Discover the benefits that come with making real estate investing deals using lease options.
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Should I Buy Real Estate with a Lease Option?
Should I buy with a lease option? “How do I decide if the property is actually one I want to buy on a lease option? The seller might be very happy to assign it over to me, but that might be because it’s a dog. How can I make the determination on this? Maybe that comes with experience. I’m getting a bunch of leads from the Automarketer and I want to know how to decide if it’s a good deal.”
Joe: First of all, I don’t buy anything with a lease option. Lease option is the bottom of the hierarchy of the Zero Down Structures of control. You want to look at the hierarchy of Zero Down Structures, which is Subject To, Multi-Mortgage, Land Contract/Contract for Deed, Assignable Cash Deals, and Lease Option. And Lease Option is the very bottom. You sell a property on lease options. You buy a property on one of the higher structures, like Subject To, or Land Contract. Those give you more control over the deal.
Joe: You have to assume that you’re the most ethical person in the room, and you’ll do what’s right. But in order for you to do what’s right, you have to have control in a transaction. So, make sure that you use the right structure when you buy a property.
Joe: Now, that doesn’t mean that you’re not going to flip properties on a lease option. The For Rent Method system that I use allows you to flip lease option properties so you’re buying and selling on a lease option that way, but you’re not keeping that property. You’re simply being someone in the middle who’s buying a property at one price, raising the price and then turning around and selling it at that higher price and taking the difference as your profit. So, what is a good deal as a lease option? Because you still have to find a good deal if you want a buyer to take it over.
Joe: Most buyers are the most sensitive to the monthly payment – not to the purchase price. Your purchase price, as long as you’re in the ballpark, and probably within 10% of the real value of the property on the price, you’re probably going to be fine. You sometimes can go a little bit higher, sometimes you can’t. You have to test it a little bit. But the main reason that lease option properties don’t sell is because of the monthly payment. If you’re not at market rent or below, that property probably won’t sell on a lease option. So make sure that you’re right in line with market rent.
Joe: People look at between 18 and 23 houses before they buy one. If yours isn’t the very best of the ones that they look at, for the money that they can spend, which is monthly payment when it comes to lease option buyers, then they’re going to buy another property. So all you’re going to be doing is helping sell your competitors’ properties. So make sure that you’re priced properly.
Joe: So, when you go out to a seller to set up a For Rent Method deal and you set up the lease option price, make sure that that price is within market rent. Otherwise, you’re going to be doing a lot of work trying to sell that property and you’re not going to get it sold. That also goes with properties that you happen to own if you bought a property subject to or on a land contract or for cash. If you bought a property and you’re trying to sell it on a lease option, you have to make sure that that monthly payment is in line with market rent. Again, try to get the top dollar that you can for the property as far as the purchase price. If they exercise the option – that way you’ll make a profit. But, the monthly payment is not something that you can play around with and be able to get that property sold. So, make sure you pay attention to that.
Joe: So, that’s it. It comes down to purchase price and monthly payment. Monthly payment being the most important part.
Joe: The other thing that’s going to have an impact is the down payment. So make sure that the down payment isn’t too much over what’s possible for that buyer. And the best way to find out how much down payment you can get is to ask your buyers, “How much have you got for a down payment? And whatever it is that they say they’ve got, you want to make sure that your down payment is a little bit higher than that. Typically, on a $150K property you’d ask for $10,000 as your down payment. So, if you’re doing the For Rent Method and you’ve got somebody who wants $150K for the property, you raise the price to $160K, you put it on the market as a lease option. If market rent is $1,200 you’d have to put it at $1,200 to get it sold. You go out there and find that buyer, they come in, and hopefully they have $10,000.
Joe: But if they don’t have $10,000, which is normal, let’s say they’ve only got $5,000, you can take $5,000 in cash and you could take another $5,000 as a promissory note that they can make payments on, typically of $150 or $200 or $250 per month until they pay it off. So that’s another way that you can sell this property.
Joe: But it’s also another thing that could impact whether or not it’s going to sell. Because if you make that down payment too high you won’t be able to get it sold because there won’t be anybody that has enough money to make that happen.
Joe: When we go out and talk to sellers that are lease optioning their properties a lot of them will say to us, “Oh, yeah, I’ll do a lease option, but I want $20,000 down” or I want $40,000 down or I want 50% down. And this isn’t probably going to happen for them. So, we have to help them understand what the reality of the market is in order to get it done. So your goal as an investor who’s flipping properties is to be realistic within the market. You’re not going to be able to sell a property for more than it’s worth. Nobody’s going to pay more than a property is worth either monthly payment if you’re doing lease option, or purchase price if you’re selling it for cash.
Joe: All right. I hope that answers the question. Good luck.