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Article by Doug Pretorius

The Lease/Option: Flexibility Times Seven

  Every guru's got a book, course or seminar about it. Many burned out landlords are switching to it. Many more investors are using it, and some beginners gravitate towards it. It has been called ingenious and innovative, even though it's been around forever, in one form or another. It's also been called one of the only non-confrontational methods of acquiring real estate.

  What is it? The Lease/Option (or Lease/Purchase or Rent-To-Own)

  I've liked Lease/Options from the day I first heard about them. There are a lot of things to like about them, and although some criticize them for one reason or another, the tide of positive comments about them certainly seems to drown out the critics.

  I'm writing this article to share my thoughts on one of the reasons I find Lease/Options appealing: Flexibility.

  Who would have thought that by combining 2 simple documents-a Lease and an Option to Purchase-a negotiator's dream tool would have been created?

  There are 7 main points that make up a Lease/Option agreement and one or more can often be altered to compensate for a seller or buyer who is inflexible about any particular area. Learning these flexibilities is critical to being able to negotiate workable deals, and gives us the ability to say: "Ok, I'll give you this, if you give me that."

  Now for a brief overview of those 7 main points:

  1. Lease Term
    The Lease Term specifies from when till when the buyer is allowed to occupy the property, and as a result for how long the buyer is obligated to make Lease Payments.
    The Lease Term can be adjusted down for less risk to the buyer or up for more security to the seller.
  2. Lease Payment
    The Lease Payment specifies how much money per period (week, month etc.) the buyer is required to pay the seller in order to maintain their occupancy rights.
    The buyer wants the Lease Payment to be low and the seller wants it to be high. The Rent Credit can be increased or decreased to compensate for a high or low Lease Payment.
  3. Rent Credit
    The Rent Credit specifies how much of the Lease Payment will be credited towards the Purchase Price; if and when the buyer exercises their option to purchase.
    The buyer wants the Rent Credit to be high and the seller wants it to be low. As mentioned, it can be adjusted along with the Lease Payment to come to an acceptable compromise.
  4. Option Consideration
    The Option Consideration specifies how much the buyer is required to pay for the option to purchase the property.
    Similar to the Lease Payment. The buyer wants the Option Consideration to be as low as possible, and the seller wants just the opposite. Often, when a seller is motivated enough, they are willing to accept a negligible amount of cash for the Option Consideration, or even just a promise to keep the other terms of the agreement.
  5. Purchase Price
    The Purchase Price is an easy one to figure out. How much must the buyer pay if they decide to exercise their option to purchase? This may be set at a specific dollar amount, or at some sort of formula, for example when the buyer is allowed to purchase the property for the balance of the existing mortgage(s) at the time of purchase.
    Again, the buyer wants the lowest Purchase Price, and the seller wants the highest. It's no surprise that a higher price is the main reason a seller would be willing to sell on a Lease/Option in the first place. Generally speaking, this is the main point of reference for all the other negotiation points.
  6. Option Term
    The Option Term specifies how long the buyer's option to purchase will be in effect.
    The buyer will want this to be as long as possible and the seller as short as possible. For obvious reasons (appreciation) the longer the Option Term, the higher the Purchase Price the buyer can agree to.
  7. Renewal or Extension Terms
    As a final point of negotiation, Renewal or Extension Terms can be agreed on separately or collectively for the Lease Term and the Option Term.
    It's quite common to find an Option Term of a few years, with a Lease Term of 12 months that may be renewed year after year. In any event, the buyer will want to be able to renew for free, while the seller will either not want the buyer to be able to renew at all, or to pay for it.

  This has been a relatively brief look at some of the areas of flexibility contained within a Lease/Option agreement. There are other points within some of these that I don't have space or time to mention, and there is a great deal to learn about how and when to adjust one or more of the points to compensate for another. But I hope I've given a useful glimpse at one of the reasons I personally like the Lease/Option.

Doug Pretorius first became interested in real estate in 1996 and after a few false starts and hard-knocks began his investing career in earnest in 2000. Doug has mentored countless students all over the world to become full-time investors in their own right and continues to help beginners as time allows.
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