How To Protect The Seller When Doing A Lease Option On A Property Investment Deal

How To Protect The Seller When Doing A Lease Option On A Property Investment Deal

Joe: Hey, it’s Joe Crump. I’ve got a question here from one of my students. “Joe, how do I protect the seller when doing a lease option on a property investment deal?” Whenever you’re looking at a situation where you’re helping someone else, find a lease option tenant doing the For Rent Method, which is what I teach as the main technique that I give my mentor students when they’re just getting started. There’s so many other tools that you can use other than that, but that’s a good one to get started on because it’ll help you get making money the fastest. But, when you do that, you want to make sure that you protect the person who’s most at risk in the transaction, because you’re going to be in and out of the deal and you’re going to be gone.

Joe: You’re going to be there to take their phone calls, or questions, or help them through struggles or problems that they might have, but you’re not really in the deal anymore. So, when you’re in and out of a deal like that, you have to look at the deal and say, okay, which party in the this transaction is most at risk? If it’s your property and you’re keeping it then you’re the one at risk and you want to make sure you protect yourself.

Joe: But if you’re just flipping the property then you’ve got to look at who else is at risk. The buyer’s at risk and the seller’s at risk – both of them. So, you want to make sure that they’re taken care of. Most of the time the seller is the on at the most risk because they’ve got a mortgage on that property, they’ve got equity in the property. They’ve got to get the property back if this buyer doesn’t exercise the option, or if they default and you want to make it as easy as possible for them to get that property back. And a lease option is one of the easiest ways to get back if that buyer defaults.

Joe: Now, the buyer you want to protect if you think the seller is unstable. So, let’s say you’ve got a seller who’s just about ready to go under. They can’t make their mortgage payments. You don’t want them to be in a position where the buyer makes all the payments on time, but then the seller doesn’t pay their payments on their mortgage. And then that property goes into foreclosure and the buyer loses their position because they’re in second position. They lose all the money they’ve got in the property. You don’t want that to happen.

Joe: So, if you think that there might be some instability with that seller, then you make sure to protect your buyer by having your buyer pay the mortgage directly. So, let’s say $800 goes to mortgage, and the rent is $1,000 a month. They could pay $800 to the mortgage company, and then they could pay $200 directly to the seller. That way that seller’s going to be getting their money and the mortgage company’s going to be getting their money and the buyer is protected.

Joe: Most of the time, though, we’ll just have the buyer pay directly to the seller. Because the seller’s want to protect their credit. They usually are trying to solve the problem and it’s not as big an issue that way.

Joe: So, whenever you’re talking to a seller or a buyer, you’re going to try to help them solve the problem in the way that makes the most sense for both them – the buyer and the seller – and for you. And if you can come to that conclusion and help them get to a place, most of the time they’re going to pick a way that actually makes you money.

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