option to buy in the future. In this situation, the tenant-buyer will have to show more income for a couple of years to qualify for the mortgage.
New Immigrants: Many people from other countries move to the U.S. for a wide variety of reasons. When someone moves from another country, they don’t have any credit history established in the U.S. Having bad credit is a challenging hole to climb out of, but having no credit is harder. A person needs a history of credit before a lender will qualify them for a loan. It generally will take a couple of years for someone to get history. A-LO for a potential homeowner allows them to get into the property they want as a tenant-buyer now with the option to buy it later.
Other Financial Issues: Financial issues can happen to anyone. The goal of a lease option from the buyer (optionee) point of view gives them choices or “options.” Without these types of options, a person’s only choice is to be a renter. The best way to look at lease options from the purchaser’s point of view is a bridge to help them over a situation until they can get qualified to buy the property. The LO gives them time to fix the problem while living in a property they want to believe in the future.