# Entrepreneur of the Week # Post 3 Rent To Own / Lease Option So following the depressing post from yesterday, I…

# Initiated week
# Post 3

Rent To Own / Lease Option

So following on from the depressing post from yesterday, I'm going to reveal to you two methods that gave me a solution to all the same problems we mentioned. Two methods that help to get the sting out of the deal, are similar but very different and are suitable for different types of assets in different situations.

In this post we will talk about the first method rent to own / lease option, a different name that describes the same transaction.

Let's start…

What exactly is a Lease Option?

The Lease Option transaction, as it is called, consists of a Lease (lease contract) and an Option (purchase option contract). In exchange for the option fee we will receive on the day of signing, the landlord will give the tenant / buyer a limited and predetermined period to buy the house at a fixed price in advance. Throughout the period the tenant will be a regular tenant for everything until he manages to get a mortgage and realize the deal.

One of the critical points in the transaction and the only significant difference in tenant rights between a lease option transaction and a regular rental, is the question of maintenance. In a regular lease, all maintenance expenses fall on the landlord, however, in a lease option transaction all current maintenance expenses (up to a certain limit) are the responsibility of the tenant. That is, if there is a blockage in the toilet or a leaking kitchen sink, the tenant will have to call the plumber at his own expense. If there is a leaking roof that needs replacement the responsibility is still our homeowners.

How does Lis Option give us a solution?

I like to compare this to the difference between a rental car and a leasing car. Anyone who has rented a car knows exactly how it behaves (poor car), however when you get a leasing car, when you are responsible for its maintenance and you have an aspiration to buy it at the end of the period, chances are we will treat the car differently as if it were already ours.

Now think about it…

We have a tenant who put us a few thousand dollars on the day of signing in exchange for the right to purchase the house during the period. If the tenant does not pay on time, he will lose the option fee, so he has an interest in being a "good boy" and meeting payments like clockwork. We combined this along with the fact that he is also responsible for maintenance expenses and we got a tenant with much less collection issues and no maintenance calls. ????

Now if we have such a tenant, who does not have to chase after him and who does not call about maintenance problems, why do we even need a management company? ????

If things work out right, all that is left is to make sure water company payments (as needed), pay taxes online twice a year and submit monthly bank account statements to the CPA at the end of the year.

Is it worth paying so much money to a management company if that's all the work there is?

Very subjective but usually not…

What happens if it does not work properly and there is a problem with the tenant?

It is important to emphasize that the lease option deal is not a promise of return or quiet and here too problems may arise with tenants.
You may still encounter collection issues, evictions, damages, and any issues that may arise similar to renting to a regular tenant.
Our whole goal is to improve profitability and lower the chance of falling for a wayward tenant who without much effort will obliterate our entire year’s return.

So how do you deal with problems?

Simple… Pay as needed…

A tenant stopped paying and cooperating?
We will pay a lawyer / property manager who will do an avication for us
Need to prepare the property for rent again?
It will not be very complicated to bring someone to refresh the house for a fee.

Bottom line in most cases I and investors I work with completely give up on the services of the management company.

Sabba and everything, how do you make money out of it ?????

Three main profit centers in lease option transactions

1. The option fee is NONREFUNDABLE. The amount of the payment varies depending on the price of the property and your ability to negotiate.

2. We saved 10% management fees, we saved another 10% on average on maintenance expenses, which means we saved 20% of the gross! Everyone is welcome to check how much 20% of the gross is worth to him net.
Usually reach a 50% improvement in profit at the end of the year!
Were you supposed to earn 8% on the regular rental deal?
Congratulations!
The deal now produces 11% -12% net.

3. The icing on the cake - the sale stage
Unlike a regular sale in the market, in this case we already have the buyer in hand which means that Hocus Focus we saved 6% brokerage.
If we wanted to sell the house and get a top dollar for it we probably would have had to invest quite a bit of money in the house in the renovation to bring it to the level required for sale to a landlord. Savings of many thousands of dollars.
Anyone who has sold a home in the US knows that in many areas it is common to ask for seller concessions. The price of the house is already fixed and we have no obligation to make discounts to the buyer.
On average at this stage we will save about 10% -15% on the sale expenses - for a house of 100K we saved 10K-15K or in other words a profit of two years from rentals.

So after I ate your head….

An example will be populated for the Lease Option transaction

A house of an investor that I really like (the name is kept in the system) in the city of South Euclid, the house has not worked for a long time, a rebellious management company that made a lot of problems, a tenant who smelled blood and did not pay rent for many months, a lot of damage. Failing to make the property work.

Start working!
First stage, preparation of the property for rent, mainly cosmetic renovation in the kitchen and bathroom, a new heating system and a garage door that was replaced after it almost fell on one of the employees (what happens if it falls on a tenant?).

Step Two, Marketing Marketing Marketing!
The most challenging part, but if there is a good house in a good area, everything becomes easier.
Prices of similar houses in the area will be around K110-K120~ with a rent of 1250-1350 per month.
We were able to bring in a tenant, a registered nurse who works at the Cleveland Clinic (like most of our tenants). The tenant deposited $ 6500 option fee plus the first month of rent at the time of signing the contract.
We closed on an option contract for a total of $ 139,000! For a period of 18 months and a payment of $ 1350!

Now that we are Israelis, we are always looking for the catch, all this good can not make sense.

So after nearly two years of researching the field I was able to find one drawback in the whole method.

It is not possible to sell the house during the option period!

This is not entirely accurate, I have had cases where I sold a lease option deal between investors but everything was transparent, all parties today are aware of the owner's debts and have pledged to honor the old agreements. Still, if you have plans to sell the property in the next two years, this is probably not the deal for you. On the other hand, if you do not mind waiting and getting a lot more money than you are supposed to if the tenant succeeds in realizing the deal, in my opinion this is the deal for you!

Some answers to frequently asked questions

Any house suitable?
Any home that people will be happy to buy and a bank will agree to finance will fit. If the house is not in good condition, it will probably not meet the two criteria I mentioned.

Is It Possible To Take Out A Home Mortgage Loan?
Yes, if done right.

I do not want to sell, I plan to hold the assets for many more years and do not sell assets as an ideology!
Excellent, if I were to offer you today 30% more than the market value of the house in cash? Would you accept the offer to buy a similar house and be left with a surplus? If the answer is no, the deal will probably not suit you.

Why should I let someone the bank refuses to give me a mortgage to live in my house?
There are so many people who are not eligible for a mortgage for various reasons, the main one being low credit score.
Anyone who knows how the method works knows that it is easy to degrade the score but correcting it takes time.
In most cases these same tenants earn high salaries but mistakes made in the past make it difficult for them to get a mortgage right now, all they need is a little boost and guidance.
Don't get me wrong, 95% -98% of the referrals I get for every home I market are from people who not only do not qualify for the Lease option, nor would I rent the home to them on a regular basis. My job is to know how to filter those tenants to bring in a good tenant with high fulfillment potential.

Why would the tenant agree to this?
The million dollar question

Let's start from the end, you need to know how to sell a lease option!
It is important to understand that we are in many cases the only ones who offer the same buyer an option and horizon for the purchase of a home.
He can enter it today, enjoy "today's market price" but buy it in the future. If there is an increase in value, he made a profit (usually an increase in value in the sale price).
As we mentioned, it could be that part of the NIS goes in favor of the purchase and then he does not "throw money in the trash".
Is this the best economic decision he can make?
probably not…
I am not here to teach classes in financial education and beyond that I always argue that it is not cheap to be poor (both financially and in education).

Who is responsible for tax / insurance payments?
Landlord. The house has not yet been sold and all of these obligations still apply to us similar to a regular rental.

Does part of the rent go at the time of the sale in favor of the tenant?
Depending on what is defined in the contract as part of the negotiation, a point that can be problematic and therefore it is advisable to consult someone who understands the issue.

Is the option fee refundable to the tenant?
The option fee does not return to the tenant under any circumstances. If the tenant decides to exercise the option, the option fee will be deducted in his favor at the sale.

Is there a registration or transfer of ownership in the registry?
No, in Lease Option transactions there is no sale operation. The sale is a side effect of the deal

Is it possible to cancel the deal?
No! Like any signed deal, there is a contract that requires both parties to abide by it.

If there are any more questions feel free to comment.

Link to the original post in the United States Real Estate Forum on Facebook - Works on a desktop computer (To view the post must be members approved for the forum)

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