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Updated almost 8 years ago on . Most recent reply

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Saim Chaudhry
  • Investor
  • Elk Grove, CA
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Lease Options - Questions

Saim Chaudhry
  • Investor
  • Elk Grove, CA
Posted

I am copying/pasting questions from 2 BP users in an article regarding lease options. The questions were unanswered and they are excellent questions, would appreciate someone to shed some light on these

1. Do you tell the seller/landlord that you are an investor and will be “subletting” the lease-option to a buyer of yours? What percentage of sellers/leads will generally be okay with this type of transaction (assuming they are okay with the LO in the first place)?

2. How do you generally structure the option with the seller and your buyer? How long of an option time frame? How much option money do you pay to the seller (in option fee) and how much do you collect from the buyer? Etc…

3. Will you sign the lease-option with the seller before you have a buyer? Or do you like to have a buyer lined up first?

4. What happens if the buyer forfeits his option? Do you generally renew the option with the seller or just let it expire? Will you ever purchase the property and then flip it in these cases?

5. Who pays the home insurance during the lease option? Property tax? 

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Bill Gulley#3 Guru, Book, & Course Reviews Contributor
  • Investor, Entrepreneur, Educator
  • Springfield, MO
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Bill Gulley#3 Guru, Book, & Course Reviews Contributor
  • Investor, Entrepreneur, Educator
  • Springfield, MO
Replied
Originally posted by @Saim Chaudhry:

I am copying/pasting questions from 2 BP users in an article regarding lease options. The questions were unanswered and they are excellent questions, would appreciate someone to shed some light on these

1. Do you tell the seller/landlord that you are an investor and will be “subletting” the lease-option to a buyer of yours? What percentage of sellers/leads will generally be okay with this type of transaction (assuming they are okay with the LO in the first place)?

2. How do you generally structure the option with the seller and your buyer? How long of an option time frame? How much option money do you pay to the seller (in option fee) and how much do you collect from the buyer? Etc…

3. Will you sign the lease-option with the seller before you have a buyer? Or do you like to have a buyer lined up first?

4. What happens if the buyer forfeits his option? Do you generally renew the option with the seller or just let it expire? Will you ever purchase the property and then flip it in these cases?

5. Who pays the home insurance during the lease option? Property tax? 

Actually, these questions have been answered, parts many times on BP.

1. Yes, you need to disclose what you are doing. We can look to the right to sub-let, but ticking off a seller that needs t play along with your plan in the future isn't smart, so disclose.

1.a depends on the leads, how they were obtained, are they owners living in the property that listed 15 days ago or some out of town owner of a total wreck? Motivation of the seller is the key, if they aren't motivated, just want to sell, they might slam the door on you, highly motivated, you're a knight in shinning armor.

2. You do realize you have 3+ question in this one question? All of these have been answered before too.

a. L/Os need to be in two contracts, a lease and a separate option, there are financing reasons for this that have been covered too.

b. long enough that the buyer can perform, a 12 month option to someone who had bankruptcy last year would be predatory dealing as there isn't a cat's chance of getting a conventional loan to do the deal. The buyer needs to be qualified, able to purchase and not under some whiz bang hard money loan program they might be able to get, but obtain financing conventionally as other buyers do. Any lease-option greater than 3 years is a violation of the due on sale clause by statute. Any option over a year may be declared a violation as well, but, rarely enforced at a year, but be aware.

c. much written about this too. Generally, an option price is set as the down payment required, 10% is common for real buyers on short term contracts, exceeding that can cause tax issues of a disguised sale. 5% will generally keep a qualified buyer in the deal, going less it becomes just a cost of doing the deal to pull rents out of if they are an investor type buyer. The value of an option price is determined over the term as the present value of the expected increase in the market value, that is what you buy with an option, the right to but a property, say 3 years later, at a 3 year old price.

d.   consideration is paid to the optionor at the time the option is given. Just acknowledge receipt of amounts paid. You also need to see your tax accountant about option prices being earned as opposed to being paid.

3. Depends on the deal, if a homeowner lives in that property you should have a buyer in mind first to mess with them. Reason is, they can sue your tail off for screwing them around on some whizbang deal that never happens, it's not so much about you electing not to buy under an option as what you make them believe, if they end up getting a trashed rental back from you, you're on the hook. If you have some empty house, you'll have less liability involved, less risks, you can get a L/O and pay the lease and beat the bushes for 3 years if you want to.

You really need to understand what a Realtor does, they have this business down to an art so doing things bass ackwards just doesn't make since. They list properties and put them up on the MLS, in the public market.....can you do that? Some exceptions but usually not. Doing that means you spent days, probably, getting your option at a good price. Now you spend time and money trying to market it, usually, without buyers and just trying to beat the bushes, you will fail unless you have a long enough period and that means, more time involved, more in expenses as well. A Realtor who finds buyers has it pretty easy as far as the sales side, all the properties are on a list and they go see them, pick one out, done deal.

So, why would someone who values their time and money, go "list" a property that they can't really advertise for sale (they advertise the contract or option, but not the property since they don't own it) and beat the bushes looking for a buyer, then fail, then lose the option price paid, and walk away empty handed.????? Dumb!

Know your buyers, what they are looking for, find those properties, get a contract, now make some phone calls, show the place, sell your option or exercise your option after you have the buyer under contract. Easy! Saves time, money, less liability, less stress, chances of getting pie on your face for failing at what you tried to do and a better way to stay out of trouble.

4. Option not taken, it expires, the option price was paid for the right to purchase, that is now spent. I buy milk, I let it sit too long, over time it turns sour, it expires, I lose the benefit of have the milk and I can't take it back and get my money back as I'm the one who bought it and allowed it to expire.   Of course you can take the option and sell the property later, why get an option if your intention is let it sit there and sour?

5. Unless it is a commercial lease, the owner pays taxes and insurance. If you listen to gurus on tenants paying taxes, insurance and maintenance on a residential property, you can have a big mess tax wise and end of allowing a tenant to gain an equitable interest in the property, just don't go there.

Instead of trying to jumping in at the deep end of the pool, why don't you go to the shallow end where the real basics of real estate are taught, away from the sharky types in the deeper waters.  All of this is covered under basic transactions, tenant and ownership rights, interests conveyed, what constitutes an option, rights and obligations. Please start at the beginning and not try to figure out some whizbang operator's deal of the month. :)

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