A lease option (more formally Lease With the Option to Purchase) is a type of contract used in both residential and commercial real estate. In a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property.
A lease option is different from a lease purchase contract, in that a lease purchase binds both parties to the sale, whereas in a lease-option the buyer has the option but the seller does not.
Can I have an existing Mortgage and still sell a home as a lease option?
Simply, Yes. Ultimately your current loan will be cleared once the buyer exercises(follows through with) the purchase of the property. You will simply have to do your due diligence to determine the rate at which the principal balance on your mortgage is reducing versus the rate at which the sales price is reducing with the monthly principal consideration from the buyer and the initial downpayment.
Will the due on sale clause be called on by your current lender?
While I can’t say expressly no in this circumstance. I can say that I have never seen it happen. Look at it this way if you were the bank and you consistently received on time payments would you order the owner to pay the loan in full immediately just to ultimately push it into foreclosure. Easy answer is No you wouldn’t. That’s how the banks feel about it too.
What paperwork is involved with a Lease Option?
In a Lease Option purchase you still have a lease just like a tenant for an apartment or house would. The lease of course is altered and for the most part refers to the Option Agreement. The Option Agreement which I have available on this website in the forms section defines the terms of the sale. The deed in this type of transaction typically doesn’t switch from seller to buyer until the option is “exercised”, simply meaning that the parties follow-through with the sale. This type of purchase is becoming increasingly popular for both homebuyers and investors due to the stringent lending practices of banks. I have an affinity to this type of buy and hold investment over regular rental units simple because it is a much more passive form of income.
Will I have to foreclose on the property?
In a Rent to Own you still own the property. The Optionee in this case is still renting the property, they do not own it. This allows you to evict them if they stop making payments saving you thousands of dollars from having to undergo a foreclosure. In New York State the foreclosure process can take up to a year. The foreclosure process really is more relevant to discuss when we are talking about Owner Financing for properties.
What is the difference between a Lease Option or Rent-to-Own and a regular rental property?
There are some similarities to these types of investment properties. The similarities are simply that both require a lease that outlines the do’s and dont’s of the property. The lease can be altered in some ways related to a Rent-to-Own simply due to the fact that the person will ultimately own the property. Many times with the properties I have under Option I will allow the Optionee’s(Buyers) to paint the interior the color of their choosing whereas in a strict rental I will not. The second piece to the Lease Agreement in a Lease Option is the Option Agreement in addition to the Lease. One major difference between a regular rental property and a Lease Option is on the management side. In a regular rental if there is a repair that needs to be done or a vacancy to be filled it will be on you to do it. In a Lease Option agreement the new “homeowner” or “Optionee” is responsible for all repairs and given that they have made a substantial downpauyment the likelihood of consistently filling vacancies is diminished greatly.
Won’t I cashflow less from a Rent to Own then a regular rental?
In some cases yes. However you have to remember that as I said before you are responsible for all repairs when it comes to a regualar rental. This can sometimes consist of a new roof, new furnace or any of the other big ticket items that can drqain your cashflow quickly. Lease Options however you consistently receive your monthly lease payment without all of the other headaches.
What kind of property am I looking to invest in for a Lease Option?
The type of property you want to invest in is really up to you. Any property can be turned into a Rent to Own. In most cases the single family residence is the most popular and the most easily marketed type of property. In many instances investors disregard multiple family buildings as rent to owns. In one case we purchased a 3 unit building along with the 3 unit we purchased a single family home. When we marketed the property we marketed it as a Rent to Own. In this case we marketed it for an investor who wanted to personally occupy the single family home while renting the 3 unit. This would ultimately allow an investor who otherwise couldn’t finance this property the opportunity to not only take possession of it and live for free but cash flow on a property that they would ultimately own. Actually paying against the principal balance of the investment while living for free.
I hope after reading this article you have seen the benefit in creating an almost completely passive portfolio consisting of Lease Options. There is now more then ever a calling for this type of service in the Real Estate market. Many people simply can’t qualify for a conventional mortgage due to their credit score, work history or other financial issues that may have arisen in their past. In this group of people there is a large number who can afford to pay a substantial downpayment and make on time monthly payments. Of course we still have to screen these buyers just as we would do with tenants but after we have successfully done that we will have consistent passive income with very few problems when compared to a regular rental. We have built an entire portfolio on options and our experience has been very positive. In many cases Investors complain that buyers never actually purchase the property. So in this case you keep the downpayment and get to re-market the property. This means what? Another downpayment. Some may disagree but again if you aren’t looking at this as a viable investment then you are missing out on a new emerging market.