Involved In Real Estate · Los Angeles, CA · Member since 2013 · 110 posts · 4 votes
Hey BP community!
Wondering if someone can explain lease options to me like I'm a 3 year old. I went to a small seminar about lease options last night and still couldn't wrap my head around it.
I guess my main questions are: - Why would a seller agree to this as opposed to just selling their home for cash? - Does the seller still live in the property, while the buyer/investor pays them the rent? And, as far as having multiple lease options, it seems as if the buyer/investor would have to have a very large amount of monthly cash flow to be able to lease multiple properties each month.
A lease/option is one form of creative seller financing. It consists of two separate agreements between the landlord/seller and the tenant/buyer. One is the lease. This is just an ordinary lease and gives the tenant/buyer (TB) possession of the property. That is, the right to occupy it. The second is the option agreement. An option agreement gives the TB the right to buy the property from the landlord/seller (LS) before a certain date (the option period). Usually there is a specific price specified in the option (the "strike price"). Usually there is a price for the option, called option money or "down payment". Technically, its called a "premium" for the option.
The LS doesn't live in the property. The LB does, though in some cases the TB subleases the property (i.e., rents it to someone else) or re-lease/options it to someone else (sandwich lease option.)
A lease/option is one form of creative seller financing. It consists of two separate agreements between the landlord/seller and the tenant/buyer. One is the lease. This is just an ordinary lease and gives the tenant/buyer (TB) possession of the property. That is, the right to occupy it. The second is the option agreement. An option agreement gives the TB the right to buy the property from the landlord/seller (LS) before a certain date (the option period). Usually there is a specific price specified in the option (the "strike price"). Usually there is a price for the option, called option money or "down payment". Technically, its called a "premium" for the option.
The LS doesn't live in the property. The LB does, though in some cases the TB subleases the property (i.e., rents it to someone else) or re-lease/options it to someone else (sandwich lease option.)
Hey Ben Kahle
There are 2 basic types of lease options....
Cooperative Assignment (AKA CA, LO assignment, wholesaling lease option, lease option flip etc.)
Sandwich lease option
The CA is where you as the investor are working with the seller and set the numbers on the house and you assign your contract to the end buyer that can't quite qualify. You get paid an assignment fee and that's it.
The sandwich LO is where you NEGOTIATE a price with the owner and then lease option it to a buyer for a higher price and ideally a few hundred more per month than what you are paying.
Starting off...only focus on the CA's!!!
Why would a seller do a lease option?
Because they want to sell but they don't have an offer, they can get full price and not pay a commission.
Ben the number one reason a seller will do a lease option is for debt relief. They bought another house and can't get the old one sold or they got transferred and have to get out of Dodge today or some other reason that they need the relief. They need to get out from under the mortgage payments ASAP.
The seller moves out of the property and you as the tenant/buyer have a lease agreement that allows you to sublease the property. You then put a tenant/buyer in the property and collect an option consideration (sandwich lease) or you can assign your agreement with the seller to the tenant/buyer and collect an assignment fee and move on to another deal.
You don't need any cash because the tenant/buyer that you put in the house pays the rent.
Wondering if someone can explain lease options to me like I'm a 3 year old. I went to a small seminar about lease options last night and still couldn't wrap my head around it.
I guess my main questions are: - Why would a seller agree to this as opposed to just selling their home for cash? - Does the seller still live in the property, while the buyer/investor pays them the rent? And, as far as having multiple lease options, it seems as if the buyer/investor would have to have a very large amount of monthly cash flow to be able to lease multiple properties each month.
Again, I could have this all backwards!
Thanks so much in advance!
Seminars are to rev u up to not being broke and getting rich! Which one did you go to?
You can lease and option from a seller, then either sublease - sub option (sandwich) or assign for a fee.
You do not need a RE sales license.
Avoid sandwiches til you have little debt and obligations. Why? Because you are liable for the tenant buyer in case they do not pay you!
Sellers want top sales price, so I stress this in my presentation, no agent's commission, no closing costs, no agent's commissions.
There are 20 million houses that have little equity in their homes.
RE: Buyers want the best neighborhoods, so I use www.NeighborhoodScout.com and find sellers in the best neighborhoods. Best schools, lowest crime, etc.
Ben, you're right in thinking that it would take a bunch of deals to make a decent living off of, while assignment fees can be nice those who claim they do an assignment fee of more than 10% can create problems for a buyer, the seller and carry more liability for themselves. If you need 50K as an assignment fee you should be doing a 500+K property.
Otherwise, skimming rents can get slim and it would take many deals to really earn a living and you usually take alot of risk for what you get.
The real money in Lease-Options is in devising variations of the basic option to purchase, teaching, mentoring and selling the programs as you saw at the seminar you attended.
Understand that you can take any RE strategy and set a path to follow, teach the system, get others to do the leg work while the organizer takes a slice of the deals. They can get others to do much of the work and bush beating and participate in each deal. There is nothing wrong with this, if they are knowledgable, fair and provide an equitable service, after all, it's exactly what a real estate broker does with agents!
Lease-Options are just a tool to use in RE investing or in dealing in RE. Usually they are a strategy for sellers who are stuck with little equity and need to get away from. As Brian mentioned there are millions of such properties, but the L/O may not be a doable deal in every case nor is it always the best way to solve a problem or have a successful transaction. An Option is just another option at your disposal.
Lots to read here on this subject, if you read enough I'm sure you can figure it out. Good luck.... :)
I've been doing lease options for 2 decades now and mentor in the subject and I have to tell you Ben that there is good profit in wholesaling lease options with very little risk if done right. At 3% to 5% assignment fee you can make a nice little living doing a few per month. As long as you deal with pretty houses in nice areas at 100K and up. The beauty of wholesaing lease options is you can work with properties with equity, little, no or negative equity and you can do them anywhere in the country (except Texas) as long as you have a phone and access to the internet. I do it all the time.
CRAP!!! I can't do them in Texas?!?!?
GRRR...I better go get a job.......
HA!!!
I would bet 1000 cases of Lone Star longnecks that John Jackson knows the lease option laws and regs (executable contracts) from the idiot RE legislators in Austin TX better than any man alive or dead.
Brian I'm sure you're right about the lawmakers in Austin. It also goes to show that concentrating on one or two things over a long period may not make one very aware in the business. I'd have no problem doing a L/O in Texas and being compliant and I'm not even in Texas!
Buying for cash, with conventional bank financing or creative OPM (other people's money), such as partnering or IRA SDIRA Lenders OR
On terms, with contracts as in LOs or CFDs or Wrap AITDs or Traditional Seller Financing that work in your state.
I do not live in TX but know several creative TX attorneys that not not only craft LOs with the current legal restrictions, but use Wraps, First Right of Refusal, Land Trusts, with Due on Sale issues discussed at length.
In TX, the Right of First Refusal (ROFR) is an alternative to the Option and the "executory contract" issues of TX law, as it stops short of being an executory device if the ROFR does not state a price for the property.
Asset Protection is another issue that REIs should look at in tandem to CREI. That is a whole different subject with competing opinions! lol
Another way, anywhere, is to use a standard purchase agreement and remove the events of default and penalties for the buyer by an addendum, damages could be ten bucks, lol, not to get that confused with consideration again. Time is the issue in Texas. :)
John Jackson - Hey John! Yes, it helped. And thank you. I could still very well be misunderstanding the whole concept, but other than simply not being able to sell their property at all I can't figure out why a seller would agree to do this. I live in Los Angeles - And it seems that, at least here, sellers have absolutely zero problems selling their homes, no matter what condition or size. Again, I could definitely be missing something - But it seems like this type of transaction wouldn't work well in Los Angeles.