When you lease or rent to own homes, you both rent and purchase the home rather that either just renting or leasing a property or purchasing it. Renting to own a home also allows you to rent it out or sub-lease the property with a purchase option if you have an option to purchase as well. In this instance I would acquire control (rather than buy) using a lease option because that gives me the right to close without the obligation to do so whereas I’d prefer to extend an option to rent to own homes to potential buyers because the buyer has the right to purchase coupled with the obligation to purchase the property. This rent to own technique is known as a sandwich option. I lease without the obligation and then they rent from me, which means they have the obligation. You could also rent or lease the property and sell the property on a wrap. When you sell it on a wrap, you will have to convert your lease into a purchase using your buyers’ cash. This means I’ve used my option to lease purchase the home. So leasing and then renting with a ownership option is a very viable way to acquire control of property. Again, remember you are not necessarily going to own the property in some cases, but you are going to CONTROL the property. With this technique, when you rent a property, you find a motivated seller and tell them,
“What if I were to guarantee to make your monthly payments over some period of time, of ($XXX) dollars, that would cover all your costs with the property? And, if I were to agree to take care of all the day to day maintenance, then at some point during this period, I were to completely cash you out, is that something we should talk about?” If the seller says, “yes” then you can work out the numbers based on the length of time you can control the property. You then rent the home to someone else for a two-year lease and sell them the Option to Purchase. Why didn’t the original owner do that, you ask? He’s not a transaction engineer! Unlike you, he doesn’t possess the specialized knowledge of rent to own homes and option contracts. Simply put, when we rent to own a home, we rent the property with an option to buy, which is why we say “Rent to Own Homes.” Then turn around and rent that same property to someone else for more money for a shorter lease period, and sell them an option to buy the property from you at a higher price than it is worth right now.
Some of you may be wondering, “Why would anyone rent a home with an option to purchase? Why would someone pay more than I just paid? Why would they rent it from me for more than I am willing to pay on a lease?” Remember, you are dealing with somebody who is highly motivated to sell. They might be in foreclosure (
Free List of Foreclosures!) or perhaps they have another problem such as a divorce or job transfer out of the area. Maybe they’re an out of state owner and just don’t want to deal with selling the property long distance. There are many reasons people are willing to sell at lower then market value. This is one of the keys to success for a real estate entrepreneur; you must buy the property below market value! Buying creatively and below market value provides you more options and exit strategies. The more techniques you master, the more tools you can pull out of your tool box to engineer profitable transactions! Every month I go to the mailbox and I find checks from properties that I control. And my name is not on the title so I don’t own the properties, but I do benefit from the control of these properties. YOU DO NOT HAVE TO OWN THE PROPERTY TO MAKE MONEY FROM IT, YOU ONLY NEED TO
CONTROL IT! You may be thinking that rent to own homes is too simple and can’t possibly work, but I promise you that all the techniques I discuss are ones that I have personally used and have many clients using with great success. This isn’t brain surgery but you have to know the exit strategies as well as how and when to use each of them.
Check out my video about real estate options.
The owner is going in foreclosure by the end of this month. He bought the house for more then what it’s worth now. The payments are high. How can I excercise L/O in this case?
By your comment, it sounds like you already have an option to purchase the property. The first rule of dealing with homeowners in foreclosure is to know your state law regarding dealing with sellers in foreclosure. There may be local rules in your state which dictate what you can and cannot do. If there is no equity and the payments are more than market rent will cover, I’m not sure why anyone would want to exercise and option on that property. If it were me, I’d let it expire. At best, it might be a candidate for a short sale.
What is the best way to avoid paying monthly payments on the property while looking for a sub leasor? Try to have people lined up to lease the property even before you lease it?
Great question. How do you avoid making payments while looking for a tenant? The best way is to negotiate your deal such that payments begin once you have a tenant ready to move in. While it would be great to always have a tenant lined up before you acquire or control a property, it isn’t always possible. It is up to you to negotiate with the other party as to party what will and won’t work. Negotiate for mutual benefit. I usually start by offering to start making payments 3 months after we sign the paper work because in many cases the property is already vacant and they are making the payments anyway. Sometimes they balk, sometimes say only one month, or maybe two but it gives me some time to locate a good tenant without funding the monthly payment out of pocket. You can also ask for three and begin payments early (i.e. as soon as you find your tenant). If they ask, “Why the delay?” My response is that, “Rather than spending money on making payments, I’d rather invest in advertising, tenant screening and making the property spectacularly appealing!” That will serve both our interests.
The terms are always negotiable. Be flexible, be creative and be sure to solve the other guys problem (don’t make it your own) and you’ll find lease options and lease purchases to be excellent transactions. Maximum leverage with minimum risk!
My landlord gave me a lease (expires march 2010) on a property that he doesn’t own. One of the owners knew about this act from the landlord and collected each month for the so call “landlord” who lived out of state. Now the property is listed as a short sale. The real owners are asking to leave by the time the short sale is over and purchased.
Is there anything I can do as tenant with this lease
I have a lease on a property that is owned by 2 people. One of the owners knew about it and did not inform me. Now the property is listed as short sale, am asked to vacate when it’s sold. Is there anything I can do
I have a lease on a property that my landlord doens’t own. House is listed as short salem\, am asked to leave. What can I do
First let me say I’m not an attorney. Second, you may want to check with one. Now that’s out of the way, here’s what the federal foreclosure legislation has to say as I undersand it. If a tenant is foreclosed out of a property the lender has to honor the lease as long as the tenant is paying rent. Upon termination of the lease term, the tenant has to move. Your situation is a bit different because the landlord is not the owner. This is why I suggest an attorney, because logic (and hopefully, the law) would suggest that if the landlord is acting as a agent of the owner than the lease would still have to be honored in the foreclosure.
This could also present you with an awesome opportunity. You mght be able to buy the house as a short sale. As an owner occupant, you might even get the bank to financine you (rates are still really low). If you get it all done and closed before Dec. 1, you might even qualify for the Federal Stimulus money, $8,000 free cash. How’s that for making lemonade out of a bunch of lemons?
Good luck!
I don’t know what state you’re in but in many states if a property is sold, the lease and tenant go along with it. The new owner is legally bound to honor the lease and all the terms in it. The seller cannot force you out…it is against the law. He could offer to buy you out and then it is up to you whether or not to accept his offer. I would also want confirmation as to where my security is being held if I were you.
Hey I was just wondering do you do all the writing yourself or do you have guest writers. I’m loving your blog. Thanks.
I write it all. Glad you like it.
Augie is right even if he’s not an attorney. Very informative post. I thank to you for this useful information.
You are absolutely right you want to control the home with a lease option. Lease options are great because you can make money on the front-end, monthly and on the back end.
I recently leased a home with an option to purchase. It was done through a respected realtor in the area. Three months later the Sherriff shows up and advises us the home is being forclosed and will be sold in an auction on Sept. 25, 2010. We spent a lot of money moving plus we painted the entire interior of the house. Thanks for your reply.
Thanks for the kind words, It is my blog so they are my thoughts. To date I’ve done all the writing. Honestly, I haven’t given guest writers much thought. Who knows what the future may bring?
Augie
Hello Tom,
This s a lousy situation and I’d be angry beyond words. I’m not an attorney and I don’t give legal advice. Depending what state you reside in, the owner may have violated the law because the property was rented but the mortgage wasn’t paid. I would have asked the realtor about the quality of the owner and status of the underlying mortgage before entering the agreement. Now, I’d be asking for a refund of the commission they earned. Our normal process any time we work with a property where existing financing will remain in place is to obtain an estoppel letter form the lender confirming that the mortgage is not in arrears. While you may have recourse against the property owner, there may be nothing there to collect. You should also note that if the owner (or anyone else for that matter) brings the mortgage current, the foreclosure goes away.
You do have a couple of options. First, If the property is taken back by the bank they may have to honor your lease which means you get to stay as long as you pay the rent. I would talk with the bank on how to handle this, because some (not all) banks have a clause in their loan documents where the borrower agrees to an assignment of rents in the event the borrower defaults on their payments. Next, you might want to try to purchase the property via a short sale. It would probably be better for the bank to sell the property to a current tenant rather than let if go vacant and all the way through the foreclosure process. You may want to get the broker and owner in on this one. Again, depending on where you are located, there are attorney’s who may be willing and able to help you with this process. It might even be possible for you to take over the existing mortgage however, I’d encourage you to get competent counsel.
I have no idea of the value of the house, the amount of the current mortgage or how many payments the owner is behind. I am attempting to give you some ideas that may help you make the best of a difficult and frustrating situation. The good news is that you could still end up owning the home you and your family obviously want.
I wish you a successful outcome.
Augie
Great article Augie and thanks for sharing your thoughts. It is important to find a realtor you can really trust. With the bad economy now, it’s scary how people will do anything to earn fast cash.
Thanks for your knowledge about technique sandwich option.
And I agree with you, about we must buy property below market price
Sandwich options have been around for a long time and they help investors provide a valuable service along with an opportunity to earn a profit. Regardless of how you acquire or control property you must either buy with equity or be able to create it quickly.
To your success…
Augie
Very informative post!
Personally, i prefer to go for rent to own contracts. This way, I feel like my money is actually going somewhere in which I’d prefer it to go … rather than just being helplessly contributing to the bank account of a land owner.
As soon as I landed my first job about about 10 years ago, my mom advised me to invest a portion of my earnings in real estate. She further advised that since I’m planing on getting my own place, I should ditch the idea of merely renting a home. Thus, blindly trailing my mom’s words, I opted for a rent-to-own arrangement with my first landlord. I recall that there were times when I almost regretted that decision — my monthly payments being considerably higher than those of my peers. However, fast forward to the present, and I’m really glad I listened to my mom. I now own that place — and currently earning money from it by renting it out.
Control vs ownership is an ongoing strategy discussion, especially in this market. I agree you don’t want to be dealing with banks…besides the lack of liquidity isn’t doing anything to revive the market. I believe it will be up to the creativity of the individual investor. Keep up the good work!
That’s great…are you planning on adding to your portfolio? This is the perfect market.
You have very relevant information here, Augie. And I admire how you provide such smart pieces of advice for your readers. Kudos to you!
One option that I love and is becoming ever more popular with homeowners looking to unload their homes, especially in this market, is rent to own also known as lease to own or rent with an option to buy.
In the Mahopac market I have seen this as a win-win option for many people.
There is plenty of opportunity for everyone who wants to take advantage of it. I appreciate your comment. Thanks!
We find lease options and RTO programs work well in many markets around the country and are a great alternative in the absence of market liquidity.
Im leasing to own a house,put 3,000 down, but husband passed and cant afford payments. question is I have a friend that wants to get a loan for the house and give me the money to buy the house from the owner, then sign over the house to her. is that possible??
There are a number of ways you can accomplish this. If your friend is willing to do this for you; great. Another alternative is that you can have your friend buy the house from the seller and then either add you to the deed or sell it to you on an agreement for deed or an installment land contract. Will you be able to afford the new payments? You have to be able to protect your friend’s credit. You might also have your friend buy it and lease it to you until you are financially on your feet. Best of luck!
Rent to own homes are better than only renting homes. You will be able to live in your home without having to pay the house in cash. You will also be able to avoid most foreclosures.
Hi there! I agree with the statement that you only need to control the property to make money out of it. Managing the property well generates money.
And the beauty is that you get the option for free. I love free options!
And why, you hit the nail on the head – the seller is not a transactional engineer.
both options have their own pros and cons. Leasing might feel like you’re throwing away money month after month but at least you don’t get the high rate increases from rent to own homes.
But with Rent-to-own homes, you get to own the property in a few years.
Decisions, decisions.
I love the fact that you can make money from a property without being the owner. Great article and an excellent site. Cheers
My wife and I were considering buying a home at one point but our credit was bad. So we had to do the lease to own program on a house we wanted. We ended loving the home and had lived there ever since.
If you desire to own your own home but are unable to secure
conventional financing today, leasing a home with an option to buy may
be your best option. A lease purchase can make your rent money work for
you instead of making your landlord rich. Typically rent to own homes
offer rent credits that reduce the final purchase price!
Melanie
Great article. You make a good point about not having to own the property, but having control over it. Not alot of people know that important aspect to rental properties.
A couple of years ago my boyfriend and I did a leas to own contract with a Realator and paid the down payment to take over the mortgage of the home. The contract is for 5yrs and then with another contract we can extend it for another 2yrs and then we will need to purchase the home at this point. My question to you is, I recently moved out of the home due to our differences with my children. I am currently looking to see if I can get with my bank to purchase the home. The contract is his name and my name, if I purchase the home out right through the bank, do I owe him anything? Can I have him removed from the property once it is in my name and purchased out right? Or do I need to seek a lawyer to have him removed from the home?
I’m not an attorney and you’d likely need to have one review the documents and agreements governing this specific transaction. The first thing I would look at is the option agreement you currently have in place to confirm that there is nothing preventing you from exercising your option early.
Next, if your boyfriend put money into the original transaction, he may have a legal right or interest that needs to be dealt with. Maybe a cash settlement or some other compensation to acquire any interest he might have. You’ll need to have that conversation at some point. I’m not sure whether or not he knows you might want him to leave (that might also be governed by the terms of the lease). If you buy while the lease is still in effect, he might have the right to stay until the lease expires. Leases are typically governed by state law.
As for the bank loan, I would assume that if you qualify for a loan in your own name based on your income and credit, the current lender would be happy to be paid in full on the underlying mortgage.
You need to decide how you want to proceed, either confirm with a bank that you meet their lending criteria and then check with an attorney or go the attorney route first. Its your call.
Good luck.
You are absolutely right! Lease Options are an excellent way to buy or sell property.
To your success…
Augie
Although this post was written awhile ago, this strategy still applies in todays market. In fact, it will always apply as long as the situation can be found.
There are so many options to help people and legitimately create a win-win-win situation with the seller. I find it the simplest to level with the seller and talk about what they need or why they are selling and look at ways to meet that need making sure that the end price is fair.
Sometimes I can present a solution without using my private lenders like the wrap for example. I’m always learning new things that I can (and can’t) do. A good attorney, a good broker and a good title company is a must have in my opinion…and active fellow investors of course! 🙂
I couldn’t agree more…a new friend of mine had this on their site…
Never give up on your dreams. Take steps to make it happen!
I have to say I agree with that too!
Good luck Dionne!
To you success…
Augie