Lease Options – Part 1

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This is part 1 of a series of posts on Lease Options for the first week of May 2006. Got bunch of email questions about them from various readers, this series would serve as an all-inclusive answer to most of these questions.

What is a Lease-Option?

Lease-Option, lease with option to purchase, tenant-buyer, rent to own – are all different names for the name animal. Basically it is an exit strategy for somebody to sell a house. But instead of selling to somebody who will go and get a mortgage and cash you out 100% - this is where you actually “lease” the home out to your buyer for 12 / 18 / 24 months or whatever term you decide to do this and then at the end of the term the buyer who has been leasing the house from you has an option to “buy” the house from you at a “pre-determined” price that you agreed upon when you did the contract 12 / 18 / 24 months ago.

The thing that makes this arrangement so different is two fold:

1. The buyer of your property has no obligation to buy the property from you at the end of the lease. They may or they may not.

2. The buyer of your property will typically gives you an upfront Option fee to lock the price of the property at the beginning of all this. That Option fee is non-refundable.

Why would somebody want to do a lease-option?

Well bunch of reasons and on top of the list imagine a person or a family who makes good money, just came out of a situation that has ruined their credit (business or personal bankruptcy / divorce / disease) and now they are back on their feet and making a decent living.

Actually they are making enough money to afford a monthly payment – the only problem is that their personal credit history especially the current parts of it makes it impossible to get a mortgage.

Now I know we all hear a lot about mortgage companies being aggressive and pretty much qualifying anybody who is breathing. Which to an extent is true – but there is bruised credit and there is bad credit and if you are in the business of buying, fixing and selling homes then obviously you want to make maximum profit on your deals.

If your buyers has less than perfect credit than their lender or bank will give them not the maximum amount via a mortgage. So lets say you are selling a house for $100,000 – your buyer has bad credit and their lender says that sure we can give you a mortgage – but for only $75,000 because of your credit and the rest – the $25,000 your buyers has to put down.

Now if they have $25,000 to put down then by all means, dance on the ceilings and once in a while you will get somebody like that but truth of the matter is that families or people who actually put money down when buying a house are RARE! We live in a culture of No Money Down Mortgages and nobody, repeat nobody is saving to put money down.

You may not like it but it is reality.

So coming back – you buyer cannot afford to put $25,000 down and you definitely want to leave $25,000 on the table because that is probably your profit to begin with.

What can you do?

Lease Option would be an alternative strategy here.

Part 2: More Reasons why people do lease options

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This is a way many investors to move properties to cover costs who are either tired of holding a house that isn't selling or just want a higher rental rate. Along with this approach you may want to pre-qual your buyer who has no money down to a note buyer like Bayview for corporate or Interbay Financial for individually held notes. (same company) Remember to always close on a mortgage and not a land contract, you will always have to convert.

Most people with a 600 or higher fico score will net a 90 to 95% purchase price on that closed loan, better than waiting 24 months in my opinion. After you get a buy contract at an acceptable rate close the loan.
Now keep in mind you are the lender so at the closing table no money changes hands until the funds come in (sometimes referred to as dry funding) only 1 of 5 title companies that I use declined this for lack of understanding. You set the interest rate at 9% fixed (they don't like adjustables)amortized over 30/15 whatever they want. Two weeks after funding everyone walks away quite happy. You just made $45,000 and left the old cupboards and the new owner owns a house he never would have with a conforming interest rate.
Now keep in mind that if every house on the street sold for $140,000 in the last 4 months and were in impeccable shape and your appraisal says $170,000 for the same house your deal will die on appraisal review, DO NOT COMMIT FRAUD, EVER!

There are many publicly traded companies out there that will buy your closed loans, even foreclosure loans at 65% LTV all day long without checking credit, all you have to do is find them and you DO NOT need to table fund! Also you must, to protect yourself and all involved in dry funding disclose in writing with all parties signing that they are aware of how the deal is going down.