Q. What are types of options?
Ans. Option to Purchase- this is the most common type of option done buy investors.
Option to Sell - this option should be done by seasoned investors this gives you thr right to sell an option if the market rises above the option price.
Sandwich Option- This requires a great deal of negotiation skills a lot of time and alot patiennce. You bascially lease a property and then lease it out to another investor and make money between the leases but this allows you to make this deal once because you never own the property it is much easier to lease option you own property.
Assignment - this not really a lease but usually confused with a lease it just gives you control of the property through a contract.
Contract Sale- is sometimes called a Realtor Option. It looks and feels like a lease but it combines the lease with the option contract which will give the tennent ownership rights. This usually benefits the Realtor.
Q.
Why is it called a lease option?
Ans. The buyer leases the property until the option to purchase is exercised.
Pays a non-refundable option fee at the time of leaseingfor the privilege of havingan option to purchase the property .
Signs 2 complete documents a Lease and an Option Contract
Q. How much should the option be and do I need to refund the option fee?
Ans. The option is based on the market appreciation rate plus a preminum (5 % is what I use). For example;
Property cost = 100,000 x 10 % appreciation (10,000)
+ 5% ( 5,000) =
115,000 for the 1st year
132,250 for the 2nd year ( 10% of 115,00 + 5% )
In a non-refundable option payment you should ask for 10% (never less then 5,000 and I have allowed them to make payments over 6 months to make up the balance over 5,000).
Then, figure the payments on the mortgage, plus taxes and any other fees (i.e. HOA). Also, you always want a min of $200.00 cash flow. Remember, you are helping these people because they could not qualify normally, and within two years they will have hopefully established good credit with you.
Q. Do I need to use two contracts for a lease purchase? Why?
Ans. You always want to use a lease contract and an option contract. Keep them seperate. You can always refer the option to the lease but never refer the lease back to the option. If you were to refer the lease back to the option, it gives the tenant equity ownership rights (which can result in you having to split your profits with the tenant).
Q. What are the lease options useful for?
Ans. Selling difficult properties, selling in a buyers market, all option money is available to you immediately, insulating you from market changes, gets you more cash flow from property, allows you to do more cash planning, avoid inspections and disclosures, no monthly maintenance costs, maintain ownership, and maintain control of property.
Q. What are the disadvantages in a lease option?
Ans. You become a landlord, your cash is tied up, and you must deal with lenders for financing purposes.
Q. What are some of the tax advantages of lease options?
Ans. Depreciation allows investors who rent the ability to plan an exit stratagy, ability to take at advantage of a 1031 exchange IRS (which sees you as an investor and not a dealer), and a good tool to use with a self-directed IRA or 401k.
Q. What things should I watch out for in contracts that convey ownership?
Ans. If you have tenant that wants a longer lease, give them a two year lease with option to buy. If they need one more year then write up a new contract with new non-refundable option payment that is good for only one year. Anything over 3 years could easliy give them ownership rights. Note: Do not let them make major repairs! The judge could look at it like they are acting as owner. They make payments to you not the bank. Set the right expectations and clarify the eviction process from the beginning.
Q. What does a valid lease option need?
Ans. A valid lease option needs; purchase price, lease dates, lease terms, lease in good standing, follows state laws, repair values, names of buyer and seller, and address of property.
Q. What is the longest you should ever lease with option for and why?
Ans. Two years with a max of one year extention with new option fee and contract. Again, you don't want to contract more than three years - that could easily give the tenants ownership rights!
Q. What are comfort animals?
Ans. These are not pets! A doctor writes a prescription for the tenant to have these animals and there is no laws as to what types or how many animals are allowed (except farm animals). Unfortunately, there is nothing you can do except charge for damages when they leave.
Q. Why don't you want a tenant to seem like and owner?
Ans. The judge could see them as part owners and could force you to split the profit and appreciation with the tenant.
