You’re probably thinking, why am I writing a post on, “Why Lease Options Are For Idiots”, given that I run several “rent to own” websites that espouse the virtues of non-traditional contract structures like lease options, lease purchases, etc.
You’re probably thinking, how can I say such a thing given that I have personally optioned and lease optioned more than a hundred million dollars worth of homes and continue to do it daily.
Have I gone absolutely crazy?
Here’s the deal:
Lease options serve their place and can be a viable contract and deal structure given the right market metrics. In a highly appreciating market where you have the ability to lock up a property via the option agreement for a pre-determined price for a specific period of time and you don’t have to worry about paying more money due to appreciation (which you then can absorb as equity upon closing) lease options can make sense.
However, we ain’t exactly in a highly appreciating market right now, are we?
Nope.
So, the question becomes, why would you want to pay money for an option fee to lock up a property for a pre-determined price when values are actually declining?
Doesn’t make sense, does it?
Nope.
Additionally, in most lease option agreements, sellers (landlords) write the contract in such a way that YOU get to assume the financial and physical responsibility of maintenance and repairs.
So, you get to pay an option fee to lock in a price that you won’t be able to pay because of depreciation, you get to pay money to repair and maintain the property, you won’t be able to close on the home (even if you wanted to) because the property likely won’t appraise (meaning you will lose the home and all monies paid in) and you don’t get any of the benefits of home ownership like the tax deduction for the monthly payment, multi-lines discounts on your car insurance, Homestead Exemptions on property taxes, etc.
Not real smart, is it?
So, you’re probably wondering, if I can’t qualify for a conventional mortgage and I don’t want to rent, what are my options?
First, let’s assume that you want to lease option a property because you aren’t sure that you want to buy the home but you want the ability to purchase it if you change your mind.
What do you do?
There are two things you can do in this scenario that will save you a ton of money and still give you the protections you want.
- You can lease option the property but only pay $1 for the option fee (you have to pay something so you have good and valuable consideration exchanging hands and a valid enforceable contract)
- You can simply lease the property with an ROFR clause (what the heck is a ROFR clause?)
A ROFR clause is a Right of First Refusal clause. What this means is that you simply insert a clause in the contract giving you the Right of First Refusal for any sale the seller decides to undertake for a legitimate offer on the property by a third party (someone other than you that wants to buy the home).
The reality is that on a standard lease contract in this market, the seller, in 99.9% of all cases, isn’t going to sell the home during your contract term so an option agreement and option fee aren’t really necessary to secure your position if you want to purchase the property. The ROFR clause ensures that you get first crack at a purchase and no one can buy the property out from underneath you.
I’ve personally contracted on properties using both of these methodologies and they work great.
But, what if you don’t want to be a renter and you want to own a property but you don’t qualify for conventional mortgage financing?
In this instance, you want to use a contract that is in compliance with the IRS Installment Sales Contract Guidelines (contract for deed, land contract or installment sales contract) which is a bona fide sale today (even though you aren’t getting a bank loan) and qualifies you for the tax deduction. These are the contracts we use.
As a matter of fact, clients who followed my instructions actually increase their take home pay by as much as $1000 per month.
Don’t believe it?
With a properly structured contract for deed, land contract or installment sales contract, you can legally deduct your monthly payment in its entirety saving you potentially thousands of dollars per year. Additionally, you don’t have to deal with a landlord and ask permission to do things like: get a dog, paint, make improvements, put up a fence.
You also aren’t dealing with annualized rental increases.
So, what do you do if you are in a lease option right now on a property you want to purchase?
Email Me and I will show you how to convert your contract to a contract for deed.
Ready to get into a home that you can own today?
Simply Enroll Now
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