Lease Option to Buy

Today, I want to do a follow up on an article I posted awhile back covering Residential Lease Options. If you have been following this blog for any length of time, you will understand that I work in real estate, and have a passion for investing. If you don’t already know the secret to real estate investing, I suggest catching up on those two articles before continuing this one. As a real estate investor, I would consider the following strategy to utilizing a Lease Option to Buy:

  1. I would locate a property that is undervalued, or that I can negotiate to well below the market value.
  2. I would buy the property using a traditional mortgage or cash out for the seller. I have found that cash or the equivalent to the seller is far more likely to persuade them to sell the property at a lower price. Also, a quick tip, if you are sure of the area a property is located in, then offering more than typical earnest money is a great way to persuade a seller. They know that you are serious and get the impression that you can close the deal, and not get rejected for a loan at the last minute. And it doesn’t hurt you to offer more earnest money, if you are getting a loan that requires money down, you can apply the earnest money toward your loan down payment.
  3. Then I would make any necessary repairs.
  4. Then I would market the property using the MLS, local paper, real estate flyers, and signs around town (and of course, in front of the house itself). You must get the message out. Use language like bad credit no problem, rent to own, financing help available, etc. This will open up the market to people that would not otherwise consider your property. Many good people these days have black marks on their credit because of a bad divorce, etc. and just cannot get traditional financing. Trust me, I have met many of these kinds of people.
  5. Ink a deal. Get a substantial cash option payment before you sign anything. Make the buyer commit to the property. They will take care of it a lot better if they have a significant amount of cash invested.
  6. Manage the property until you get to the end of the lease. This can be good or bad. You will have to deal with leaky toilets and electrical outlets not working, but if that is too much for you, hire a property management company.
  7. At the end of the lease, finalize the deal. If they are ready to buy, you must sell. If they can’t buy, then you get to keep the option payment and re-sell the property (you can repeat the process, and get another option payment, 🙂 ). In some circumstances, the buyer may negotiate for more time. This is ok, however it opens up the entire contract for renegotiation, allowing you to reassess the property’s value, and get better terms on the deal.

This is a simple version of how I would invest in a property using the Lease Option to Buy strategy to sell the investment. If you have questions/comments, please leave them at the bottom of the page. And sign up for my RSS feed to stay up to date on all the latest information and tips automatically, and free of charge.

2 thoughts on “Lease Option to Buy

  1. Just curious whether this has actually worked for you. How many properties have you managed to sell this way. I’m especially interested in your comment about targeting people with bad credit since I would have thought these types of deals fall through a lot of the time as the people realize they cannot afford the property.

  2. My primary business model is to buy and rent properties, because of the area I am in is a very strong market, so when I find a distressed property it is a gem, and I don’t want to lose it. So when I buy into a property, I normally will rent it out and hold on to the title. However, I have rented to bad credit people, I actually have two renters right now with bad credit. Here’s the trick – if you are going to sell/rent to people with bad credit, they need to have a legitimate excuse for having bad credit. In both of the cases that I am renting to currently, it is a single mother who went through a bad divorce, and thus has bad credit. In these cases, they are able to make the payments, they have just had a bad stroke of luck. One last note I will add, these cases need a little more attention and interaction, because they do not know as much about dealing with landlords as a normal customer probably would know.

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