Choosing a Lease Option for Your Real Estate Property
The world of investing is filled with mechanisms investors use to get into properties and turn a profit. As a new real estate investor, that avalanche of information can often seem insurmountable. Financing options alone on a real estate investment could take days to fully understand.
Nestled somewhere in that information is the lease option, a mechanism used by some investors to get into a property quickly and with no down payment to speak of. It is a flexible solution to some investing issues and can provide a solution where everyone benefits the buyer and seller.
The Option of a Lease Option
The basic form of a lease option dictates that a buyer and seller agree on a payment plan for a particular piece of real estate that includes the option to buy the property at some point in the future with a particular selling point. Should the buyer decide against purchasing the property, no harm is done, and the agreement is simply terminated. However, if the buyer does decide to purchase the real estate, the seller is obligated to sell for the price and terms agreed to at the onset of the contract.
Benefits of a Lease Option
While this type of deal is not for every investor or every property, there are certainly some benefits. These agreements are often rapidly worked out, giving the buyer control of the investment property and the seller a monthly payment in short order. The buyer remains flexible in the investment, having the ability to decide later not to purchase the property and the seller benefits from that flexibility by keeping the monthly payments and perhaps keeping the whole property in the end.
The buyer benefits by escaping any sort of down payment to get into an investment property, only having to come up with the monthly payment. If the property is managed correctly, that monthly payment will come directly from the revenue seen by the property.
One of the most common ways this method is used is for investment properties that could use some renovation to ultimately command a better sale price. A buyer will enter into a lease option agreement, work on the home to improve its value, and then pursue a separate buyer that will pay more than the cost of the lease option. With such an arrangement, an investor can turn a profit on a home he or she was never even the legal owner of.
Is Lease Option for You?
Of course, there are some pieces of information to consider when deciding whether a lease option is right for your investing needs. The most important piece of advice when dealing with a lease option is to take special care when drafting the contract as it will largely determine whether your investment succeeds or fails.
Every lease option agreement will include a monthly payment amount, an option fee (a low amount paid to the seller to enter into the agreement much smaller than any kind of down payment), the option sale price, and the expiration date for the agreement. You must decide whether you want to purchase the property or not before the expiration date or else the seller is freed from the obligation to sell. You can still make payments and enter into another agreement if the seller deems it worthy, but that obligation expires.