|Is Lease Purchase Investing For Everyone?
Is lease purchase investing for everyone? For many investors, the answer has been no. But
what would happen if your approach was Why not?
Any real estate investor, novice or seasoned, can employ lease purchasing successfully. Many
investors miss the opportunities available with lease purchasing because they mistakenly believe the
myth that traditional real estate and creative real estate investing offer minimal risk. Nothing could
be further from the truth.
All investing has risk, some more than others. But there is one exception to the rule - lease
purchase. With a lease purchase, investors receive all the benefits of control/ownership of the
property without ownership - how can you beat that scenario?
Lease purchasing, aka Rent To Own, is the ultimate creative real estate niche strategy. It can
be used to control single family homes, condos, town homes, mobile homes, land and multi-dwellings.
This strategy can also be used:
- on foreclosures
- on probates
- on tax lien properties
- on "upside down" or "under water" properties
- in place of low or no money down strategies
Investors can use this strategy in an up, down or sideways market while commanding 15-20%
above market rents and selling prices. The best part of this great strategy is that the investor can
pay full price and still make money.
Investors who take advantage of lease purchasing gain a great advantage over fellow real
estate investors. They can often do several more deals each year than their competitors.
How It Works
Here is how lease purchase works. A potential seller transfers control of and rents their
property to a potential buyer until the buyer exercises his or her option to purchase the property. A
portion of the rent money paid each month goes toward the future purchase price.
Lease purchase options provide several benefits to owners, investors and buyers.
- Owners can avoid a foreclosure on their credit report by getting their mortgage current.
Additionally, with their mortgage payments now going in on time every month, their credit begins to
- The potential buyer is not throwing rent money away as in a traditional rent situation but rather
investing in the home's future purchase. Cash rich and credit poor buyers are perfect for this kind of
- Investors can take a situation that others would walk away from and turn it into a deal. Deep
discounts on the purchase price are not necessary to yield a profit - investors can even pay full
market price - since the investor can charge above market rents and sale prices.
An investor lease-options a property for $200,000 from the seller. The comparables match out
and the property is determined to be worth that much. Using a sandwich option, the investor takes over
the property and pays the seller an option fee of $10,000 for the option to buy, which in the case of
a foreclosure can pay off the Sellers arrearage with the bank and make the mortgage current. The
investor then rents the property from the seller for $1,500/month. The investor can now lease options
the property to a third party, the buyer, on the investors terms. These terms typically include an
option fee from the buyer ($15,000), above market rents ($2,000) and a higher than market sale price,
in this example, perhaps $220,000 to buy the property. The investor can allow a portion of each months
rent to go towards the purchase price should the buyer decide to execute their option to buy.
The investor makes money up front with the spread in option fees ($5,000), each month with
the spread on the rents ($500), and in the end with the spread in purchase prices ($20,000) if the
buyer decides to execute their option. If they don't... the investor can charge another option fee
($15,000) to a new buyer and keep the money put towards the purchase price from the previous buyer.
What Can Go Wrong?
If the deal doesn't pan out the way an investor speculated or the market takes an unexpected
turn, a profitable transaction can into a potentially negative one. But investors using lease
purchasing can walk away without losing hundreds of thousands of dollars, because they've not invested
the same kind of initial capital commonly necessary in traditional or creative low down payment deal.
Smart lease purchase investors construct their contracts with iron clad terminology that
provides escape options. It's important to have a thorough understanding of lease options before
exercising them. Investors often think a lease option is exactly like renting, yet it's completely
While New England real estate investors continue to focus primarily on buying and selling,
investors in the South and Midwest have been doing lease purchasing successfully for many years. And
New England is catching on.
Lease purchasing can be the missing piece of the puzzle in many circumstances. It can allow
for a seemingly impossible deal to come together in a win-win situation. It's an option every investor
James A. Gage. is a best-selling author and internationally-known expert in Lease Purchase, AKA
Rent To Own Real Estate Investing and Negotiating. He Mentors One-On-One throughout the U.S. and
across the world. James is also director of the Gage Consulting Group, LCC , 800 Main Street,
Suite 104 Holden, MA 01520 . http://www.jgage.com
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