What does ethical lease option investing mean? Basically, a tenant – either a current homeowner looking for a mortgage solution through lease option refinancing, or someone who wants to purchase a home but does not sufficient down payment funds – signs a lease option contract stipulating that, for a fee, they will retain the first right of refusal to purchase the home in the future.
Meanwhile, they will occupy the home and make monthly payments to you. Should they default on their contract, they will lose their lease option “fee”.
While this sounds like a “win” for all parties, the truth is that lease option strategies – in particular rent to own – have gained poor reputations because unscrupulous investors and operators have skewed the lease option contract to their favor.
But you can do it ethically and still make great profits.
If you are serious about attracting solid, reliable tenants to your lease option strategy, then as an investor you must retain a large measure of integrity and do things right.
It means you need to be able to discuss all elements of the lease option process, contract, qualification criteria, and monthly payment calculations. The use of mystery numbers in computing a tenant’s monthly payment, for example, is non-defensible. Don’t do it that way.
Here are my top 5 ethical lease option investing tips that I've picked up over the years as a lease option investor.
1. Be honest all the time
A cliche though it may be, honesty really is the best policy. What does this look like? Well for starters, don’t lie to tenants, brokers or lenders. Just don’t do it, even if it’s tempting to embellish your situation. If you have never done a lease option refinance deal before, don’t try to pretend that you have done a dozen. It really is that simple.
2. Show all the numbers
When you go through the financial analysis with your tenants before they sign on with you, it is important to know where each number comes from. No mysterious, magical “rule of thumb” numbers here. Everything must be defensible.
Many new investors get nervous about showing their tenants how they make money and how much they make. That’s normal. But any reasonable tenant understands that you are running a business, and there is a cost to the service your are providing. If they really have a problem with some of your numbers, then it’s time to find another tenant.
3. Offer a review period
Never, ever push a tenant into signing something they really aren’t ready to commit to. Make sure they have sufficient time to review the contracts with their lawyers and to think about this big decision they are about to make.
4. Use lawyer-approved contracts
There are man lease option and rent to own contract templates available, and these are a great start for you to create your own. Be sure to have your own lawyer review them before you offer them to a tenant. You want to make sure that you are protected in case anything goes wrong. This also shows your tenants and others that you take your investing strategy seriously.
5. Maintain ongoing communications
The importance of maintaining regular, ongoing communications with your tenants and other real estate professionals cannot be overstated. It doesn’t have to be much – just a simple email or phone call to check in.
If your focus is on short term monetary gains at the expense of tenants, then you can certainly do that and get away with it for a while. However, if you really want to build a good business, get the best tenants, and enjoy a solid reputation, then ethical lease option investing is the only path to take.