Are Lease Options Legal in My State?

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:

  1. Two distinct and separate agreements: a standard lease agreement, and an option to purchase.
  2. Both documents must be signed by both the lessee and lessor (buyer and seller on the option to purchase agreement).
  3. The purchase option agreement must contain a specific procedure to exercise the option.
  4. 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.

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