A lot of people, including a friend of mine, tell me they want to go into real estate to earn some extra income. That really ridiculous. Real estate is generally a capital intensive business. That is, you will need a lot of money to start real estate investment. Nowadays, many gurus and real estate investment websites are almost entirely devoted some investment strategies that actually are not investment strategies at all: lease option. A lease option (also known as lease purchase contract) is a legal document that combines a basic lease contract with an option to purchase contract. The tenant/buyer pays to the landlord/seller a non-refundable option deposit that is applied to the purchase price of the home. The tenant/buyer then pays to the landlord/seller a sum that is typical to the rental amount usually on a monthly basis. A portion of that monthly payment is then applied to the purchase price of the home. During, or at the end of the lease period, the tenant/buyer has exclusive right to but the home under the terms to which both parties have previously agreed. Based on my experience, lease option is not a profit strategy. It is merely a financing structure which is only applicable to some rare situations like a need to do a reverse exchange. In fact, about 90% to 95% of lease optionees will find that they are no more qualified to buy the home they are lease optioning at the end of the option period than they were at the beginning. Consequently, the option expires and they are left with absolutely nothing. Fortunately, I have just found that we can buy, sell, and invest in real estate safer and easier with lease purchase contract. Most real estate investors don't know that if you control a home --rather than own it-- you can make even bigger profits at lightning speed, with almost no money out of pocket, and no headaches. I mean, you have total and complete control over every single aspect of the home, but your name is not on the deed. A lease contract puts you in immediate control of a home as far as occupancy is concerned. When you throw an option to purchase contract into the mix, you now have an exclusive right to buy the home at a later specified time for a specific amount of money. The home essentially belongs to you unless you decide not to buy it. Say you find Bonnie and negotiate the control of her home with a lease to purchase contract. Let's say that Bonnie agrees to lease to purchase her home to you on the following terms: Down payment: $1,700 (first months rent plus $1,000 option deposit)
Rent: $700 per month
Rent credit: $250 per month
Term: 1 year
Sales price: $75,000 Since you know the value and appeal of the lease to purchase contract to buyers, you raise your sales price and monthly payment accordingly. You place an ad in local newspaper which reads: "Rent-to-Own. No Qualifying! $3,800 down, $800 per month."
Clyde the Buyer --who can't qualify for a mortgage for one reason or another-- calls you and inquires about your terms, which are: Down payment: $3,800 (first months rent plus $3,000 option deposit)
Rent: $800 per month
Rent credit: $100 per month
Term: 1 year
Sales price: $89,000 You will make exactly $2,100 upfront, $1,100 in monthly rental payments, and $13,800 in back end net profit for a total net profit of $17,000 in just twelve months. Imagine doing just one of these deals per month! You've gone out and controlled a home for a short period of time with minimum cash out of pocket. You did your homework and got a good deal on the home. You sub-leased your lease to purchase agreement with Bonnie to Clyde for a $17,000 profit. Your only risk through the entire deal was that it might take you a week or two to find a quality tenant/buyer. Well, I've got good news for you. When someone sees an advertisement for a lease to purchase deal in the newspaper, they are on it like white on rice. Because you're offering financing terms that no bank or lender in the world can touch with a ten foot pole. Do two to five of these deals each and every month because they are so quick, easy and profitable. And, by the way, if you choose, you can assign (sell) your option to a third party or another real estate investor. It's still worth $14,900 in one year. You could pocket your upfront profit of $2,100 and sell your option for at least a couple thousand dollars or more. |
