Lease - Buy Option in Foreclosure and Preforeclosure Situations
Improve your chances of higher profit by lease-buy options
Why lease-buy option?
Leasing with buy option allows you to buy a real estate property in the future from homeowners who are having problems in paying their monthly mortgage installments. In general, you need to pay a fixed price (option purchase price) for real estate property. You make immediate profit if home has a higher value at the end of your option period. This is a windfall income just by having such an option. You may recover all or some portion of the total amount of rent that you paid during leasing period.
On the other hand, you may decide not to pay if you don't see big profit in buying the home. You simply get out of the lease-buy contract by not exercising your buy option. Furthermore, you may negotiate a new buying price if the house did not appreciate during the lease period.
Factors affecting your lease/buy option decision
Lease/buy option gives you a chance to buy a fixer-upper home while living in it.
- Your difficulty in buying the property is solved. You can exercise your option to buy it anytime.
- You can repair and rehabilitate it while you live in it.
- Because you fixed the price to buy in advance, any appreciation in value of the property is yours.
- When you exercise your option to buy it at a fixed price, you will probably have enough equity in the house to obtain a conventional loan.
- You save on initial expenses.
- You save in taxes. Tax-deductible expenses when you buy a property (closing costs, points for mortgage loan, property taxes, etc.) result in less tax deductions when your income is low. You deduct such expenses later when your income is in a higher tax bracket.
- If you agreed that your monthly payments would be counted toward your purchase price, then you start building equity with your installments and appreciation in property value.
Consider IRS rules when considering these advantages
Here are some that you need to be careful with:
- Your monthly installments must be close to market rent. Amounts lower than prevailing rent will create suspicion.
- Don’t label monthly installments as interest or down payment.
- Transfer of ownership should be an option, not automatic.
Review more information on Rent or Buy by Freddie Mac to see your advantage and disadvantages from another angle.
Lease-buy option advantages
Lease-buy option allows you to own a property in the future without tying up your money. This is a great flexibility. In general, you pay a higher lease as you get a buy option and benefit from appreciated home value. You may negotiate for a certain amount of your payments to be counted toward the purchase price.
Lease/buy option may help homeowner to avoid possible foreclosure in the future, securing a stable income from the property to pay mortgage installments. Selling the home also eliminates the risk of foreclosure in many situations.
Lease-buy option also makes your qualification easier.
- Your investment is small.
- You know the option purchase price in advance. No surprises!
- You have a better chance to ask for owner financing.
- You qualify easily if you have such problem with lending institutions.
- Lease-buy option forces you to save money to buy the property.
Lease-buy option allows you to improve your credit rating for your future real estate investments.
Use lease-option to your advantage as a landlord
As an owner of the property, you may use lease-buy option to your advantage:
- You receive higher income.
- You know in advance how much profit you will make.
- Your property will be maintained better by your tenants as they plan to buy it.
Consult your Certified Public Accountant (CPA) or tax accountant to comply with IRS rules before you sign a lease/option agreement.
Some lease/buy terms used for commercial properties
- Net, net, net (triple net) lease = tenant pays all costs.
- Some leases are based on gross sales. You pay more as you sell more products or services. This is a kind of risk/reward-sharing arrangement.
- For instance, you pay minimum rent in the beginning if you don’t make money.
- It motivates shopping center owners to keep their places attractive so that they can make more money as they attract more people.
Value of commercial buildings is highly dependent on the income they create.