I’ve been investing in real estate and businesses for more than a decade and even though I haven’t been on this board in a very long time, I do like to come by and check out what people are currently doing in real estate.
Lease options are big now because of the difficulty in getting financing. But lease options in the beginning can seem like a dream come true and easy money but the nightmare isn’t when you enter the lease option it’s at the end.
Here’s the nightmare combination:
Most Sellers accept a lease option because their property is overpriced (if it was priced right it would most likely be on its way to being sold by regular financing).
Most Buyers go for a lease option because their credit isn’t good enough to get regular bank financing (if they could get financing then they would).
So you put these two people together and sign a 1,2,3 or even 5 year lease option and at the end of the option guess what?
The home is still over-priced (big surprise there in this economy) and the Buyer still has bad credit.
So guess who they are both are going to be calling to get satisfaction? YOU.
It doesn’t matter if you simply assigned the lease over or are doing a sandwich lease you were the one who put the deal together so they will be coming to you to make the magic happen.
And if you added any rent credits toward the down payment in the contract you better bet that the Buyer is going to want their “equity” back from the amount paid.
To add to your troubles its most likely the Seller has been waiting for years to close on this over-priced property and the Seller and their family have been dreaming of all the ways they are going to spend the new windfall. They are going to want cash, not talk.
An even though I’ve been warned by very smart people not to get caught up in this trap, unfortunately, I’ve been stuck in this situation too many times.
Here’s what I do and what I’ve learned.
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Always make your options assignable - If you’re in a lease option deal that starts smelling like a lemon, always have the option to give it to someone else.
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Always have a longer lease option from the Seller and a shorter lease option from the buyer. You don’t want to get caught flat-footed with the Seller expecting their money and you’re just finding out the buyer can’t perform.
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Separate the lease from the option.
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Limit the amount of rent credit towards the down payment and make sure the clearly state that all rent credits are for the purchase only and completely nonrefundable to the Buyer. Spell this out in every way possible to make it clear.
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Make the option just that -only an option to buy. In this case, if all else fails you can still walk away. Do not sign a lease/purchase under any circumstance.
After playing with lease options for years these have become my non-negotiable items. I have tried it every other way and this way keep me out of the most trouble and gives me time to turn a bad deal good.
Most of you probably already know this but I just wanted to add what I’ve learned.
I hope this helps.