Seller Financing & Owner Financing - Amir Ben Bassat - Entrepreneur of the Week - Post 4

Seller Financing & Owner Financing - Amir Ben Bassat - Entrepreneur of the Week - Post 3

Same Thing…

As I wrote in a post yesterday, we are working with 2 very different but very similar methods.
The main point that differentiates between a finance transaction and a lease option transaction is the sale transaction.
That is, while in a finance transaction a sale is performed, in Bliss the put option is a side effect of completing the transaction.

Contract For Deed (CFD) / Land Contract

Describe the legal instrument used to make such a sale. Varies from state to state, in Ohio we work with CFDs.

So, how does it work?

We as owners of the house get into the shoes of the bank!

Anyone who has not seen The Banker a must-see movie!

We sell the property to a buyer who for various reasons can not / does not want to take a mortgage from the bank. We set a selling price, interest rate and a period for the payment schedule (amortization). At the time of signing we will receive a downpayment down payment and throughout the period we have defined we will receive regular payments. It is important to emphasize these are not rent payments and these are payments consisting of principal plus interest.

Why should we do that?

Two reasons

The first…

Easy… to make more money! 🤑

The second reason is that we have a “garbage house” and there is no bank that will agree to finance it or approve our buyers financing in the future. Therefore, we will not be able to make a lease option.

Remember? A house is suitable for a leased option only if both conditions are met. Both buyers who want to buy and a bank that will agree to finance.

Similar to the Lease Option deal once we have made the tenant a landlord, we enjoy the same change of position and all the benefits I talked about in the previous post (I am lazy who does not remember, please return to post 3).

Unlike Melis Option, in a finance transaction the buyer will be responsible for all payments! Including insurance and taxes.
Of course if the bank is not willing to give a mortgage to the tenant there is probably a reason, so we will have to price that reason both in the sale price of the house and in the percentage of interest on the loan.

How much interest? As much as possible… Everything is negotiable.

Benefits for sale in finance for a tenant:

1. Sale at a price higher than the market price by tens of percent!

To all those investors who sold them deals in 40K who thought they had made the deal of their lives until they realized it just did not work.
For all those investors who bought houses at 80K and realized that the house is only worth 40K (it hurts but there are so many of these).
A sale on finance can be a great strategic exit from the bar, and it is a tool I really like to use in situations like this.

Sale of a house even if it is not in good condition! In such deals the house does not have to be sweetened, no problem if there is an old kitchen or dirty carpets, in advance we are dealing with a population with lower standards, and what we are selling here is an opportunity and not a dream house .

3. Management and control! Anyone who has worked in low-income areas knows that getting paid on time, if at all, is a privilege that should be appreciated. A sale on Finance produces us much more control and a significantly higher return. The tenant knows that if he pays on time throughout the period, eventually the house will be his and he usually treats us and the house accordingly.

4. Tax benefit! If there is to be a capital gains tax on the difference between the purchase price and the sale price, the tax payment will be distributed according to the loan period, and in offsetting expenses and depreciation a professional accountant will be able to write off the tax liability.

5. Sophisticated exit strategy! The same mortgage we created with the tenant (Note) has buyers. If we do it right we can sell the debt itself to another investor and get out of the deal with cash. (A complex area that needs to be known in advance)

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Rent To Own / Lease Option - Amir Ben Bassat - Entrepreneur of the Week - Post 3

Rent To Own / Lease Option - Amir Ben Bassat - Entrepreneur of the Week - Post 3

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 will combine this together with the fact that he is also responsible for the maintenance expenses and we got a tenant with much less collection problems 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.

Continue reading on our site…


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You can contact us on the site - we have more then 10,000 articles in 12 languages:

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Phone: 978-600-8229