The investor’s (Optioner’s) point of view gives them a hybrid type of property. The investor can get monthly cash flow and a pre-determined sell price in the future. Since the tenant-buyer has an ownership mindset, they are many times the best type of tenant.
One of the biggest concerns with becoming a property owner is the stress of property management or handling tenants. With lease options, we have owners in our properties instead of tenants. Owners generally take care of properties better than tenants. The question is always how do we make a tenant-buyer an owner?
A tenant buyer is a tenant until they exercise the option to buy. The tenant-buyer has the option but not the obligation to buy. Having this control is a benefit to both you as the investor and the tenant-buyer. The tenant-buyer is in control of finalizing the deal. As the investor, you have a tenant who will pay higher than fair market rent (10-40% more) and will take care of most or all of the maintenance on the property.
You have an owner in your property instead of a tenant. They will have pride of ownership and keep the property in better condition if they choose not to exercise the option. Generally, they will want to exercise the option since they are paying premium rent and repairs.
A tenant buyer will also have more skin in the game than if they were a traditional renter. The deposit is called Non Refundable Option Consideration for legal purposes. The consideration is usually 3-5% of the value of the property. A significant amount that if the tenant-buyer damages the property, you have some of their money to fix it back up. With the higher consideration, the likelihood they will follow through and exercise the option goes up exponentially.
The downside for you as the investor is that you don’t realize the longer-term appreciation of the property. Since you will be selling to the tenant-buyer when they exercise the option, you won’t own the long-term property. The term of a LO can vary but usually falls into the 1-4 year range. This timeframe gives the tenant-buyer sufficient time to fix their credit, show income, save for a down payment, or establish credit. As the investor, you can miss out on the long-term appreciation you might realize. The tradeoff is a better tenant who takes care of the property, giving you monthly cash flow and earned income when you sell it.
One of the best parts of a LO is you will not have to worry about what the market is doing, and you won’t have to spend time looking for houses. Another benefit is you should only do them on nice homes in nice neighborhoods. You won’t be a slum lord, and if the tenant-buyer doesn’t follow through, you can find another tenant-buyer or sell it.
Lease Options are a strategy where you will have minimal competition, and you will always have demand. If you ask any realtor or mortgage, most of them will have people that want to buy a house but can’t qualify. This is precisely what you are looking for. The clients the relator or mortgage broker can qualify are not your market, so that you won’t be competing for the same client. You want the clients they aren’t making money on. You will help the realtors and mortgage brokers close more deals. You will be assisting potential homeowners in getting into a property. Investing for profit while investing for purpose is precisely what we want to do.
You make money when you solve problems, and that is what the lease option accomplishes. We have talked about how we help the Optioner (Seller) and the Optionee (Buyer), but we can also help an investor. Many investors would invest in property but don’t want the headache of tenants and toilets. A joint venture partner on a lease option deal can get a great return without talking to tenants or fixing toilets.
The process of a joint venture lease option allows you to make money on a purchase lease option without using your cash or credit. You will have a tenant-buyer who wants a house. You have a joint venture investor who wants a reasonable return with the property or tenant headaches. You are in the middle, and you can make a cash flow and earned income by putting the people together and solving their problems.
Most people don’t know about lease options, so your main job is to educate them on how you can help them.
- Tenant buyer: You get them into a property they want sooner and help them save for a down payment or get their credit fixed.
- Investor: You get them an investment without the headaches of property management or maintenance.