The Power of a Lease Option by I.Fox

The power of a lease option is amazing. Imagine taking control of the property you want today. Not tomorrow but today by using the power of a lease option. Very few people know how powerful this little known real estate technique is when it comes to purchasing real estate. Truth be told, it’s not a new method at all. Home buyers & purchasers of real estate have been using it for years and years. The key here is leverage, which is essential to any real estate purchase.

Can you really think of anyone other than the banks who loan money or millionaires with enough cash to buy their real estate for all cash at the prices they cost today. Take some time and think to yourself do you have $25,000 just laying around. Ok, double that amount, maybe you have $50,000 laying around to buy a home. Realistically, a nice home in the area you want is probably at least $100,000 or more. At this point, if you have that much laying around my first question is, “Why?” My next question is, “Do you think that is the best use of your money?” Let’s say you have $100,000 sitting in a money market. You
aren’t earning very much on it all, especially at today’s rates. For example, if you are earning 3% on your cash it will take 24 years for it to double and become $200,000. Of course, this is provided you don’t ever withdraw any money and you keep it constantly invested.

So unless you decide to move far away from the area where you already live you will need to borrow money at some point. Also, you will need a down payment and closing costs. On a FHA loan, which has the least stringent requirements for qualification you need 3% down. Closing costs estimated by a very well known lender, Countrywide, are about 5% on a $100,000 loan. Closing costs include lender fees, third party fees, taxes & insurance, etc. and are unavoidable in buying a home. Using these numbers, you can do the math and see that the minimum you will need on the average $100,000 loan is 8%, which = $8,000.

Let’s be honest this is a big hurdle to jump for most first-time home buyers. Often the payments per month are not the problem but the large amount of cash down is. By using a lease option, you create a way to jump this hurdle. A lease option fee is only about 2-3 times the monthly rent. However, you now have the exclusive right to purchase the property at the end of the lease option period. The seller is obligated to sell to you at the pre-determined price you agreed on. Of course, you can choose not to exercise your lease option however you will forfeit the lease option fee and any rent credits.

Usually, the monthly rent is a little higher than the fair market rent however all these payments are used as rent credits. With the lease option fee and rent credits you begin to build equity immediately. The lease option fee and rent credits MUST be taken as a second check to establish a paper trail for the buyer. When this is done it makes it very easy for the lender to see the amount that has been saved towards the down payment. Often the seller keeps a record of this for you. I suggest though that you keep all cashed checks, rent receipts and/or statements associated with down payment. This makes the lender’s job that much easier when it comes time to help you if you do your part.

Now that home which was once out of reach due to the large down payment upfront is within reach at the end of the lease option period.