Why I like Lease Option Assignments

 Many people have heard of Lease Options, but using them daily in your REI Business has risk and reward. 

Sandwich Lease Options are great tools, but there is risk when the Tenant Buyer does not pay you, the "sandwich" person and you are stuck paying the Lessor-Optionor. 

In a Sandwich Lease Option, you as the middle man (aka master leasee): 
- lease with an option as a principal, then 
- sub lease and sub option. 

You make cash profit on the difference of 
1) lease payments, 
2) option payments and 
3) back end exercise payments. 

The risk is to have the tenant buyer not pay you, so you are stuck with paying the seller - optionor/lessor. 

Many have used a Performance Lease Option, where it is agreed that the if the sub-lessee does not pay you (the master lessee), you do not have to pay the owner. I find that as a tough request to make of the seller - owner. 

What I do with lease options is Lease Option Assignments. 

I offer to Lease Option the property from the seller, and Assign the deal. 

Many sellers in this tough non-lending market just want a way to 
- get a reasonable sales price on their home 
- avoid a real estate Agent's 6% commission 
- net as close to their asking price as possible after costs 

The costs for a Seller to sell in this market: 
Say for a $150,000 house 
- 6% $9000 Agent 
- 2% $3000 Closing Costs 
- deductions of sales price 5% ($7,500) to 10% ($15,000) because of Buyer's Market 

So the costs to sell may be from $19,000 to $27,000. That does not net the seller close to $150,000. 

As far as buyers, people want a great well buildt house, safe neighborhood, great schools for their kids, and a well thought way to qualify for FHA Financing. 

FHA has created tougher qualifying for home loans, increasing down payments from 3.5% to 10% (for FICO Scores 580 and below). 

So what I do is use rent credits. 

Example) We charge regular market rent. 
If the Tenant pays on time, as an inducement, he - she receives a 50% rent credit, FOR THE 1st YEAR ONLY. 

So for $1000 monthly rent paid on time, tenant would receive $500. 
This is NOT CASH, only useful for when exercising the option. 
If the Option is not exercised, then the rent credit has no value. 

Say a house appraises for $150,000. And the seller allows rent credits to be used as a marketing tool to fill the house quickly with a qualified tenant buyer. 

We offer the house at $155,000, with move in option payment of $5000. 
Monthly Rent is $1000 per month, and Annual Rent is $12,000. 
Maximum Rent Credits are 50% or $6000. This is a type of Seller Concession. 

So the numbers.... 

$155,000 strike price 
- $5000 option consideration at move in 
- $6000 rent credits 
--------------------------------------------- 
Seller nets $144,000 (if buyer pays closing costs). 

We assign our deal for to the Tenant Buyer for $5000. That is our fee. 

The Tenant Buyer gets: 
A lease for 36 months (12 months with 2 extensions of 12 months) 
$5000 option towards a down payment 
$6000 towards purchasing the house (toward the down payment or decreasing the purchase price) 

On a $150,000, a 10% down payment is $15,000. 

The Downpayment Shortfall is $15,000 less $5000 less $6000 = $4000. 
A budget is prepared to save the $4000 ASAP. $4000 divided by 36 months = $111.11 per month. 

This way to home ownership by using a lease option is helpful to the 
- home seller who wants to net a certain amount, and 
- a home buyer that needs time to qualify for a FHA mortgage. 

The real estate investor has little risk because he is out of the deal, unlike the sandwich where is at risk if the tenant buyer does not pay.

Brian has made money in lease purchase consulting since 1986. He coaches select students for 1 year coaching agreements in every state except Texas. Brian Gibbons, coach of Lease Purchase - Rent to Own Consulting - http://REISkills.com.