Lease options were defined in Part 1. In Part 2, we will talk about structuring a lease option.
Common Lease Option Deals
My typical strategy is to lease option from a seller and then to lease option that home to a buyer. How Lease Options Work Illustration:
|options to||options to (may buy)||may buy|
The above illustration depicts a “sandwich lease option”. In a sandwich the meat is in the middle. The best part of a sandwich is the meat, and you (the investor) are in the middle of the transaction. Your reward is the meat–the difference between what you paid for the home and then what you sold it for.
Seller Bob lease options his home to Investor Wendy for $150,000 at $850 a month for 3 years. Investor Wendy then would lease option the home to tenant buyer Sally for $180,000 and $1000 a month and only give Sally 1 year to purchase the home. In this example, Investor Wendy would have $150 a month cash flow and $30,000 in profit on the difference in the price of the home (what you paid and what you sold it for).
This is a simple example in lease options, because there are so many more things that can be negotiated in a deal. It is very important you only work with buyers that have an opportunity to purchase your home. I only accept applications from tenant/buyers I think could qualify later for a mortgage. I can't determine for sure if they will, but a good mortgage lender can give me that advice. I recommend you work with a good mortgage company to make that determination.
Wendy's Ethics Rule
Don't commit to a lease option with potential buyers who have no way of ever being able to qualify for a mortgage. That is being greedy and taking advantage of someone. It is not fair to the buyer. If the buyer messes up – shame on them! If you mess them up – shame on you!
Lease Options Profit Potential
At this time average profit on a lease option deal is right around $40,000 per transaction. Lease Options typically turn over every 12-24 months. Depending on what part of the country you reside in the profit range should vary from $25,000 – $150,000 (Midwest to Northern California).
You decide how much you need to make, and then you will know how many homes you need to lease option to achieve your goal. Not only can lease options set you up to live today, but they can set you up for Future Financial Freedom and retirement. Just sit back and imagine….how would it feel to be completely debt free? Real estate is the vehicle that can allow you to achieve just that.