1. What
is a Lease Purchase agreement? |
|
A Lease Purchase Agreement is essentially another name for
a Lease Option Agreement. It is a purchasing technique. A lease purchase contract combines a basic lease
contract with an option-to-purchase contract.
In other words it is a lease
for a fixed period of time with an option to purchase the property
on a future date. The price of the property is usually agreed upon
at the inception of the agreement. With a Lease with Option to
Purchase, the tenant has the right, but not the obligation, to
purchase the property.
This Lease Purchase Contract should be divided
into two separate agreements; a Lease
agreement and an Option agreement. Many items have to addressed,
such as disposition of deposits if the option is executed, and
disposition of deposits if the Option is NOT executed.
When a renter signs a lease with an option to
purchase that property for a specific price within a certain time
frame, that is called a lease purchase. The renter is called a
tenant buyer. In most lease-purchase situations, a portion of the
rent is applied to a future down payment.
Lease purchases are most popular among buyers
who don't have enough funds for a down payment and closing costs.
The tenant/buyer pays to the landlord/seller a
non-refundable option deposit that is applied to the purchase
price of the home. The tenant/buyer then pays to the
landlord/seller a sum that is typical to the rental amount usually
on a monthly basis. A portion of that monthly payment is then
applied to the purchase price of the home.
During, or at the end of the lease period, the
tenant/buyer has exclusive right to buy the home under the terms
to which both parties have previously agreed.
In other words, Lease +
Option to Purchase = Lease Purchase
A Lease Purchase contract combines a basic
lease contract with an option to purchase contract. It is one of
the most powerful ways to sell a home.
The tenant/buyer pays to the landlord/seller a
nonrefundable option deposit that is applied to the purchase price
of the home. The tenant/buyer then pays to the landlord/seller
rent to compensate the landlord/seller for the tenant/buyer's use
of the property.
Rent payments are usually made on a monthly
basis. A portion of that monthly payment is often applied to the
purchase price and/or the down payment of the home.
During the term of the lease, but before the
option expires, the tenant/buyer has the exclusive right to buy the
home under the terms to which both parties have previously agreed.
Back to Top
2. Is
Lease Purchasing legal? |
|
Lease Purchasing is legal in all 50 United
States, Canada, Australia, the UK and any other country which has
a free-market economy where lease agreements and option agreements
are legal.
Back to Top
3.
How Does a Lease Purchase Work?
|
You move into a home that you will lease until you
are ready to qualify for a loan to purchase it.
The Option Deposit and rent credits will apply
towards the cost of the home which can be applied towards
closing costs or down payment.
Back to Top
|
4.
How Do I Qualify For a Lease Purchase Home? |
One
of the main qualifications is a sincere DESIRE to own
your own home.
A standard rental application is filled out and
reviewed.
You may also want to discuss this commitment
with a mortgage advisor to get a clear plan on what it
will take to position yourself for a mortgage at the
end of the lease term. This may entail correcting
credit issues, pay off bills, save for down payment,
etc...
Back to Top |
|
|
5. Why should I use a Lease Purchase Contract? |
|
Generally speaking, the Lease Purchase contract
is the quickest, easiest and least expensive way to buy, sell or
invest in real estate.
It replaces the typical adversarial relationship
that usually exists between buyers and sellers with a win-win
method of transferring real estate ownership. As a result, it is
highly sought after by those who know about its powerful features
and benefits.
If you're the buyer you will have minimum cash
out of pocket, credit problems are okay, faster equity growth,
increased buying power, and peace of mind.
If you're the seller, you will have a top sales
price -- even if demand is low, positive cash flow, the largest
market of buyers, minimum risk, no realtor commissions, no
maintenance, no land-lording and a non-refundable option deposit.
Back to Top
6. Will
it work in my area? |
|
Yes, it works well in all markets, both hot and
cold and is perfectly legal in all 50 United States, Canada,
Australia, the UK and any other country which has a free-market
economy where lease agreements and option agreements are legal.
Back to Top
7. What is a Sandwich Lease? |
|
A Sandwich lease is a leasing arrangement in
which an entity leases property from one party and leases that
same property to another party. In this arrangement, the entity is
both a lessee and a lessor, so it both pays and collects rent on
the same property.
Lessee: Is a person or entity, who is also
called a tenant, that leases a property from the Landlord (the
property's owner or the entity that controls the property.)
Lessor: Is the Landlord (who is either the owner
of property or in the case of a Sandwich lease situation is the
tenant lessor) who rents the property to another party called a
tenant or lessee.
More Information on Sandwich Leases Here
Back to Top
8. What
are the disadvantages of the Lease Purchase contract? |
|
There are only a few minor disadvantages.
The first (if you are the landlord/seller) is an
"equitable title" claim by your tenant/buyer. Any good
Lease Purchase course will teach you how to minimize your risk
regarding this claim.
The second (if you are the tenant/buyer) is
protecting your option. What if your landlord/seller disappears,
dies, or decides they don't want to sell? Again, any good Lease
Purchase course will teach you how to protect your option.
The third is the infamous Due-On-Sale Clause.
The Due-On-Sale clause is a non-issue. Here's
why...
There isn't a single lender that is going to enforce their Due-On-Sale rights on a
mortgage that is performing (being paid on time). Why? Because
lenders are in business to make money. If they enforce their DOS
clause, they are essentially taking back possession of a property
in order to sell it, more than likely for a huge loss.
Furthermore, lenders will only enforce their DOS
clause for one reason, the payments are late. And if
the payments are late, the bank is going to foreclose, not enforce
their DOS clause.
The only other reason a lender will enforce
their Due-On-Sale rights is if there is a low interest rate loan
on the property and the current interest rates are significantly
higher.
And remember, as real estate attorney William
Bronchick says "there is no Due-On-Sale jail".
Back to Top
9. How
can I learn the Lease Purchase business? |
|
Unfortunately, you can't learn the Lease
Purchase business in any university. Some people offer boot camps,
seminars and mentoring. They range in price from $1,000 - $25,000.
Therefore, the only way you can learn this business for a
reasonable price is to get yourself a good Lease Purchase Home
Study course.
You won't find these courses in any bookstores
or shopping centers. The only place to get them is on the
internet, by responding to a television infomercial or click
HERE
to contact one of our affiliates that have boot-camps, courses
or mentor on lease purchasing real estate .
Back to Top
10. What are the Features
And Benefits of a Lease Purchase Transaction? |
|
The Lease Purchase contract is the quickest,
easiest and least expensive way to buy, sell or invest in real
estate. It replaces the typical adversarial relationship that
usually exists between buyers and sellers with a win-win method of
transferring real estate ownership. As a result, it is highly
sought after by those who know about its powerful features and
benefits.
Landlord/Seller Benefits
If you don't need much cash up front ($1,000 -
$20,000), the best way to get your full asking price and a higher
than average monthly rent for your home is to sell it on a Lease
Purchase. Since you are offering a huge value and attractive
financing to assist the tenant/buyer, they tend to be willing to
pay a higher sales price and higher than average rent.
Tenant/buyers can easily understand the concept of trading price
for time and value.
When you Lease Purchase your home, you receive a
non-refundable option deposit. This amount can be as much (or as
little) as you wish. You will receive a majority of your profits
at closing when, and if, the tenant/buyer exercises their option
to buy. You also win if the tenant/buyer defaults or allows the
option to expire since option deposit is non-refundable. You can
begin the whole process over again by collecting another option
deposit from another tenant/buyer.
The earnings potential for the landlord/seller
is tremendous since a well-negotiated deal will reap profits at
every stage of the game.
Here are some features and benefits for the
landlord/seller:
- Top Sales Price, Even if Demand is
Low for Your Home: You attract more buyers who are
willing to pay a premium because of the exclusive
financing terms and value you're offering.
- Higher than Usual Rent: Since
you are flexible on your financing terms and are
offering a tremendous value, you can demand a higher
than usual rent.
- Positive Cash Flow: Since you
can demand a higher than usual rent, your positive
cash flow will increase.
- Non-Refundable Option
Consideration Up Front/Minimum Risk: When a
tenant/buyer executes (signs) a Lease Purchase
contract, you receive an non-refundable option deposit
that is yours to keep should they default or decide
not to buy.
- No Realtor Commissions: Since
you are selling your home by owner, you will avoid
paying a 6-10% realtor commission which can add up to
thousands of dollars. You will also save on
advertising costs because your home will be sold more
quickly.
- Attraction of the Highest Quality
Tenants: Because you are renting to tenants who
have a vested interest in your home, they think like
homeowners and tend to take good care of it.
- No Maintenance, No Land-lording:
Tenants who have a vested interest and believe they
are a homeowner may feel a "pride of
ownership" that encourages them to pay on time,
perform maintenance and make improvements to your
home
- Tax Shelter is Maintained:
Because you remain on the deed until the option is
exercised, you maintain all of the tax benefits of
ownership.
- Larger Market of Buyers: You
are marketing your home not only to traditional
buyers, but also to renters and investors. These three
groups make up over 85% of people seeking to buy real
estate.
- No Long Vacancies: When you
advertise your home as a Lease Purchase your phone
will literally ring off the hook. Typical turnover
time is days or weeks instead of months or years.
- Peace of Mind: It is safer
than conventional rentals because of the quality of
the tenants and their vested interest in your home. It
also means that someone is living on-site who will
watch and guard your home against fire, theft,
vandalism, etc.
|
Tenant/Buyer Benefits
If you are in the market to buy a home, you are
probably aware of the advantages home ownership provides (tax
shelter, appreciation, security, etc). If you are actively seeking
homes for sale on a Lease Purchase agreement, you either
- cannot purchase a home through conventional
means,
- are not ready to make a commitment,
- are a real estate investor,
- are very smart or
- a combination of the above.
The Lease Purchase contract provides you with
many features and benefits, but perhaps the most powerful one is
the rate at which you accumulate equity. Compare any lender's loan
amortization schedule to that of a Lease Purchase contract and
you'll quickly see that the Lease Purchase contract wins
hands-down -- every time. Moreover, the buying power of a
Lease Purchase contract can quickly and easily land you a home
that you would never qualify for the conventional way.
Here are some features and benefits for the
tenant/buyer:
- Faster Equity Growth: Equity
accumulates much faster (five times or more!) than
with conventional financing through a bank or lender
(See APPENDIX B - Equity Charts).
- Rent Money is Working Toward the
Purchase of the Home: Every month a portion of
your rent payment (typically $100-$500, depending on
the home) is credited towards your down payment or off
of the sales price (See APPENDIX B - Equity Charts).
- Option Consideration is Credited
Towards the Purchase of the Home: When you sign a
Lease Purchase contract, you will pay the seller an
option deposit. This money is your vested interest in
the home and will be fully (100%) credited to you when
you buy the home.
- Minimum Cash Out of Pocket:
When you purchase a home conventionally, you must pay
at least 5% down plus closing costs and prepaids. When
you buy with a Lease Purchase, you only pay first
month's rent and a small option deposit. This will
save you between 25% and 85% every time you buy a
home.
- Frequently No Down Payment at
Closing: Since you have given the seller an option
deposit and you have been receiving monthly rent
credits, there will frequently be very little or
nothing left to pay for a down payment at closing.
- Profits from Appreciation:
Since the sales price is locked in before closing (as
specified in your agreement), any increase in property
value will mean that your equity (what you owe minus
what it's worth) is increasing in the home .
- Possible Assignment (Sale) of
Contract for a Profit: If you are allowed to
assign your option (it will be in your agreement), you
may assign it (sell it) to a third party for a profit.
- Increased Buying Power: When
you buy a Lease Purchase home, you can put down as
little as first month's rent and a $1 option deposit.
Compare
that to a typical bank or lender who requires 5-20%
down plus closing costs and pre-paids.
- Credit Problems are Okay:
Qualification restrictions simply do not exist. You
will be approved at the sole discretion of the seller.
- No Lengthy Escrows or Mortgage
Approvals: Your approval will be based solely at
the discretion of the seller instead of a lender who
can take up to a month (or longer) to render a
decision.
- Control of the Home: You will
be put in full legal control of the home for a
specified period of time without actually having to
own it.
- No Taxes, Less Liability:
Since you do not own the home (yet), you will not have
to pay property taxes and your liability exposure will
be dramatically reduced.
- Quick Move In Time: You can
typically take possession of the home in less than one
week instead of conventional move in times of one to
three months after your offer was accepted.
- Maximum Leverage: You are
spending very little (or no) money to control a very
expensive, and very profitable, piece of real estate.
- Time: Before you actually buy
the home, you will have 6-24 months (depending on your
agreement) to repair your credit, find the best
interest rates, investigate the home and research the
neighborhood and/or schools.
- Minimal Maintenance: Large
maintenance problems or any maintenance problems that
exceed a certain amount of money are delegated to the
seller.
- Privacy: Your name will not be
on the deed until you exercise your option to buy.
- Peace of Mind: You will have
full control of the home and can maintain it or
improve it however you wish.
|
Investor Benefits
As an investor, you are probably aware of the
principles of leverage (the use of borrowed funds to improve one's
capacity and to increase the rate of return on an investment).
With the Lease Purchase contract, you can buy (control) properties
for literally no money down without using a lender or going
through the loan application process.
Additionally, the Lease
Purchase contract is so quick and easy to use, you can
significantly increase your productivity and, as a result, your
cash flow. You will receive the same features and benefits as the
landlord/seller or the tenant/buyer, depending on which role you
take in the transaction.
Realtor Benefits
As a realtor, you would be wise to add the Lease
Purchase contract to your toolbox of income producing techniques.
Imagine opening your doors to a world of buyers and sellers that
nobody else in your office has even considered. In fact, every
buyer and seller you meet is a potential Lease Purchase candidate.
This can provide a special market niche for you. And having a
special niche is what separates the top producers from the
mediocre ones.
Never lose another deal because your seller is
overpriced or because your buyer can't get financing. A Lease
Purchase requires half the work of selling a home the conventional
way so you will be much more productive (and wealthy).
Furthermore, some of the most successful professionals in the
world, including insurance agents, movie stars, musicians and
authors benefit from a little-known financial secret about the
best kind of income you can earn; residual income.
What do they
know that you don't? Simply put, they know that residual income
provides for a steady cash flow that is paid at a date after
your work has been completed. Imagine the income you'll receive
from lining up one or two quick and easy deals every month for the
next twelve months.
Or instead of waiting one or two years for the
options to mature, you could:
- Consult with people on an hourly
basis?
- Pay a referral fee to someone for
lining up these opportunities for you?
- Charge an up front fee for your
services instead of waiting for the residual income?
|
The possibilities are endless.
More important, you are in a position to make
the Lease Purchase option known to a select group of potential
clients who would not qualify in any other way to purchase. They
will remember the opportunity you gave them. At minimum, you have
a fiduciary responsibility to determine whether a Lease Purchase
agreement could help them solve their real estate problems. It may
be exactly what they need.
Back to Top
11. What
is the Due-On-Sale clause? |
|
It is a clause in a mortgage agreement providing
that, if the mortgagor (the borrower) sells, transfers, or, in
some instances, encumbers the property, the mortgagee (the lender)
has the right to demand the outstanding balance in full. It is a
contractual right, not a law.
Banks began inserting Due-On-Sale clauses in
their mortgages in the '70s when interest rates rose dramatically.
Home buyers were assuming existing loans rather than borrowing new
money from banks because the interest rates on existing loans were
lower. The banks used the Due-On-Sale as a way to kill their own
worst competition.
The homeowners fought the banks in court
claiming that the enforcement of the Due-On-Sale was "unfair
trade practice." The consumers won, but the banks lobbied
Congress to pass a federal law which would supercede the courts.
The banks ultimately won and the "Garn-St. Germain Federal
Depositary Institutions Act" was passed.
The Garn law gives the banks the right to
enforce the due-on-sale, but it also carves a few exceptions in
which the lender may not enforce it. One of those exceptions is
that a homeowner may transfer title to a living trust for his own
benefit.
The Due-On-Sale clause is a non-issue. Here's
why...
There isn't a single lender on the face of the
earth that is going to enforce their Due-On-Sale rights on a
mortgage that is performing (being paid on time). Why? Because
lenders are in business to make money. If they enforce their DOS
clause, they are essentially taking back possession of a property
in order to sell it, more than likely for a huge loss.
Furthermore, lenders will only enforce their DOS
clause for one reason, the payments are late. And guess what? If
the payments are late, the bank is going to foreclose, not enforce
their DOS clause.
And remember, there is no Due-On-Sale jail.
Back to Top
12. The
difference between a Lease Purchase and a Lease
Option? |
|
In general there is absolutely no difference
between a Lease Purchase and a Lease Option.
When an experienced real estate professional
talks about a Lease Purchase or a Lease Option agreement, they are
usually talking about an arrangement that contains both a lease
contract and an option to purchase contract. By definition, this
is really a Lease Purchase (or Lease Option, depending on your
perspective). Thus...
Lease + Option to Purchase = Lease Option AND
Lease Purchase
The only time they are different is when the
Lease Purchase Agreement has a clause that states that the tenant
buyer is obligated to purchase the property during the lease
period or at the end of the lease.
Back to Top
13. How
much money do I need to start my Lease Purchase
business? |
|
Technically, one dollar will get you started.
Most experienced Lease Purchase investors make a healthy upfront
profit on every deal they do, therefore, you probably won't need
any money to get started. However, if you're a beginner and you
don't have any collateral for the option deposit, it would be to
your benefit to have $500 - $2,000 in the bank. This money can be
used for your option deposit, to cover late payments from your
tenant/buyer or unexpected maintenance.
Back to Top
14. How
much should I charge for rent each month? |
|
You can charge whatever you like. I suggest
determining what similar properties in your neighborhood rent for,
then I would add a little (maybe $50 - $300) to your figure. Since
you are offering the best financing terms anywhere, you have the
right to demand a premium rental payment for your property.
Back to Top
15. How
much should I charge for the option deposit? |
|
You can charge whatever you like. I try to get
as much as I can to ensure that my tenant/buyers are actually
going to follow through and buy my house. A typical tenant/buyer
will not walk away from anything more than $3,000 to $5,000, and
if they do walk away, you simply keep their option deposit and
find someone else who has a large option deposit.
Back to Top
16. How
much should I give for the monthly rent credit? |
|
You can give whatever amount you like. I tend to
give 25% to 50% of the monthly rent. However,
I
live in San Diego, California where the cost of an entry
level single family home is at least $350,000 and
therefore it is quite easy to increase the purchase price of the
home to cover the higher rent credit.
Let's do a quick example of how monthly rent
credit works...
If you have a tenant/buyer who has contracted
with you to Lease Purchase your home for 12 months, you could give
them a $500 per month rent credit. At the end of the 12 month
period (the option period), they will have a $6,000 credit which
they can use to either (1) reduce their closing costs or (2)
reduce the sales price.
If you would like to raise your rent credit to
make your property a little more marketable, simply raise your
sales price accordingly. For example, if you would like to give a
$800 per month rent credit, simply raise your sales price by
$9,600 ($800 increase x 12 months = $9,600).
Back to Top
17. How
do I protect my option if I am the tenant/buyer? |
|
There are several ways to protect your option.
First, you can record it in the public real estate records
(usually done at the county courthouse). Second, you can create an
escrow up front in which a title company or attorney holds the
executed deed. Third, you can record a mortgage to secure the
performance of the option agreement. (Called a Performance Trust
Deed in California) A good Lease Purchase course will explain
these in greater detail.
Back to Top
18. What
is the best way to advertise a Lease Purchase
home? |
|
Let me share with you my simple recipe for
successful Lease Purchase marketing. Mix three parts local
classified advertising with one part signs in the yard, one part
flyers at local retail outlets and one part postcards to real
estate professionals and you've got a winner. With any luck,
you'll have your home sold within two weeks!
In San Diego there is a "Rent to Own"
heading in the Classified section of the San Diego Union
newspaper. 90% of the time, if I place an ad in the Rent to Own
section of the Sunday classifieds, by the following Wednesday I
will have a signed lease purchase agreement with a qualified
tenant buyer.
Back to Top
19. Why
aren't realtors receptive to the Lease Purchase
contract? |
|
Realtors who are uneducated on the subject
believe they won't receive a commission if they list a home for
sale by Lease Purchase. The truth is, they will indeed receive a
commission, but it will be delayed until the deal actually closes
6-24 months down the road.
Otherwise, most realtors are starting to catch
on. Some states even offer Lease Purchasing as a course for
continuing education credits.
Back to Top
20. Where
can I get a credit report for my tenant/buyer? |
|
Getting a Credit Report is extremely important.
Order the Credit Report that lists if the tenant has ever been
evicted. If the credit report shows the potential tenant buyer has
IRS tax liens, I pass with that prospect. The best place to get a
credit report for your tenant/buyer is through a local loan
officer. Tell this individual that you're an investor and that
you'll be sending them business. They will be delighted to help
you and probably offer to give you credit reports for free.
Alternatively, you can do a search on the
internet for "credit report service." You'll probably
come up with a half-dozen companies that charge between $15-$30
for this service.
Back to Top
21.
Should I incorporate my Lease Purchase business? |
|
Incorporating will provide you with some solid
protection for your personal assets in the event you are sued. If
you're just starting out, I recommend holding off on this until
you get a deal or two under your belt. Once you've decided that
you like the business and you're going to continue on with it,
then consider incorporating.
Back to Top
22. Who
carries the insurance on a Lease Purchase home? |
|
The insurance on the home is carried by the
owner of the home (you cannot insure something you don't own, this
is called "insurable interest").
The insurance on the contents of the home will
be carried by whomever owns the personal property inside, usually
the tenant/buyer. This is typically called renter's insurance.
If you are the middle-man in the deal (you're
the landlord/seller, then you sub-Lease Purchase to a
tenant/buyer), you might want to get yourself a general business
liability policy to protect yourself from any liability claims.
For additional liability protection information (click
here)
Back to Top
23. Who
pays the taxes on a Lease Purchase home? |
|
The person whose name is on the deed pays the
taxes.
|