Let’s begin with the type of option that most folks have heard of – lease options. Lease options are best structured using two documents – a lease contract and an option contract. The lease outlines the agreement between the landlord and tenant regarding property rental. The option outlines the agreement between the property owner (usually the landlord) and the tenant regarding the tenant’s right to buy the property.
There is a big difference between a lease purchase and a lease option. With a lease purchase, the tenant is saying he WILL buy the property. With a lease option, the tenant is saying he may buy the property. A lease option locks the property owner into selling the property according to the agreed-to terms and conditions outlined in the option agreement. On the other hand, the tenant can exercise his option and buy the property or he can simply walk away. For most buyers, if their goal is to buy the property in the future, a lease option is a better, safer way to go.
Why would a property owner ever agree to a lease option? There are several reasons: 1) Using lease options often attracts a better caliber of resident – the resident thinks more like a homeowner. 2) Instead of getting a $700 fully-refundable security deposit, the landlord gets a non-refundable option fee – this fee can be anywhere from several hundred to tens of thousands of dollars. 3) The owner is able to lock in a fair-market price while also getting favorable sale terms.
Now let’s talk about straight options. Over the past six years, as real estate values have tumbled, we’ve used straight options to build future potential wealth. A straight option is when a property owner agrees to sell you his property at a pre-agreed-to price and terms within a certain time period.
Here’s an example of one of our straight-option deals. A few months back, we met a homeowner who needed to make some repairs to his house but couldn’t afford to pay for the repairs. At that time, his home was worth $135,000. The repair estimate was $3,500. The owner’s loan balance was $130,000. We paid him a $3,500 option fee (that would be applied to the sale price if we exercised our option) and in return he sold us an option that would allow us to buy his property anytime within the next six years for $135,000. Was this a win-win deal? The owner got $3,500 and was able to make the needed repairs to his home. This wasn’t money he needed to pay back – it was money he received for selling us an option. In addition, he thought the $135,000 sale price was more than fair because he felt real estate values would continue dropping into the foreseeable future.
On the other side of the coin, we think real estate values are near the bottom and within the next six years will be well on their way back up. Let’s say three years from now we exercise our option and then sell this property for $160,000. It would give us a profit of $28,500 ($160,000 – $131,500 = $28,500) with a yield of 71.98% on our $3,500 investment - that’s a lot better return than we can get at the bank.
These are just two of the types of options we use regularly. Don’t you think options are worth learning about? Bill and Kim’s North Georgia Real Estate Investors Association meets on the second Thursday of each month, from 7 p.m to 9 p.m., at the Hilton Garden Inn off Main Street in Cartersville, Ga. For more info, go to REIoutpost.com.