The Lease Option Purchase - Good for buyer and seller.
If you are an investor that sells properties using lease options you no-doubt understand why it can be an appealing avenue for those that need rental history and/or rent credits to counter challenging credit reports. But, would YOU consider buying a property using a lease option purchase? You better!
There is a reason that some of the most successful real estate investors, including Donald Trump, use the lease option purchase technique (ok, there are actually several reasons!).
Advantages to the Buyer
- Appreciation: One of the typical advantages of controlling a property using a lease option purchase is that the buyer retains the right to capture some, if not all, appreciation during the term. The longer the term, the greater the appreciation can be. In the single-family arena, where terms are usually 12-24 months, even moderate amounts of property appreciation can add up.For the buyer, especially, every percentage point of appreciation counts. And, if you're nice enough to offer (or get) a 24-month term in a market increasing at 3% annually, $6,000 on a $100,000 property is significant.
- Principle Pay Down: If an option is accompanied by a lease the possibilities are greater for increased equity build up.
By applying a portion of the monthly lease payment amount to the purchase price of the property one has the opportunity to widen the gap between the market value and the loan amount. Depending on whether the monthly rent amount is inline with market rates...this is free money! A 30-year amortized, $100,000 loan at 7% begins at approximately $82 per month of principle payments.
A $100 per month rent credit beats that, dollar for dollar, every month for almost 3 years!
- No New Loan: Possibly the most noteworthy advantage of using a lease option purchase
in the residential market is that when the Optionee begins the purchase process,
no "new loan" is required. The prerequisite for this may be working
with the right and informed mortgage broker but is usually easily accomplished
through a refinance. This can mean no additional out-of-pocket monies for closing.
- No money down: I know what you're thinking, "I would never offer such a thing!" You
don't have to. For real estate investors rich in tools to find motivated sellers,
there is the opportunity to get their next home using this lease option purchase technique with no money
down. You don't have to tell the seller that an option fee may be customary!
Advantages to the Seller
When you add it all up the numbers are hard to resist, so don't try! If you're
in the market for a new (or new to you) home, consider using a lease option purchase.
- Claim tax relief on the interest payments on the mortgage, which, especially near the start of the mortgage, will be the main part of the mortgage payments.
- Lease payments may well be higher than the mortgage payments. The seller can be making money each month.
- Share in the rise in property value in some agreed proportion with the buyer, over the length of the lease.