How Does Lease Option To Buy Work?
If you’ve purchased a property and you’re looking to rent it out, you may want to consider doing a lease option. But how does a lease option to buy work? And is it right for you?
There are several simple steps to set up a lease option and start your journey to growing your investment portfolio.
What is a Lease Option?
A lease option is a way to keep ownership in an investment home without spending money out-of-pocket each month. The property is rented to a tenant, who has interest in purchasing the property, but can’t because of poor credit or no down payment.
By paying a fee for the first right to buy the tenant can purchase the property during their lease term if you sell. However, if they don’t end up buying the home you keep the fee, and all of the rent paid.
Steps to Set up a Lease Option
A lease option is something that credit challenged buyers would be interested in. They want to be homeowners, but can’t get approved through traditional methods.
There are several steps to take to set up a lease option.
1. Determine the rent and payment options
Before you look for a tenant you need to decide what rent you will charge and the amount of the first right to purchase fee that will be paid at closing.
Because a lease option is for tenants who don’t have an option to buy a house through a traditional method, you can set the rent above the fair market rent, sometimes by as much as 20%.
You can also set a rent credit that will be deducted from the sales price if they do decide to purchase within the set timeframe. For example, if the tenant pays $1,000 per month they won’t get a rent credit. If they choose to pay an increased rent of $1,200 per month you can offer a $300 rent credit.
If the tenant does not purchase the home, you keep the right to purchase fee and all the rent paid.
2. Prepare and market the house
After you decide on a rent amount you can prepare to market the house.
You don’t need to spend a lot of money or do extensive work on the home. Preparing the home can be as simple as a fresh coat of paint and some welcoming touches like bathroom towels and a bowl of fruit in the kitchen.
When the house is ready, you will put a sign in the front yard and a visible flyer in the window. You can also put up bandit signs in the neighborhood for drive by interest. The marketing should be clear that someone can start the process of owning a home with bad credit.
You do not need to spend a lot on advertising. You can market the rental for free online with craigslist and other online marketplaces. It is also very effective to have a phone number to advertise where there is a pre-recorded message explaining the process of the lease option.
If you have extra funds, you can start a direct mail campaign.
3. Find a Buyer
When you have interest you can pre-qualify the tenant with a set list of questions about their maximum monthly payment and how soon they need to move. If they see the house and are interested, screen the buyer to make sure they meet your qualifications. This includes:
- Credit report
- Recent bank statements
- Pay stubs
- How much they have for an earnest deposit
If the buyer qualifies, you can move on to closing.
It is important to set up the closing as soon as possible. There are a few things to keep in mind:
- Do a final walk through before closing to note any damages
- Have an attorney at the closing
- Set up automatic payments to collect the monthly rent
To learn more how to find buyers and structure a lease option, I invite you to join me at one of my live events or check out my free course, the Investor kit.