REI ETUTOR Lease Options

Lease Option Contracts REI eTutor What is a Lease Option Contract? A contract to lease a property + An option to purchase the property

Benefits REI eTutor How do I benefit? Little to no cash out of pocket. Obtain control of the property. Immediate profit with monthly cash flow. Low risk.

Benefits REI eTutor How does the homeowner benefit? Obtain higher sales price than cash offer. Positive cash flow. No commissions. No maintenance. No land lording Tax benefits until day of sale.

Legality REI eTutor Are lease options legal? Yes! Check with your local attorney to see if there are any specific laws you must abide by for a lease-option contract.

Success REI eTutor Will this really work in my area? Yes!

Risks REI eTutor Potential Risks Equitable title claim Protecting your option  Ex: Seller backs out, dies, disappears, etc. Due-On-Sale Clause  Non-issue

Equitable Claim REI eTutor What is an equitable claim? Tenant argues lease/option agreement is equivalent of an installment contract. Buyer “owns” property even though no passing of title. Landlord is lender.

Equitable Claim REI eTutor Risks with an equitable claim argument Foreclosure process takes must longer than an eviction. Result  Costly monthly payments  Additional court costs  Change of court venue

Equitable Claim REI eTutor There is light at the end of the tunnel. Tenant rarely wins. Why? Court must interpret lease/option for something it is not.

Equitable Claim REI eTutor Protect Yourself Have a local attorney draft the lease-option contract. Avoid lease option contracts of more than 3 years Avoid tenant improvements during the lease Avoid creating large amounts of equity between purchase price and market value. Avoid large down payments.

Protecting Your Option REI eTutor How do you protect your option? Record the option in the public records. Create an escrow where an attorney or title company holds the deed.

Due-On-Sale Clause REI eTutor What is the due-on-sale clause? A provision in the mortgage that states the mortgage must be paid in full upon the sale of the property or conveyance of interest. Is this an issue? No! We have never seen a bank enforce the due-on-sale clause. Why would the bank call a performing loan due? This would only hurt them The due-on-sale clause is a contractual right, not a law.

Lease Option REI eTutor Option Deposit Large enough so tenant does not walk away. Large enough to cover damages in case tenant does walk away. Average $5,000+/- Range $3,000 to $15,000 depending on the neighborhood, market, and price of home.

Lease Option REI eTutor How to make money Spread on your rent payment  Ex: Your payment is $900, tenant payment is $1,150  Monthly profit of $250 Option price How much profit?  Your choice!

Lease Option REI eTutor Monthly Credit To give or not to give  Your decision If credit, charge above and beyond normal tenant payment.  If tenant payment is $1,150, anything above is a credit towards purchase price.

Repairs REI eTutor Who is responsible for repairs? Major repairs  Investor Minor Repairs  Tenant Goal is to avoid tenant improvements

Attracting Sellers REI eTutor What type of sellers? Motivated but not anxious Looking for higher sales price Looking for tax benefits Slightly upside down

Attracting Buyers REI eTutor What types of buyers All walks of life Usually in process of reestablishing credit Preapprove to see if they can get mortgage in 2 years

Lease Option REI eTutor Where to find them Craigslist Local Classifieds Yards Signs Creation of a buyers list (See Module on Buyers List)

Conclusion REI eTutor REMEMBER Every Offer Does Not Result In A Deal But Every Deal Is The Result Of An Offer