Lease options are becoming a hit across the country once again. They have
always been prominent in areas where the median priced homes were fairly
stable, but now with large market declines they are becoming possible in
areas where they didn't work for years. All lease options contain key
elements that are essential to making them a win-win for all the parties
involved.The lease option is a combination of a rental lease and an
option contract to purchase a property at a specific price (strike price)
and for a specific time (expiration date). Investors can own a property
and lease option it to an end-buyer or the investor can lease option the
property from the original seller and re-lease option the property to the
buyer.The ability to lease option and re-lease option a property is one
way an investor can do deals with little or no money and collect a dual
or triple income stream on the property:a. the differential of the rent
paid to the original seller and the end-buyer, b. the non-refundable
option consideration (not a deposit) and c. the profit when the buyer
exercises the option and buys the property.In the above scenario, the
investor will make money even if the end-buyer does not exercise his
option to purchase the property because the non-refundable option
consideration is forfeited to the investor. The option consideration to
the original seller should be in the amount of $100 to $500, while the
option consideration from the buyer should be 3% to 5% of the purchase
price. In some areas of the country, a 3% option consideration is
difficult to get, however, this can be worked into the monthly rent
payments and held as a closing credit - if the end-buyer closes.The first
key to doing a lease option with a end-buyer is to do a lease that is
separate from the option agreement. This virtually insures that if the
investor (optionor) has to evict the buyer (optionee), he has a single
document to enforce in a court action. If the investor has a single
lease-option document, the court likely will favor the tenant (optionee)
and give him back his option consideration and allow him to break the
lease. Because of this, the investor should give the original seller a
single document lease option but use the dual documents with his end-
buyer.Other key elements of a lease option are: 1. The strike price
should increase after each 12 months of the option exercise period in the
range of 3% to 5% depending on market conditions in the area.2. The term
of the lease and option contract should be annual and renewable for 2 or
3 years.3. The buyer should be responsible for all repairs up to $2,000
and the original seller should be responsible for major mechanical
systems and repairs over $2,000. This way the investor has no financial
risk for repairs.4. The property should be insured for casualty losses
and the co-beneficiaries of the policy should be the investor and the
original seller. In case of a fire, if the original seller gets all the
insurance proceeds, he may not want to repair the property and the end-
buyer would look to the investor to make up the loss.5. The rent to the
original seller should be as nominal as possible - specifically 6% of the
strike price of the option contract. For example, if the strike price was
$100,000 the annual rent would be $6,000 or $500 a month. The property
should rent to the end-buyer for as close to twice this amount as
possible.6. The rent to the end-buyer should have nothing to do with
rental values in the neighborhood but should be based on what the
mortgage payment will be when the end-buyer gets financing in one or two
years. This is very important so the end-buyer doesn't balk at getting a
mortgage and moves on to continue renting elsewhere because he doesn't
want to pay a "high" mortgage payment.7. The investor's lease should
stipulate that his rent doesn't start until he re-leases the property and
will stop if the end-buyer stops paying his rent.8. The investor's lease
and option should have renewals at least twice as long as the buyer's
lease and option renewal periods, i.e. investor has a one-year lease
option with three renewals and his end buyer will get a 1 year lease
option with one renewal.In summary, lease options have always been
popular in various parts of the country. In some areas, the contract for
deed is more popular but it has disadvantages compared to lease options.
Investors looking to do deals with little or no money should look into
lease options.