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The Basics.
General definition
Simply stated, a Lease Option/Purchase contract combines a basic lease contract with an option to purchase contract, which creates a Lease Option/Purchase contract.
Before we describe what a Lease Option/Purchase contract is in detail, we must first define a few simple basics for you.
What is a contract?
A contract is an agreement between two or more persons (individuals, businesses, organizations, or government agencies) to do, or to refrain from doing, a particular thing in exchange for something of value.
What are the key elements to a binding real estate contract?
- Offer and acceptance: Original signatures with no alterations to the contract. If the original offer is marked up and initialed by the party receiving it, then signed, this is not an offer and acceptance but a counter-offer. Any final agreement should be reduced to a final writing and signed by both parties.
- Consideration: A bargained for exchange of something of value. Money is the most common form of consideration, but a promise to perform (i.e. a promise to pay) is also satisfactory.
- In writing: A real estate contract must be in writing and it must:
- Identify the parties: The full name of the parties must be on the contract.
- Identify the property: At least the address, but preferably the legal description must be on the contract.
- Purchase price: The amount of the sales price or a reasonably ascertainable figure (an appraisal to be completed at a future date) must be on the contract.
- Signatures: A real estate contract must be signed to be enforceable.
- Legal purpose: The contract is void if it calls for illegal action.
- Competent parties: Minors and mentally impaired cannot enter into a contract.
- Meeting of the minds: Each side must be clear as to the essential details, rights, and obligations of the contract.
What is a Lease contract?
A lease contract is an agreement, usually written, between the owner of a property and a renter who desires to have temporary possession of the property. As a minimum, the agreement identifies the parties, the property, all consideration, the term of the rental and the amount of rent for the term.
In addition to the basics of a rental (who, what, where, when, how much), a housing rental may go into much more detail on these and other issues.
What is an Option contract?
An option contract is defined as "a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer."
Or, quite simply, an option contract is a type of contract that protects the individual making the offer (the offeree) from a seller's (the offeror) ability to revoke the contract.
What is a Lease Purchase Contract?
Again, it's very easy. A Lease Purchase contract combines a basic lease contract with an option to purchase contract.
The tenant/buyer pays to the landlord/seller a nonrefundable option deposit that is applied, at closing, 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 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 exclusive right to buy the home under the terms to which both parties have previously agreed.
Features & Benefits: Why you should consider a Lease Option/Purchase
Features & Benefits
Without a doubt, the Lease Option/Purchase contract is the quickest, easiest and least expensive way to buy, sell and 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 prized by those who know about its powerful features and benefits.
Specifically (if you're the buyer), you will have minimum cash out of pocket, credit problems are okay, faster equity growth, increased buying power, time to kick the tires and peace of mind.
Specifically (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 maintenance, no land lording and (my favorite) a non-refundable option deposit.
Landlord/Seller Features & Benefits
If you don't need much cash up front ($5,000 - $20,000), the best way to get your full asking price and a higher than average monthly rent for your home is to offer it for sale on a Lease Option/Purchase. Since you're 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 Option/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 the option deposit is non-refundable. You can begin the whole process over again by collecting another option deposit from a different 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: 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 money: When a tenant/buyer executes (signs) a Lease Option/ Purchase contract, you receive a non-refundable option deposit that is yours to keep should they default or decide not to buy.
- Highest quality tenants, minimum risk: 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 headaches: Tenants who have a vested interest and believe they are a homeowner feel a "pride of ownership" that encourages them to pay on time, perform routine maintenance and make improvements to your home.
- Tax shelter is held intact: Because you remain on the deed until the option is exercised, you maintain all of the tax benefits of ownership.
- Largest 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 95% of people whom buy real estate.
- No vacancies: When we advertise your home as a Lease Option/Purchase our phone will literally ring off the hook. Typical turnover time is days or weeks instead of months or even 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.
- Management Company: Most people don't know how to be a landlord. Our company will collect rents, draw up agreements and re-rent, if necessary, for a small fee.
Tenant/Buyer Features & 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 Option/Purchase agreement, you are either (1) a very smart renter, (2) a very smart real estate investor, (3) not ready to make a commitment, (4) cannot yet purchase a home through conventional means or (5) any combination of the aforementioned.
The Lease Option/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 Option/Purchase contract and you'll quickly see that the Lease Option/Purchase contract wins hands-down -- every time. Moreover, the buying power of a Lease Option/Purchase contract can quickly and easily land you a home that you could only dream of buying 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.
- Rent money is working towards purchase: Every month a portion of your rental payment (typically 10-50%) is credited towards your down payment or off of the sales price.
- Option money is credited towards purchase: When you sign a Lease Option/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 the conventional way, you typically must pay at least 5% down plus closing costs and prepaid fees. When you buy with a Lease Option/Purchase, you only pay first month's rent and a non refundable deposit. This will save you between 25% and 85% every time you buy a home.
- Frequently no down payment at close: 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 sale for a profit: If you are allowed to sell (assign) your option (it will be in your agreement), you may sell it to a third party for a profit.
- Credit problems okay: Qualification restrictions simply do not exist. You will be approved at the sole discretion of the landlord/seller.
- No lengthy escrows or mortgage approvals: Your approval will be based solely at the discretion of the landlord/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 a week or less, instead of conventional move in times of one to three months, after your offer was accepted.
- Maximum leverage: You are spending very little money to control a potentially very expensive, and very profitable, piece of real estate.
- Time: Before you actually buy the home, you will have 3-24 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 can be delegated to the landlord/seller. Agreements can vary.
- Privacy: Your name will not be on the deed or in the public records until you exercise your option to buy.
- Peace of mind: You will have full control of the home and can maintain or improve it however you wish. Major changes sometimes need approval from the seller.
Investor Features & Benefits
As an investor, you will receive the exact same features and benefits as the landlord/seller or the tenant/buyer, depending on which role you take in the transaction.
Furthermore, as an investor you're probably aware of the principles of leverage (the use of borrowed funds to improve ones capacity and to increase the rate of return on an investment). With the Lease Option/Purchase contract, you can buy (control) properties for literally no money down without using a lender or going through a lengthy loan approval process.
Sell your home for top dollar in 30 days
We are frequently asked, "Is there anything you can do to help me sell my home? It's been on the market for a long time and there just isn't any interest in it." Our answer to that question is a resounding YES! But only if you can be ready to move fast and would like to sell it for your full asking price (their eyes light up with excitement).
You would be amazed at some of the responses we get from folks. They often look at us like we just beamed down from my mother ship and quickly check my holster area to see if I brought my death-ray gun.
After about 20 seconds of explaining that we mean them no harm, we proceed to tell them exactly how we can guarantee success in such a short period of time.
More importantly, when we've PROVEN to them how quick and easy it is to use the Lease Option/Purchase contract to sell their home, they are believers for life.
If you're interested in selling your home lightning fast, and for top dollar, here are the nuts and bolts...
The Lease Option/Purchase contract will NOT work for sellers who need large amounts of cash up front. This is what I mean by "large amounts of cash up front..." if you can live with $5,000 to $20,000 cash right now, and wait for the rest of your profit for a period of 6 to 12 months, the Lease Option/Purchase contract is exactly what you need.
Let's say your home has been on the market for 6 months with no offers.
You're frustrated so you decide to change your terms a little and offer your home for sale on a Lease Option/Purchase. This opens your doors to the largest market of eager buyers anywhere. Read this great but typical story about some people's challenges.
Along comes Bob the Buyer who is self employed. He was turned down by XYZ Mortgage Company because he needed to be self-employed for at least 12 more months.
Bob the Buyer pays all of his bills on time, earns a great income, and is very responsible but he can't get a mortgage to save his life. Bob the Buyer is dumbfounded at his predicament and is tired of throwing money away on rent.
Bob sees an ad in the paper or a yard sign and calls to make an appointment to see your house. He loves it and wants to buy it! Yeah!
Since you're flexible on terms and are offering a tremendous value, Bob is willing to pay you full price for your home. He is able to put $5,000 down, pay you more money per month than your mortgage costs you, and he agrees to buy the home from you in 12 months. We draw up the paperwork, get the cash and close the deal.
Now you've got your portion of the non-refundable option deposit, a positive monthly cash flow, a written sales agreement for FULL asking price on your home to close within 12 months... PLUS you maintain your tax shelter by remaining on the deed, and there will be no maintenance or land lording headaches since Bob will take care of the home as if it were his own!
You might be wondering, what if Bob decides not to buy your home? GREAT! We love it when that happens! You get to keep your portion of Bob's non-refundable option deposit PLUS we get to put your home back on the market so you can collect another large option deposit -- and probably even increase your sales price! Ask us about our 1 month payment guarantee.
People who want to keep Lease Option/Purchase a secret from you
Without a doubt, the largest industry in America and throughout the world is the Real Estate Industry. Each year hundreds of billions of dollars pass through the hands of buyers, sellers, investors, builders, contractors, some realtors, lenders, title companies and insurance companies just to name a few.
Below is a list of people who want to keep the features and benefits of the Lease Opinion/ Purchase contract a secret from you because, to an uneducated individual in these professions, they think it takes money out of their pockets.
Lenders
Lenders are the granddaddy of them all. They are the last people in the world who want to see you do a Lease Option/Purchase deal.
Their logic? Lenders believe that you will be bypassing their lengthy application approval process, their overburdening underwriting system, and their "mightier than though" attitude. Unfortunately for you and me, this simply isn't true.
The fact is, if you're buying or selling a home on a Lease Option/Purchase, one of the parties in the transaction will eventually have to deal with a lender.
The bottom line is, uneducated lenders believe that the Lease Option/Purchase contract will take money out of their pockets. It's simply not true.
Real Estate Sales Agencies
Here's an interesting one.
Our Real Estate Company has an entire division set up to handle nothing but Lease Option/Purchase deals.
Most realtors will tell you that they either have never heard of a Lease Option/Purchase contract or that it's not something they recommend.
Why don't they recommend it? Most realtors believe that they won't receive their 6-7% Real Estate sales commission.
Repeat after me, "Mr. or Mrs. Realtor, your total commission will only be delayed, not sacrificed." There... that was easy.
The fact is, our realtors have a desire to achieve greater success -- and put more money in their pockets - they can capitalize on other Realtors lack of desire or knowledge. We have created a niche in our company by using the Lease Option/Purchase contract to satisfy TWICE as many customers. With this attitude, we can easily open our doors to the largest market of buyers and sellers anywhere in the world.
We would like you to think for a moment about what types of businesses are in your town... You might live in a large city where there are banks and real estate companies on practically every street corner. And even if you live in a small town, I'd bet that you will still find that these banks and real estate companies everywhere. Am I right?
That's the primary reason we have opened an entire division within our company to help with Lease Option/Purchase contracts. Most other Real Estate companies want immediate gratification with their commissions. We believe by devoting our time and efforts, we will build customers for life.
In closing
Whether you are buying or selling allow us to find the perfect home or buyer for you. Please fill the information below to get started or find out more.
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