6/20/09

Yesterday, two out of the three partners at New Haven Homes attending their final real estate investing seminar with the trainer Wealth Intelligence Academy (Rich Dad Education).  The it was the first day of a three day seminar, and as always, our excitement for attending these events was through the charts.  Thus far, we have attended a wholesaling and creative financing class, and this class was the finishing touches to our wholesale game.  The class was on Lease Options.

A lease option is defined as follows: A lease under which the lessee has the right to purchase the property.

A lease is defined as follows: An agreement by which an owner of real property (lessor) gives the right of possession to another (lessee), for a specified period of time (term) and for a specified consideration (rent).

As defined above, a lease option can be very useful in the acquisition of a property for investment, as well as to be used as an exit strategy.  There are many types of lease options as listed below:

-Lease option to buy personal residence

-Purchase lease option

-Sandwich lease option (which I will talk more about in detail below)

-Fixer-Upper lease option

-Multi-Unit lease option

-Option without a lease

-Assignment of option

The Sandwich lease option is perhaps the most powerful of all the techniques noted above.  It is both a lease option to acquire the property, and at the same time a lease option to exit the property.  It comes in two parts.  The first lease option is with the seller of a property.  As a general guideline, you want to structure this option as follows with the seller:

-Term of 3-5 years of rent, with the option to buy at any time during that term.

-Take over their monthly mortgage payment (their mortgage must be current in payments!)

-Option Consideration:  The payment you make to the seller to enter into the agreement (make this as little as possible, usually payment to make their loan current).

-Lock in a price that you will be able to purchase the property for in 3 – 5 years.  (the lower the better if you believe the market will appreciate).

Now, if their monthly mortgage payment is greater than the fair market rents in the area, you may want to steer clear of this deal, unless the appreciation, lower consideration amount, or the equity position of the property is worth the negative cash flow during the term of the option. Now that we have structured the seller side lease option, lets see what the tenant buyer lease option will look like:

Tenant Buyer Lease Option:

-Term of 2 – 4 years (below the term of the seller, or at least at the term of the seller)

-Charge a premium over the fair market rent of the area as a rental rate.  This is done because usually the tenant buyers are a higher credit risk as they cannot purchase a property conventionally.

-Charge a high lease option consideration fee (minimum 3.5%, which is currently what FHA is charging as a downpayment)

-Lock in price in which you will be able to sell the property at in 3 – 5 years (lock in a high price that is reasonable to ensure that the tenant buyer will be able to get a loan and appraisal of the property at that price.  We are not trying to screw the buyer out of home ownership, be reasonable in setting the future price!)

Essentially, you have not entered into a sandwich lease option.  Ideally, you will be earning a spread on the monthly rental income between the seller side and the buyer side each monthly.  You will also have a nice upfront lease option consideration fee from your buyer, which in an ideal scenario would be higher than the lease option consideration fee paid to enter into the lease option with the seller.  Also, there would be a spread between the lock in price with the seller to purchase the property, and the lock in price with the buyer to sell the property.

When and if the buyer decides to purchase the property, he will exercise his option and go through the normal process of obtaining a bank loan.  The idea here is that if he was paying rent on time for two years, and was responsible during that time to pay all other payments such as car, credit, etc, he would be able to easily qualify for a loan.  You will also have to exercise your option to buy with the seller, and perform a double closing in order to sell the property to your buyer.

New Haven Homes, LLC is excited to begin using this fabulous technique, and we have two more full days of this seminar to perfect our understanding of the technique.  Feel free to comment on this blog with your thoughts and experience with lease options, specifically, Sandwich Lease Options.

Join our buyers list at http://www.wesellnewhavenhomes.com