Are Lease Options Legal in My State?

Posted on August 29, 2019 by Wendy Patton

A lease with an option to purchase is a legal agreement between at least two people. This makes the question, “Are lease Options Legal in My State?” a good question to ask. Embarking on this very profitable real estate investment strategy should be done with your eyes wide open. And with the help of a trusted mentor.

Depending how your structure the deal, there can be two or four legal contracts involved. With that said, the sandwich lease option is the lowest risk real estate investment that you will be involved with. The entire point of sandwich lease options is for you to profit, control, buy, and sell property – all without owning it!

Are Lease Options Legal in My State? – Yes They Are!

If you already own the house that you are selling on a lease option, the two contracts are the lease (rental agreement) and the purchase option contract. When you use my much preferred sandwich lease option method, you use the same two contracts but have one version between you and the current owner and a different version between you and the end buyer. Very simple really, 2 contracts X 2 versions.

Laws change and investors must remain current. A good place to start is by asking “Are Lease Options Legal in My State?” And since lease options have been around for decades, your next step is understanding the basic legal requirements. The basics to the sandwich lease purchase option contracts include:

Purchase price. In the contract you have with the seller, this is how much you’ll pay at a future date to very temporarily buy the house from the current owner. The other purchase price is between you and the end buyer. The price difference between these contracts is the biggest of the three different profits you’ll make in the deal.
Term. This is how long both lease option contracts will be valid. It is the number of months you have to complete the purchase from the seller and how long the end buyer has to complete the purchase from you. You want the first contract to be slightly longer than the second contract.
Purchase option fee. This is your second profit point. This is the fee you pay the seller for the exclusive right to purchase the house in the future. The end buyer also pays you an option fee to purchase in the future. You profit from a higher fee paid to you by the end buyer than what you pay to the seller.
Rent credit (optional). When you charge a higher than market monthly rent to the end buyer, a portion of the rent is applied to the down payment or purchase price. This is an additional incentive for the end buyer to complete the purchase. Even if you don’t use a rent credit, you’ll charge the end buyer a higher rent than what you pay the seller. This is your third profit from the sandwich lease option.

Back to: are lease options legal in my state? Not only is the answer YES, but you now have a good idea of how and why the sandwich lease option is very profitable because you control the property without owning the property.

Briefly, the other contract is the lease. These are the standard rental agreements that are widely used for rentals. The one addition to the contract is often for the renter to take more responsibility for maintenance and repairs. This makes good sense because the renter is becoming the owner. For you, as the sandwich lease investor, this works very well because you won’t be obligated for maintenance and repairs – this saves you both time and money!

Here is some more detail to answering Are Lease Options Legal in My State?…

Basics to Lease Options in Your State

I’m not an attorney nor do I know the exact laws and regulations in all states. However, for the most part, all lease option agreements must have:

Two distinct and separate agreements: a standard lease agreement, and an option to purchase.
Both documents must be signed by both the lessee and lessor (buyer and seller on the option to purchase agreement).
The purchase option agreement must contain a specific procedure to exercise the option.
The purchase option agreement must have a legal description of the property.

In a lease option agreement, the title to the house remains with the landlord until the tenant purchases the property. In other words, the starting point of the arrangement is a tenancy, not a house purchase transaction. As an investor, you begin by seeking out tenant/buyers that are most likely to successfully complete the purchase. And then, work with them to make it happen.

Successfully Answering the Question: “Are Lease Options Legal in My State?”

The right approach to the question “are lease options legal in my state?” is making the transaction a win-win-win proposition (sandwich leases). You want the tenant to complete the purchase, pay you a handsome profit, and then you move on to the next deal with a fully satisfied tenant/buyer in place. Think “word-of-mouth advertising” here. Your next tenant/buyer may well be the sister-in-law of the buyer you just made happy.

In all scenarios, consult your state to determine what laws govern lease options. That’s the only way of accurately knowing if lease options are legal in your state and what regulations apply.

Although this begins as a tenant and landlord arrangement, there are significant advantages for the investor (you). Through the legal contracts, I transfer as much of the responsibility for the property as possible to the lessee as the potential owner. However, ultimately I am still legally responsible for the property as the true owner/landlord. That means I am entitled to the tax write offs, depreciation, and rent. When the buyer exercises the option to purchase, all of this transfers to the new owner.

Are Lease Options Legal In My State? – What Laws Might Apply

One area to be sure you understand are laws regarding applying a portion of the monthly rent towards the down payment or purchase. Just because you call it a lease option, doesn’t make it a lease option in the court’s view. The court may view applying monthly rent towards the purchase as granting “equity” to the tenant. This can cause complications if the purchase option is NOT executed. This is a reason I keep the lease and the purchase contracts as separate documents and transactions.

You will profit with lease purchase options in your state. The bottom line is that the more you learn, the more you earn.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Options System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate and find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

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Multiple Property Ownership – The Good and the Bad

Posted on August 14, 2019August 29, 2019 by Wendy Patton

How many rental properties do you dream of owning? Most investors want to own as many as possible. A long time ago I also believed owning as many properties as possible was the best answer…. Until I didn’t think that any more… It took a leap of faith, but one day I took the time to consider the pros and cons of owning multiple properties. I figured out the number of properties I really wanted to own out right is a big Ø – even as a highly successful real estate investor. What I discovered is what I really wanted is to control as many properties as possible without the hassles and financial commitment of ownership – and you should too! The magic happens when you understand the wealth building capability of lease options and sandwich lease options.

The Con Side of Owning Multiple Properties

For most real estate investors, it’s counter-intuitive that merely controlling properties is financially superior to outright ownership. From highly experienced investors to beginners, available cash for investing is typically in limited supply. Experienced investors might own 20 rental properties with a book or retail value of well over a million dollars. Those rental properties can be leveraged (borrowed against) to free up liquid cash, but that means putting owned properties at risk as well as taking on debt that has to be eventually repaid. For the purpose of understanding the pros and cons of owning multiple properties let’s assume the experienced investor has $15,000 in liquid cash to invest. The same amount that a beginning investor is likely to start with. For both experienced and beginning investors $15,000 is enough to qualify for a mortgage to own a $150,000 rental house. The experienced investor might be able to stretch this amount into 2 properties based on historic performance. But neither investor, new or seasoned, is likely to take ownership of more than 2 houses.

The Pro Side of Controlling More Properties Using Lease Options

When you understand lease options, it becomes clear you can control and profit from more properties than if you own your rentals. Rather than a $15,000 down payment to own a rental, that cash is better applied as option fees to take control of multiple houses with options to buy at a later date. As a knowledgeable investor, I’d consider a $2,000 option fee when buying a $150,000 house to be on the high side. But we’ll be conservative here and go with that number. The result is $15,000 gives you control of 7 houses rather than ownership of 1 or 2 houses. Your monthly positive cash flow from rental income is going to be about the same whether you own or lease those houses. To keep the example easy, assume rent income each month is $1,500 (1% of the purchase value). From that income, you can expect to pay about $675 per month towards the mortgage if you buy or the same amount if you lease. Both ways it leaves a gross monthly profit of $825 (before taxes, insurance, and maintenance/repairs).

ROI is the Big Pro With Lease Options

Here is the big kicker when it comes to the pros and cons of owning multiple properties versus lease options. The owner bought 2 houses (at best) for the $15,000 investment. That creates a gross monthly profit of $1,650 ($825 X 2). The lease option investor took control of 7 houses. This creates a gross profit per month of $5,775 ($825 X 7). The clear winner is the lease option investor who earns $4,125 more each month ($5,775 – $1,650) than the rental owner. As big of advantage as this is, it becomes much more rewarding when you consider the return on investment (R0I) ratio. Below is a simplified calculation which excludes taxes, insurance, and repairs but all things being equal these should be in proportion for each house regardless if it is owned or leased (lease options can be negotiated to pay a smaller portion of those costs). The annual gross ROI for the owner is 132% (12 months X $825 rent profit X 2 houses = $19,800, $19,800 / $15,000). The gross ROI for the lease option investor is 462% (12 months X $825 rent X 7 houses = $69,300, $69,300 / $15,000). Controlling the property with a lease option is the clear financial winner over owning the property.

Even More Positive Income From Lease Options

Let’s keep in mind, owners do gain appreciated value that option investors will not gain. First, it will take many years before the appreciated value catches up to that huge difference in ROI. Furthermore, the option investor will have pulled in even more profits over a couple of short years and then moved on to repeat the deal several times long before the appreciation (which isn’t liquid) catches up. This is where the sandwich lease option becomes far superior when considering the pros and cons of owning multiple properties. The lease option investor puts an end buyer in place who pays the rent until the purchase is completed. The end buyer pays you a lease option fee which almost immediately returns your original investment. When your investment becomes ZERO, your ROI becomes infinite. Typically, you even profit by collecting a higher option fee than you pay. In our example, the rent profit was a wash between the owner and the lease option investor except that the lease option investor was collecting positive rent on 7 houses instead of 2. The lease option investor collects another big payday when the end buyer completes the purchase. For our example, we’ll assume the lease option investor sells to the end buyer for $10,000 more than he or she has an option to pay the original owner. The sandwich lease option results in a $15,000 initial investment that is returned to the investor almost immediately + a gross rent profit which is far superior to the house owner + a sales profit which exceeds the owners appreciated value. All without the responsibilities and risks of ownership. When it comes to the pros and cons of owning multiple properties, the lease option wins hands down. By Wendy Patton For more than 30 years, I’ve used the Sandwich Lease Option System to earn my students and myself millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of this fact and my personal success that I share the Sandwich Lease Option System with others. If you found this information useful, please visit again soon at wendypatton.com. For more exclusive content, please subscribe to my RSS Feed and YouTube Channel. What did you think of this article? Please leave a comment below.

Should I Get a Real Estate License?

Posted on August 14, 2019August 26, 2019 by Wendy Patton

You might need a real estate license to invest in real estate!

Becoming licensed does takes time and money. For those and other reasons, give plenty of thought to the question, “Should I get a real estate license?”

First Questions First

The first question to answer is “What are my primary goals regarding real estate?”

Do you want to sit in an office on weekends waiting for client calls? Will you enjoy showing houses to others in the evenings? Will enjoy explaining the buying and selling process to every new client? If you are answering ‘yes” to these and similar questions, then your time and money might be well spent on a real estate license. You can still run your investment business on the side.

The main reasons for a license are:

MLS Access – easier without a license today than ever before.
A source of income – you get part of the commission or save it when selling.
Networking – Getting in with other Realtors can be another source of leads and deals.

On the other hand, if you want to completely be your own boss – answering to no one else, then put getting a license on the back burner. Your answer to the question, Should I get a real estate license? Should be no.

A Real Estate License Requires Some Time and Money

Training and testing cost both time and money. State requirements vary for example, in my state of Michigan it is an 40 hour course but in some states 100+ hours of training is not an unreasonable. This is only the beginning point when considering if you should want a real estate license. There may be additional training your broker will require. Long term, you also need to consider the ongoing training courses required to keep your license current. For most people, I estimate the basic costs for just getting your license is somewhere between $1,000 to $1,500 plus the time commitment. This is a small fee to pay to save many times over that per deal.

There are other fees and time requirements to be considered as well. The brokerage firm you work for will have specific fees you have to pay. You may be required to join associations – even to gain access to the MLS, which has an additional fee. Also, brokerage firms requires a big chunk of your time manning the office phones, holding open houses, filling out weekly reports, and more.

Responsibilities Come with Saying “Yes” to a Real Estate License

Consider the added responsibilities when asking “should I get a real estate license?” From a professional investor’s point of view, the most challenging responsibility is full disclosure. I believe in full disclosure being an agent myself, because having a license does have a disclosure requirement, but that rarely will affect your deals. In every state I’m aware of, you’ll be required to disclose to all buyers and sellers you have a real estate license.

When brokering deals for other people, this works in your favor by enhancing your professional standing. But not so much when buying or selling your own investment properties. That same enhanced professional stature leads many private buyers and sellers to believe you have an upper hand that works against them in personal deals – even when it’s not true. This is an important part of understanding your primary goals when deciding if you should get a real estate license.

Ultimately, Are the Benefits Worth it?

Most investors are primarily interested in access to the MLS and to a smaller degree the professional networking with other brokers. Without a doubt, most retail transactions do go through the MLS.

But do most of your investment deals go through the MLS? At this time and in many parts of the country, the MLS deals don’t appeal to most investors. These MLS deals are priced at the high end of the comparable range and can even lead to bidding wars. Not exactly the types of deals most investors are looking for. Successful investors network though local investment clubs, probate attorneys, bankruptcy attorneys, and even the mailman who comes across distressed houses on his/her daily route.

You can always use a licensed agent/broker on the occasions you want to. By working closely with a few licensed brokers, they will give you the next best thing to unfettered access to the MLS.

Answering the question “Should I get a real estate license” really does start with understanding if your primary goal is becoming an investor or a broker. If you plan to work out of a real estate office, you will be added to the company webpage and receive marketing training along with given generic marketing materials. But it will cost you a lot of time and money. That’s time and money that may be better spent learning from other well-established and successful real estate investors.

Without knowing you personally and your specific circumstances, it’s impossible for me to give you a definitive Yes or No answer to the question “Should I get a real estate license.” However, I will be thrilled getting to know you and your circumstances so that the two of us can come up with the best answer for you.

By Wendy Patton

For more than 30 years, I’ve been a licensed Realtor and broker. If you ever want more information on getting a real estate license please call my office to find out more. 248-394-0767

If you found this information useful, please visit again soon at wendypatton.com.

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Month: August 2019