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Lease Options are a way to purchase real estate, usually with very little or no money down, sometimes even with money back in the investor’s pocket. Sound too good to be true?  Well, it isn’t. Can an investor end up with money in their pocket and not have to put 10 to 20 percent down to purchase real estate? Yes. These techniques are commonly used today by hugely successful investors. This book is going to show you how you can find sellers and homes you can purchase with little or no money down – truly the fastest way to Future Financial Freedom (FX3).

A lease option is a strategy that gives an investor the right to lease a home and also the right to purchase the home during or before the end of the lease period.  An option is a contract that gives its purchaser the right to exercise a privilege. In the case of real estate investing, it gives the investor the right to purchase property during a contracted period of time.  It is a technique that involves gaining control of a property, without the added burdens of ownership.   All money made in real estate is made by controlling property.  Owning property is the most obvious way to control it, but control is possible without ownership – and control is what makes the money. It was a dying John D. Rockefeller who told all of us his secret to achieving great wealth, “Control everything, own nothing.”  All of today’s most successful real estate developers utilize options.

It is important to be aware that there are some risks involved with this technique, but I will cover these risks later on to help you minimize your exposure. The rewards that can come with lease options truly far outweigh the risks, so long as you keep aware of all that is involved. All real estate investing involves some level of risk.  Lease options, because of how they are done, are truly the safest way to invest (in my opinion). Real estate investing is truly the quickest and best way to build lasting wealth. Many of the world’s wealthiest people acquire much of their wealth through investing in real estate and also using options.

While sandwich lease options can build you tremendous wealth, they usually shouldn’t be considered a short-term investing strategy.  I define a short-term strategy as one in which the time that passes from the start of the transaction to completion (cashing out) is less than one year. A classic example of this would be a rehabbing project (fixing up a house and reselling it). The other side of the spectrum would be a longer-term strategy, such as buying a rental property and renting it over many years. I consider sandwich lease options to be in the center of that spectrum, usually requiring one to three years for the best payoff.  However, you can always immediately sell the deal to another individual or investor for a profit; this is what is called in the business wholesaling or cooperative lease options (more on my website about these techniques). This can be done if you buy the property at a low enough price that you can turn a profit by selling the deal to another investor at a discounted price.

 Visualize This Scenario

In every seminar I teach, I ask the students, “Who of you would be willing to purchase a home valued at $200,000 for $100,000.”  Of course all hands shoot up. Then I continue by asking if they would still be willing to purchase the same home if the price was $150,000.  Most of the hands stay up.   I proceed upwards with the price increasing the increments by $10,000 each time. I always watch with amazement as the hands slowly but surely drop. At the price of $180,000 almost all hands are down. The point I am trying to make to each of them is that most investors are not willing to pay this close to retail price for a home.

I then re-pose the question to them: “How many of you would be willing to pay $180,000 for a $200,000 house with no money down, with a 10-year time to pay the $180,000 to the seller at $1,000 per month? Oh, how about if we say all $1,000 of your payment each month gets applied to the price of $180,000? Now are you interested?”  Now all their hands go back up.  I ask, “Why, now, are you willing to pay $180,000 for that home that you wouldn’t have a few minutes ago?”  They respond in unison saying, “Because you added some attractive terms!”  My response is always the same: “You didn’t ask the terms before!”

Terms are parts of a lease option deal, such as price, amount down, length of time to pay, monthly payment, monthly credits, and other negotiated items with the seller, which will be discussed further and in more detail in later chapters. Many times even experienced real estate investors don’t ask, “When does the seller need his cash?”  They say “no” to a price before they ask when the seller needs his/her money. The previous example illustrates how most investors think — they don’t ask all of the right questions about the property before they make a decision. They look at the surface but they don’t dig deeper for other possibilities.

Lease options provide a creative solution that can allow you to negotiate terms that can increase your profits and provide a great investment opportunity.  Now you are able to pay a higher price on a home if you can get reasonable terms, and having this tool at your disposal allows you to open up many new possibilities and make money on deals that were before completely ruled out. It’s all about terms!

 

Wendy’s Advice on Sandwich Lease Options
If it isn’t a Win/Win/Win for the Seller, the Investor, and the Tenant Buyer then walk away from the deal. There are plenty of the deals out there where everyone can win.

 
When doing any lease option deal, it is one of my mottos that everyone must win or don’t do the deal.  There are 3 people involved: the seller, you the investor and the tenant/buyer.  It must be a win/win/win; otherwise walk away.

Standard Lease Option Deals

My typical strategy is to lease option from a seller and then to lease option that home to a buyer.

 How Lease Options Work

The above illustration depicts a Sandwich Lease Option. In a sandwich the meat is in the middle.  The best part of a sandwich is the meat, and you (the investor) are in the middle of the transaction; your reward (the meat) is the difference between what you paid for the home and then what you sold it for.  There are also ways to make this deal even better and more profitable, which will be discussed in later chapters.

A variation of a Sandwich Lease Option is the Cooperative Lease Option.  In a Cooperative Lease Option (discussed on my website) the investor finds a seller and does a lease option with them, and then “flips” or assigns their contract to an end tenant buyer and keeps the option fee.  They do not stay involved or in the middle.

One other possibility is a Lease Purchase. While a lease option gives the investor the right to purchase real estate, the lease purchase guarantees that he or she will purchase the property during a given time period. Therefore, use lease purchases with much caution.

How Lease Purchases Work

Lease Option Deal

Here’s a great real-life example from my files of a lease option deal from start to finish – a true win/win/win:

The seller:  Janet

Janet, a seller, answered an ad I had placed in a newspaper.  I placed an ad that read:

Company looking for 3-4 homes in the area, on long term lease.  Call 123-222-2222.

 
Janet’s home had been listed on the market for $189,000 with a Realtor and had recently expired. She saw my ad and decided to call. She’s exactly the person I was looking for. She was willing to sell and also willing to do a long-term lease. Bingo!   I still had to determine some other factors to make sure it would be a win/win/win.

Janet’s most important area of concern was her price, and she was set at $185,000, and she was not going to budge on that portion of the deal. As soon as I knew that Janet was set on this one area of negotiation, I could work with the other areas of the terms for myself (see Chapter 3 on Negotiation).  I would need to look at the rest of the terms to see if I could still make this a win/win for my side of the deal. These days I do not say no as quickly as I would have years ago; I look at the entire deal now, instead of getting caught up with a traditional style of price alone deal structuring.

Janet fixed her price, and so I had to look at monthly payments and the timeline available. By having all the facts I was able to analyze the entire deal, and thus make sure I would still obtain MY bottom line of profitability.  At the time of this particular deal we were in a strong appreciating market – approximately 6-7% per year.  So I figured that at $185,000, with 6%, that would be about $10,000 per year just in appreciation.  I had really hoped to get the property for $175,000. Even with $10,000 in appreciation after the first year, I would only be where I had originally wanted to be in the first place! I did end up buying the house for $185,000, and put $4,000 of improvements into the property (just basic carpet and paint).  I now had $189,000 into the property.  Selling it for anything above $189,000 would be pure profit.

Janet was not in trouble financially but she was motivated to sell!  She had a severe shoulder injury that was preventing her from doing the maintenance around the property. She made great money, and could have hired someone for the maintenance, but decided that with 20 plus surgeries under her belt and more to go, she just wanted some time outside of her large home and yard to deal with.  She didn’t need her money out of the property, but she did ask for $1,000 up front so she could go rent a lake front home in the area.  The $1,000 I gave her for the option fee, plus the $4,000 for improvements, was a total of $5,000 out of my pocket for this home, which is less than 3 percent down. In the scheme of things this is a small amount down for this home.

The Buyer:  Roberta

I knew Janet and I were going to come to terms and do the necessary paperwork on Sunday so I ran an ad on that same Sunday and I got a call from Roberta. I told Roberta that she could drive by the home but that she could not go in yet or on the property, because someone still lived there.  Roberta didn’t even know I didn’t have the deal tied up – I just wanted her to drive by and see if she liked it.

Roberta had poor credit and seven dogs.  Most landlords won’t rent to someone with seven dogs, and most mortgage lenders won’t do a mortgage for someone who has poor credit.  With an inability to get a mortgage she is also unable to work conventionally with a RealtorÒ, so what is she going to do? No one will rent to her, and no one will give her a mortgage.  This puts many people in a situation where they desperately need a solution.  I am trying to help people with this type of situation. They want the American dream, yet they are unable to obtain it any other way.   Lease options give people a second chance to improve their credit while working towards the purchase of the home they desire to own.

If you’re a landlord, all you get up front on any of your rentals is the security deposit, and that is just not enough cash to take on the risk of someone with poor credit and seven dogs.  You can change this scenario by converting these people from tenants to tenant-buyers.  Then, the risk that once was on you is shifted to the tenant-buyer – where you truly want it.  With Roberta putting a lot of money down (option fees are not refundable), she was taking on the risk.

Let’s look at how the deal transpired:

My Out of Pocket costs:

Option Fee to Seller (Janet)-$1,000.00
Improvements-$4,000.00
Option Fee from Tenant Buyer (Roberta)+$10,000.00
Leftover in my pocket+$5,000.00

 

I didn’t even own this home and yet I had $5,000 in my pocket. Roberta is the one risking $10,000 with her option fee, as it is non-refundable. If she doesn’t buy, she’s walking away from a lot of money. She now has a lot of risk on her also with her $10,000 option fee.

Janet asked for $1,100 per month, and I in turn asked Roberta for $1,450 per month.  That way I was able to pay Janet and still have a cash flow of $350 per month which would add to my profitability in the deal. In this case Janet had a lot of equity in the home, and I was able to leverage that equity to get her to accept the lower monthly payment of $1,100.

The option sale price I set for Roberta was $225,000. How did I get that figure? I put a 10 percent option premium on top of the retail price (to be discussed in a later chapter – Determining Profitability of Deals) plus I added an additional 6 to 7 percent appreciation rate at 18 months which was approximately another $20,000, I rounded it up a little to get to $225,000.

Now I understand that you may or may not have appreciation in your market at the time you’re reading this book.  It doesn’t matter if you do or don’t; you account for that in the beginning before you make your offer to purchase.

What was the property actually worth?  Value is always determined on what a buyer is willing to pay.  Roberta later had the house appraised at $267,000. Did I lose $42,000?  I don’t think so. After all, I did make about that much. Was Roberta happy with the appraisal? OF COURSE!  Janet is happy because she got the price she wanted, and Roberta is happy because she’s suddenly has an appraisal that gives her an additional $42,000 in equity that she can utilize if she wants.  Janet won, Roberta won, and I won. I believe this demonstrates what a classic win/win/win deal is all about.

Here’s my profit at closing:  Not bad for not actually owning anything (except for 2 hours) – just controlling it!

 

Front end cash$5,000
Back end sale$31,000
Tax Pro-rations$2,800
Cash flow x 14 months$4,900
Total Profit$43,700*

 

*   It is not exactly $43,700. There are transfer fees in a few states, title insurance fees, and I give my buyers option credits each month when they pay their rent on time. The extra $2,800 on tax pro-rations was given as extra profit to me also (not available in most states – a bonus when both the buyer and the seller paid for property taxes at closing.  Only one person needed to pay for property taxes.  Therefore, the extra $2,800 is given to the investor in the middle of the sandwich lease option deal.
 

Wendy’s Ethics Rule
Don’t do lease options with potential buyers who have no way of ever being able to get a mortgage.  That’s just being greedy and taking advantage of someone.  It is not fair to the buyer.  If the buyer screws up – shame on them!  If you screw them up – shame on you!

 
Financial Freedom – You can get there!

This examples show you how lease options can be very profitable. The previous example is a fairly simple version of the lease option technique, as there are many other creative ideas you can do to make them more profitable and more complex as you choose (covered in chapter 9). Remember, you may need several deals just to lay the groundwork for your future financial freedom.  It doesn’t happen with one deal, and it doesn’t happen overnight.  However, with persistency it truly can happen!

There are several “paydays” using these techniques:

While the option fee is non-refundable, don’t get excited on your first deal by immediately going out and buying that big screen TV you’ve always wanted.  What if something happens down the road in six months?   In owning or controlling real estate there are things that come up that are completely unexpected: broken furnaces, leaking roofs, unpaid rents, etc.  Plan ahead for those things and you will be safe.  If you have held the option funds in reserve, you will be able to cover your expenses.  That’s just good business sense.  Yes, the money is yours to keep, but be wise with it because you may need it.  You might actually want to put it aside entirely for a “rainy investor’s day” so that you will be prepared.  Then after the deal closes, you can take another look at the money because not only will you have that initial option fee, now you’ll have the backend from the closing. As you are getting started in this business or any other business, it is important to be conservative with your cash flow and money. I recommend you keep your spending very tight and conservative.  Also, you may want to be prepared to buy the next property should a good deal be offered up to you.  Unfortunately most of our country does not have good spending habits, and therefore these habits allow people to get into financial trouble.  It is very important to be on a strict budget for this type of business. If this will be hard for you, then you may want to find some outside help to get you on a system, which can enable you to get this set up.   I cannot stress enough; it can be a make or break for people!

Let’s say you made $30,000 overall on the deal.  Here’s one positive way to use that money:

Reinvest.   Reinvestment will continue to bring income, but you will also want to pyramid your income. For example: if your first property made $30,000 overall and you received $5,000 in an up front option fee, now you’re going to want to look for 2-3 new properties, probably with the same profit ranges. You’ll need money up front to pay your option fee to the seller, even though you will reimburse yourself later with the option fees from the buyer. Also, the properties may need repairs that will also need to come out of your pocket up front, so you need to have the funds available from the previous sale. During this time you will probably still be keeping your day job just to keep enough cash flowing in while you are building your new business.  Reinvesting also doesn’t just mean pouring money into new properties.  It can also mean purchasing new office equipment, software or anything else you need to continue to build your business.  Maybe it’s time you trashed that clunker computer and got one that was made in the 21st century, install a 2nd phone line or get bookkeeping software.  I cannot stress enough: be prepared for your future!

At this time my average deal is $40,000 in profit for a sandwich lease option. Lease options typically turn over every 18-24 months.  Depending on what part of the country you reside in the profit range will vary from $20,000 – $120,000 (Midwest to Northern California).  You decide how much you need to make, and then you will know how many homes you need to lease option. Not only can lease options set you up to live today, but they can set you up for Future Financial Freedom and retirement.   Just sit back and
 

Wendy’s Ethics Rule
Don’t do lease purchases if you don’t intend to follow through on the transaction.  Do what you say you will do and when you say you will do it.  Help keep real estate investing an honest profession.

imagine…how would it feel to be completely debt free? Real estate is the vehicle that can allow you to achieve just that.

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