Lease-options have spurred the imagination of would be buyers lacking the cash, and/or credit and more importantly lacking the knowledge that almost everyone can own their own home and/or investment properties. Also, promoted to those would be investors who lack the people skills or time necessary to be a landlord, but still want most of the benefits of real estate ownership without the responicabiltys!



Lease-options are real estate tools used by the good and the evil among us. Most lease-options are an agreement between good and evil people. We all know far to many real estate people who believe you only get rich by taking the suckers money, most people who attempt to buy on lease options are simply donating money to these sellers.

In my book One House At A Time /Finding And Buying Single Family Rentals I spend a lot of time on the option scam as presented to real estate investors. I say scam because in my experience these lease-options seldom result in a new home owner. But, Ive only been in lending and real estate for 35 years, may be when I get more experience Ill change my mind. Even when good people try to help each other lease-options seldom turn out that way. They can work but they must be done right from the beginning, I included instructions in the book.

Before I offend you any more I need to define my terms.

Guru, a Hindu spiritual leader or any unusual teacher. There are Gurus in all fields of life, but thanks to TV infomercials most of us think of real estate investment instructors. Not all Gurus are bad, thanks to my classes and writing Im a real estate Guru.

Option, the purchased right to purchase property. A type of sales agreement that obligates the seller to the buyer, but not the buyer to the seller. When use properly a great and powerful real estate tool. In the book I strongly advocate the use of short term options in lieu of sales agreements whenever possible.

Lease, a rental agreement for any property real or personnel. Most often used with reference to rental agreements for more than one interval, i.e.,: a one year lease calling for 12 monthly payments. The most common real estate contract.

Lease-Option, a combination of the right to purchase, with a rental agreement. Like a mule it can be a powerful tool. Like a mule its flawed lacking the sleek beauty and speed of a horse or the friendly cuteness of a surefooted donkey. All to often lease-options involve getting screwed by a jack ass.

Scam, anything that purports to do one thing while obviously doing something else. Scams are normally immoral, but often not illegal. Scammers can often provide antidotal evidence that their program works, leaving out that it probably wont work as presented for you.

Sucker, those dreamers who think theyre going to get something for nothing. Those people who buy the programs about buying on lease-options. The victims of those people who bought the programs on selling on lease-options.

Traditionally lease-options were offered by sellers who needed to entice a tenet to rent their property at a premium price, with or without an up-front payment to the seller. More recently lease-options are used by sellers who have to wait out a prepayment penalty. Sellers believe that a tenet with an option to purchase will take better care of a property they may someday own.

To protect yourself from being a scammer or being scammed you need to determine whats in the deal for the other guy, and what you hope to gain.

Landlords/sellers:

1. A better tenet is a good reason to offer a lease-option. When the lease is what, we call triple net, where the tenet takes care of the property and pays for everything youre almost out of the landlord business.

2. Sub-prime and/or adjustable rate mortgages often have prepayment penalties, a lease-option with a good buyer, having made a sufficient up front payment can be a good way to wait out the penalty. See #1.

3. You need money now and are willing to trade equity for the cash. You need more monthly income than the market rent will provide.

4. The down side:

a; Youre committed to sell the house at a fixed price.

b; During the term of the option youll not normally be able to refinance or sell the property.

Tenets/buyers:

1. Youd like to buy the house, but for some reason you cant commit at this time. IE: You havent sold your old house yet, your new job is tentative, in the near future youll qualify for a much better loan.

2. You want to tie up the house youre renting, so you can buy it later for whatever reason.

3. Youre going to, with the owners permission, substantially improve a house ( like, repairing an older home, landscaping a new home) and you want to protect your investment.

5. The down side:

a; If the option requires a substantial up front payment, or monthly premium youre likely to lose it.

b; If you dont qualify for a mortgage today youre not likely to a year, or two, or three from now, either!

c; Your lender may not recognize your equity. Dont mistake this with losing your equity, but the lender may not use the current market value of the house or your credits toward equity, when determining the loan to value.

d; Youre committed to this house at a set price. If for any reason you dont buy this house, you lose your money!

e; If youre ever late with a payment you will probably lose all your money!

Many, if not most, Gurus who advocate selling on lease options teach Landlords/sellers:

1. Take a large up-front option payment, and a large monthly premium.

2. Included a provision canceling the lease-option if the payment is received in as little as ten days late!

3. Demand payments in person.

4. Make yourself hard to find!

5. Evict!

6. Resell!

7. In a good year you can sell the property twice with substantial non refundable up front payments! In a great year three times!

Ive tried to sum up several chapters in one short article lease-options are a tool, akin to a handgun! At one time lease-options can be a great benefit, fun, even sexy. Lease-options can be great protection, for a tenet. Finally lease-options in the wrong hands can do great evil!

Three final notes for would be tenets/buyers:

1. Never turn down a free or low cost option.

2. Never, never, never let an option expire without getting the property appraised. What you have thought was outrageously expensive might be a real bargain near the end of the option.

3. If you do want to use a lease-option watch for A Consumers Guide to Buying And Selling With a Lease-Options # 2. There are things you must do at the start of a lease-option if the lender is to recognize your equity an the time of purchase