|How To Protect Yourself In A Lease Purchase Deal
First The Good News:
Youíre holding a cashier's check made out to you for $5000.00. You also hold in your
entrepreneurial hands a contract that will generate $250.00 per month Positive Cash Flow. The deal
even gets better; it's someone else's property and you have minimal liability with no Tenant &
Toilet problems. You call home and tell your significant other to get ready; you're going to do the
town and he/she is really proud of you! Yes, life is good! You have just created, negotiated and
achieved your first Lease Purchase deal of your real estate investor career and now you can envision
many more deals of the same kind.
How did you do it ?
You got with the program, worked hard and went out and found a nice 3 bedroom / 2 Bath
Home, you know the one with the white fence around it. You have Negotiated the deal so you make money
at the beginning of the deal, the middle and at the end. You now control it for the next two years
with just one month rent out of your pocket. A Tenant Buyer will be renting to own from you in a
Sandwich Lease and placing $5000.00 as non refundable Option considerationin to your pocket. A
Sandwich Lease is simply when you rent and control another's property for a specific period of
time with all the terms of the purchase pre-negotiated. If you have quality contracts with a
specialized assignment clause you may rent this property to another. You should always profit
immediately or upfront with what we call option money (a non refundable amount of money paid at the
initiation of the deal), have positive monthly cash flow and a possible note or cash when the option
is exercised (purchased). !
Congratulations, you now control the property without the title changing hands and you
can sublet, assign, transfer or convey any rights which you have to a third party. Not bad, huh ? Only
here comes Murphy's Law...................
The Bad News.
There are many ways your Lease Purchase deal can go wrong UNLESS you take some of the
following steps to protect yourself and the deal.
- Option Money: Always get enough non refundable Option consideration upfront. Nothing beats
making money upfront, but better yet getting a substantial financial commitment from your tenant/buyer
reduces the likelihood of a problem. Donít do a Lease Purchase with a Tenant/ Buyer unless they can
commit a minimum of Option Money (3 to 5 months rent or more). Remember we want to finance like a
tenant and invest like a investor.
- Contracts: Donít use generic real estate office or stationary store Lease Purchase contracts.
Have a good contract drafted by a competent real estate investor or attorney. It should contain the
verbiage that will protect you. I use 7 different and specific Lease Purchase Contracts in my
transactions depending on my strategy or position in the deal.
- Memorandum: Record a Memorandum of Option. This document can be recorded simply and inexpensively
and can offer tremendous protection for your rights in the property. You can file these documents at
your local Registry of Deeds where the mortgage has been recorded.
Example: The seller tries to sell the same property to another person without you being notified. The
memorandum clouds the title and the owner is not able to sell the property without dealing with you
- Credit Check on Tenant/Buyer & Owner: Check the credit of the buyer and the seller. Know as
much as possible about the people you're doing business with - knowledge is power.
- Preliminary Title Check: Do your homework and check out the owner and the property with one of
the commercial property on-line services available or better yet contact your local Title company or a
professional researcher for information. Do your due diligence.
- Open Escrow: Open escrow and have escrow instructions issued at the onset of the transaction. It
will create a paper trail and show the intent of the parties in the event of a legal challenge.
Special Tip: Try to always use your Escrow/Title Company or Attorney in these matters. It
just makes sense to work with people with whom you have established a business relationship. They might
just look out for you.
- Deed: Have the owner place the deed into escrow as soon as possible. In the event you or your
Tenant/Buyer wish to close, there will be one less delay.
- Payment Account: Set up a direct payment account with an escrow company, title company or a
bonded/established accountant or firm to pay the bank, taxes, etc.
A. Have the Seller make you the loss payee on the insurance policy (if you can).
B. Require the Tenant/Buyer to have renterís insurance.
- Property Inspection: Do a property inspection/walk-thru with the Tenant/Buyer and use a complete
inspection form that the Tenant/Buyer can sign.
Note: Take a camcorder video of the property with the Tenant/Buyer and have them sign and date the
- Honesty: Be upfront and honest in your dealings with all the parties. Hopefully, in turn, they
will reciprocate and you will all enjoy a Win/Win deal. Let the seller know that you will be subletting
the property to qualified Tenant/ Buyers.
Final Thought: The best way to protect yourself in any Lease Purchase is to deal with all
the possible problems before they occur, this is part of the Negotiating process whether with the
Seller or the Tenant Buyer. Most real estate investors fail not because of lack of knowledge concerning
a strategy, but rather they do not know how to Negotiate. Negotiating is a "Million Dollar
Skill" and most people do not know how to do it on a consistent basis, but if you ask most people
they have convinced themselves that they are a top notch Negotiator is every avenue of their life.
My challenge to you is to take account of your life, success leaves clues; if your business/investing
is not successful or your just trending water- you do not how to Negotiate adequately. Don't loose
your upside potential to anyone or anything.
Hindsight is 50/50, but Foresight is 100%!
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