Lease Purchase investing can be a very lucrative method to
invest in real estate, however, it should be used with caution. There are
only a few instances where a lease purchase should be used over a lease
option.
A Lease Purchase is a guaranteed purchase of a
piece of real estate sometime during or at the end of a set lease period.
A Lease Option is the right to
purchase real estate sometime during or at the end of a set lease period.
There are times when both should be or could be used to invest in real
estate.
Here are a few examples of when you may prefer a Lease Purchase instead
of a Lease Option:
- The market is appreciating rapidly.
- The deal structured is a great investment –
no matter what happens in the market.
- The property has a buyer that is solid and
lined up.
- As a final negotiation technique on a solid
investment.
Let’s break these down further and evaluate them each in more detail.
The market is appreciating rapidly:
When a market is appreciating rapidly, then a lease
purchase can be a good choice. After 12 months of payments (with proof of
cancelled checks) an investor can use a “lease option refinance” on the
home. This enables the investor to buy the property and close on it with
their own mortgage based on the appraisal and not the purchase price. This
program is available all over the country. For instance if the investor
secured the home on a lease purchase for $200,000 and the home now appraises
for $275,000, the investor would be able to show $75,000 equity in the home,
assuming they had 12 months of payments to the seller. This is over 20%
down, therefore no private mortgage insurance (PMI) will be necessary on the
purchase of the home either. Normally I would not suggest a lease purchase
or lease option with a short time frame with the seller, unless it was a
very good deal. I would normally recommend 3-5 years at a minimum, however,
in a stronger market sellers may not be willing to go that long term.
Contact
www.CatalinaCapitalMortgage.com if you are looking for a lender who
can structure this.
The deal structured is a great investment – no matter what happens in
the market:
When you structure a lease purchase that is so good it
doesn’t matter if the market depreciates a small amount, then you know you
have found a good investment. For instance: a seller is willing to lease
purchase their home to you at a price of $200,000 and the day you lease
purchased the home it was worth $250,000. The seller might have also given
you a long time period, low monthly payments, or option credits from each
month’s rental payments. Any of these things can create a very strong profit
margin for the investor. When a lease purchase deal is structured very
strong for an investor, then it is okay to guarantee a purchase.
The property has a buyer that is solid and lined up:
If you already know who will be purchasing the home from
you and you know they are solid, then you can consider a lease purchase.
Just make sure that your buyer is really solid on the home and is qualified
to purchase. Using lease purchases with end buyers can be risky, as the only
recourse is to sue for specific performance. If the buyer can’t get a
mortgage or doesn’t have money before the end of their time frame, then what
will you win in court anyway? You can’t squeeze blood from a turnip, so what
will you do even if you win? You will only be throwing away good money after
bad. Consider this when you feel you have a solid buyer. How solid are they?
Can they get a mortgage? How sure are you on this? For instance, I am a good
candidate on a lease purchase. A seller would be able to get me to perform.
I can qualify, I do have the means, but not everyone can or will. Make sure
the investment is good enough if they don’t or that you will be willing to
close if your buyer does not.
As a final negotiation technique on a solid investment:
There are times when you might be negotiating with a
seller for a lease with an option to buy and the seller is concerned that
you will not perform or purchase the home. They don’t want the house back
and are hesitant. This is when you can throw the lease purchase in as a way
to secure the deal. Only do this if the deal is solid enough as a lease
purchase. Don’t guarantee something you don’t want to or can’t fulfill.
When investing in real estate using a lease purchase
always know ethics play a big part. If you say you will purchase the home
from the seller, then you should do what you say you will do. If for
instance you can’t close on the home due to personal circumstances then
consider several other options: partner with someone who can, sell it
outright, get a private loan, wholesale it, etc. Always make sure you do
what you say you will do as a real estate investor or you will affect the
real estate investing entire industry.
Lease Purchases are a great way to buy real estate when
the terms or market are right. Always get a Lease Option if the seller is
willing to do one over a lease purchase. It is a safer technique. Lease
options are great as well, but there are those times when nothing will work
better than a Lease Purchase.
© 2007 by Wendy Patton
Wendy Patton is widely
recognized as one of the most inspiring speakers on "Little or
No Money Down" real estate investing. Her real estate savvy and
great depth of experience and knowledge has helped her in
orchestrating the most complete and easy to follow, Lease/Option
Program in circulation.
Home Study Courses by
Wendy Patton
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