Lease Options? Wholesaling?

Question

I've heard a great deal about lease options and wholesaling.  I understand the gist of each method.  Lease options are pretty much rent to own correct?  Why would a seller choose that option rather than getting their money up front?

Bill Gulley · Answer

A preference over what?

The type of transaction depends on the situation. Existing financing in place, property condition, time available for the transaction, the seller's needs, the buyer's needs and capacity to close, the market conditions..... it's not that a lease option is a bad thing, it's that it's not always the solution. If all you know are L/Os then I guess when it is proper, you're doing the right thing, when it's not, you're driving a square peg in a round hole. :)

Mike LaCava · Answer

Zachary Harris there may be a few reasons. The seller may have a hard time selling the property for a price they want so rather than lowering the price they lease option it for a higher price locking in future profits. They most likely will not need the money so they use this strategy. Sometimes they get a large option non refundable down payment so they get some of their profit up front anyway.

Bill Gulley · Answer

Not a bad set of tools.

Then we can add to that

Assignments of leases and lease financing

Cross collateralizations and collateral assignments

Seconds held by sellers

Lease backs with or without options

Contractor Assignments with power of sale

Construction liens to partner with sellers

Assumptions of private loans and installment contracts

Subordinations of Interest and installment purchases-funded

Divided Interest purchases using the above mentioned methods

Donations to non-profits, to charitable trusts then purchase

Bulk property purchase agreements with landlords

Note purchase-modification-or DIL with or without lease back

Asset trades

Purchasing revisonary interests for a period certain

Time share agreements with divided interests, not just for resorts

Heck, there are lots of uses for just the right of first refusal

There's more that intertwine, not to mention financing angles.

Then, there is commercial, RE only, with a business or business only. :)

Jamaal Hunt · Answer

I am actually placing consideration of doing this as well. I'll pay about $50 mo to owner for the right to sell and assign property to end buyer in 45 business days. Seller is happy and Im being open and honest up front of me making a profit and I appear to be more credible than random people whom are "pretending" they have cash.

A person may ponder: "what if you have 5 properties paying $250/Mo?"

Imo itll force me to be motivated since I have actual skin in the game because if I dont sell in that time frame I lose the money and cant get it back. Now if the property reach closing then money paid will be credited at settlement.

Account Closed · Answer

Hey Zachary:

Let me try and simplify this for you. Having been doing lease options both wholesale and sandwich for the last twenty years I can tell you the one basic reason sellers do them. Debt Relief. In my experience sellers that need (not want) to get out from under a property quickly for a variety of reasons are looking for debt relief, pure and simple. I have never put up more than $10.00 as an option consideration since I started working with lease options back in 1994 so that should tell you that cash is not the motivation for the seller.

If you are in the right market talking to the right people you'll have no problem controlling a house without ownership through a sandwich lease option or wholesaling the property using a lease option using $10.00 as the option consideration. I do it all the time.

As far as the downside to lease options it's no different than any other area in real estate. If you have full disclosure, know what you're doing and don't make promises you can't keep you've got no problems. The people that get into trouble in real estate or any other business generally violate those rules.
Best,
Joe

Brian Gibbons · Answer

Like Bill Gulley said,

If you are a 1 trick pony you are not serving the seller's needs.

Here are just some of the tools I use...

-Options

-Leases
-Lease with options

-Sub2 with or without Land Trusts
-Wraps - AITDs
-Contract for Deed

-Sale and purchase with addendums

-Land Trusts

-Private Money 1st mortgages

-Joint Venture Partners

-Seller Carrying New 1sts on Free and Clear Houses

One of the BASIC SKILLS to develop is LISTENING SKILLS, like a MD Doctor asking your history and symptoms before he prescribes the drug.

You are doing it wrong if you are prescribing the drug first and forcing the benefits down the throat of the seller.

Bill stated...
"The type of transaction depends on the situation.

-Existing financing in place,

-property condition,

-time available for the transaction,

-the seller's needs,

-the buyer's needs and capacity to close,

-the market conditions.....

If all you know are L/Os then I guess when it is proper, you're doing the right thing,  when it's not, you're driving a square peg in a round hole. :)"

[b]Be a transaction engineer, not a 1 trick lease option pony.

Serve the Seller, and he/she will sing your praises.[/b]

Brian Gibbons · Answer

Hi Zachary Harris

Bill Gulley and Mike LaCava bring up good points.

It is an exciting spring-summer for lease option assignments or wholesaling lease options.

As Mike LaCava was saying there are benefits to both sellers and buyers to sell - buy on terms.

An article in the WSJ a few months ago says prices are up but inventory is down.

3 of the 6 reasons had to do with:

1. Inventory is down because 10 million have 0 - minus 5 % equity.

2. Inventory is down also because another 10 million have 0 - 20% equity.

3. Thirdly, many sellers do not want to list today because they do not want to lose 5% to 7% of their home if they wait 12 months.

So what to so with these sellers?

You cant wholesale flip.

But you could get them full price on a lease option with the sales price tied to a new future appraisal.  Say in 24 months.

so the sellers make more money with a sales price in the future.

The rent will pay down the mortgage.

If the rent does not cover the mortgage, you can charge a rent payment plus an additional monthly option payment.

You as a RE Investor will sign up the Lease Option Seller in the name of your LLC as the tenant buyer, and then you will sell your interest in your Lease Option for an Option Release Fee.

I shoot for 3% or $5000 min.

I will finance 50% of the fee for the right Tenant Buyer.

I hope that helps you a bit!

Brian

Zachary Harris · Answer

Mike LaCava Bill Gulley  Gotcha.  Do you guys have a preference?

Bill Gulley · Answer

The reason you hears so much about it is pretty much is that it's an easy conept to sell, promote, teach and devise into different products, not that it's the best strategy in a transaction really.

A seller who is motivated to get out of a property that is not very marketable (say in a poor condition or a poor location or even a good property but the owner must dump it) may consider the income to break even and get away with a future sale.

Done properly, they are not easy slam dunks that you hear about and if you put a tenant in as a sandwich lease, you can have issues.

Do they work? Absolutely! Just like anything else you need to understand the entire process to get to closing and manage the deal along the way. :)

Lease Options? Wholesaling?

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