An Overview for the Way to Future Financial
Freedom (FX3)
for the Real Estate Investor
Part 1 of 2
Lease Options are becoming quite the buzz word lately.
Years ago it was harder for me to get Realtors to even consider a Lease
Option for their clients. Today, markets all across the country have
changed. Lease Options are currently a viable industry trend and needed for
many sellers to sell their homes.
What is a Lease Option?
A Lease Option is a way to purchase real estate, usually
with very little or no money down, sometimes even with money back in the
investor’s pocket. Sound too good to be true? Well, it isn’t. Can an
investor end up with money in their pocket and not have to put 10-20% down
to purchase real estate? Yes. This technique is used commonly today by the
most successful real estate investors.
The lease option strategy gives an investor the right to
lease a home and also the right to purchase the home during or before the
end of the lease period. An option is a contract that gives an optionee the
right to exercise a privilege – and in the case of real estate investing, it
gives the optionee (investor) the right to purchase property during a
contracted period of time. It is a technique that involves gaining ‘control’
of a property, without the total burdens of ownership.
ALL money made in real estate is
made by controlling property. Owning property is the most obvious way to
control it, but control is possible without ownership – and control is what
makes the money. It was a dying John D. Rockefeller who told all of us his
secret to achieving great wealth, “Control everything, own nothing.” All of
the most successful real estate developers today utilize options, in one
form or another.
It is important to be aware that there are some risks
involved with this strategy (as with all real estate investments), but there
are also ways to minimize your exposure and the rewards that can come with
this technique truly out weighs the risks. Real Estate investing is truly
the quickest and best way to build lasting wealth. Many of the world’s
wealthiest people acquire much of their wealth through investing in real
estate.
While lease options can build you tremendous wealth, they
usually shouldn’t be considered a short-term investing strategy. I define a
short-term strategy as the time that passes from the start of the
transaction to completion (cashing out) being less than one year. A classic
example of this would be a “rehabbing project” (fixing up a home and
reselling it). The other side of the spectrum would be a longer-term
strategy, such as buying a rental property and renting it over many years. I
consider lease options and subject to’s to be in the center of that
spectrum, usually requiring one to three years for the best payoff. However,
you can always immediately sell the deal to another individual or investor
for a profit; this is what is called in the business “wholesaling.” This can
be done if you buy the property at a low enough price that you can turn a
profit by selling the deal to another investor at a discounted price.
Visualize this scenario
In every seminar I teach I ask the students, “Who of you
would be willing to purchase a home valued at $200,000 for $100,000.” Of
course all hands shoot up. Then I continue by asking if they would still be
willing to purchase the same home if the price was $150,000. Most of the
hands stay up. I proceed upwards with the price increasing the increments by
$10,000 each time. All of the hands slowly but surely drop. At the price of
$180,000 almost all hands are down. At $190,000, usually, all hands in the
room are down. The point I am trying to make to each of them is most
investors are not willing to pay this close to retail price for a home (nor
should they in most cases). I then re-pose the question to each of them,
“How many of you would be willing to pay $200,000 for that same home 10
years from now in a market that is appreciating at 10% per year with nothing
down and only $1000 per month?” Now all their hands go back up. I ask, “Why,
now are you willing to pay more for that house that you refused to pay
$180,000 - $190,000 for a few minutes ago?” They respond in unison saying,
“Because you added some attractive terms!” My response is always the same,
“You didn’t ask the terms before!” Most investors never ask the seller for
any terms. They only consider one term - Price! They walk away from deals
before they know if terms are even possible.
“Terms” are parts of an entire deal, such as price, length
of time to pay, monthly payment, amount applied to the purchase price and
other negotiated items with the seller. Most of the time even experienced
real estate investors don’t ask, “When does the seller need their price?”
They say no to an entire deal before they ask the seller when the seller
needs their price. The previous example illustrates how most investors
think, they don’t ask all of the right questions about the property before
they make a decision. They look at the surface but they don’t dig deeper for
other possibilities. Lease options provide a creative solution that can
allow you to negotiate terms that can increase your profits and provide a
great investment opportunity. Whenever you can negotiate the terms on real
estate the value of the property goes up. Deals that were out of your reach
before now might be possible – i.e. large apartment complexes. Now you are
able to pay a higher price on a home if you can get reasonable terms, and
having this tool at your disposal will allow you to open up many new
possibilities and make money on deals that were before completely ruled out.
I am not suggesting that you pay $200,000 for a home worth $200,000,
especially in many markets today, but you can if certain market conditions
and terms previously described exist. If your market is flat (not
appreciating) and you have only 2 years to exercise your option to buy the
home, then maybe the price you offer should be much less. It’s all about
terms!
When doing any lease option deal, it is one of my mottos
that everyone must win or don’t do the deal. There are 3 people involved in
a Sandwich Lease Option: the seller, you (the investor) and the
tenant/buyer. It must be a win/win/win, otherwise walk away.
Wendy’s Rule about Buying on Lease Option
If it isn’t a Win/Win/Win for the Seller, the Investor and
Tenant/Buyer then walk away from the deal. There are plenty of the deals out
there where everyone can win.
To find out more about Lease Options and Subject Tos, you
can order Wendy’s autographed book on her website: “Investing in Real
Estate with Lease Options and Subject Tos”
Part 2 of this article will cover more details about structuring a Lease
Option.
© 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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