Does the "Purchase Option" system work?

Question

I just read an article about a system called the "Purchase Option" system. Basically, you find a motivated seller and offer to lease their home for a number of years and then have the option to buy them out at the end. Of course then you find a tenant/buyer to pay you the rent and buy YOU out at the end.

Anyone hear of it? (I'm sure some of you have)

It sounds really neat to try... does anyone know if it's legit??

Thanks!
-RedMan

Anyone hear of it? (I'm sure some of you have)

It sounds really neat to try... does anyone know if it's legit??

Thanks!
-RedMan

Anthony Sulecki · Answer

Ive never done a lease option, but I hear its important to get a good amount of money down from the tenant. What I think is the most attractive is how you get paid. You get a nice downpayment, cash flow per month, (if you did it right) and a payout at the end. Pretty nice.

Ryan Webber · Answer

I have never done a sandwich lease option, but I know of several investors that swear by them.  I've never heard of the seller refusing to sell scenario in actual application, but I guess it could be an issue.  If it came to that, you would win, so I'm not sure if it would really be that big of an issue.

N/A N/A · Answer

No,

I don't give rental credit and I usually charge higher than market rents.  I balance this out with my personal coaching on getting their credit in shape.  I have had tremendous success doing it this way.

Rick

Ryan Webber · Answer

Imentor, are you still doing LO's in Texas.  You said something about not connecting the lease and the option fee, is that sufficient to circumvent the executory statutes?

I am curious because most investors I know, and most attorneys I know won't touch LO's anymore, but I haven't checked back into it for a while.  Has any case law come down about it?

Anthony Sulecki · Answer

Yes, absolutely. Im glad to see someone here is positive about L/O's. If you cover yourself, choose a qualified tenant, and be fair all around, everything should work out ok. If there are any objections at the end of the deal, youve  probably made enough cash to push some of it around to make everyone happy, without ever having to end up in court, etc. Though I hear lawsuits are rare. (Again, if you do it right.)

Imentor, do you give tenants rental credit?

N/A N/A · Answer

Most L/O tenants feel the same way.  They will do repairs on their own and generally are pretty easy to deal with.  But sometimes life hits them and they just can't pay up.  They know that there deposit is gone.  I like to tell them that if they clean up the place I will give them $500 upon inspection to avoid having to evict and pay a cleaning crew.  I never give them money until they are moved out and the house is spotless.

Good Luck

Rick

Anthony Sulecki · Answer

Yes, it is nice. A larger downpayment equaling a better tenant, because they have more invested, and none of it is refundable.  Ill tell you what, if Im giving someone 5K+ on a downpayment for anything, knowing its not refundable, Im in for the long haul.  :D

N/A N/A · Answer

Tony,

the non refundable option is nice.  I have done several of those.  You have to be sure to not make the lease contingent on the option fee or vice versa.  If this happens it can be considered as an executory contract by some courts/judges.  You will have top foreclose in order to get your bad paying tenant out.

This stuff got so bad in Texas that they have placed some serious limitations on what is allowed for lease options and contract for deeds are now a thing of the past.

Good Luck

Rick

N/A N/A · Answer

Redman,

You are right to stick to flipping and wholesaling for now.  If you are tight on cash stick to wholesaling until you build up a reserve. Don't get too carried away by all of the other stuff that is out there.  Get good at one thing first before moving on to the next.

Good Luck

Rick

Michael Rossi · Answer

The reason that you haven't heard of this happening frequently is that end buyers (your buyers) don't usually exercise their option and therefore the property is never purchased.  These end "buyers" are really nothing more than renters.  They have bad credit which does not improve and therefore they are never able to buy the property.

In addition, sandwich lease options are typically used by newbie investors who have no money and bad credit.  The VAST majority of these new investors fail in a short period of time, so again, there is no exercise of the option.

I don't even do sandwich lease options and I know 2 people who had these go badly.

I am not against anyone using sandwich leases.  I am just pointing out the difference between the hype and the reality.  In reality, the risk is higher than just about any other type of REI deal.

Does the &quot;Purchase Option&quot; system work?

Does the "Purchase Option" system work?