Mortgages are affordable, we do not argue, but sometimes there are different moments in life. Suppose you do not have money for a down payment, and the conditions of the bank may not suit you at all. What are the ways not only to acquire property but also to earn money on it? Let’s discuss the Lease option agreement and understand the advantages and disadvantages.
What is a lease option agreement?
A lease options agreement is a legal agreement between a homeowner and a tenant that allows the tenant to manage the property and earn income, with the right (but not the obligation) to buy it out later.
A lease option agreement is two agreement documents:
- The first is a lease: you agree to a monthly payment to the property owner, which allows you to manage the property and rent it out to other tenants for your profit.
- The second is an option: you agree to a price to buy the property later if you desire.
How does the Lease Options Agreement work?
At the heart of any lease option agreement are 4 main conditions that must be agreed with the owner of the property:
- The upfront payment you make to take advantage of this agreement (called a refund).
- The monthly payment is usually the amount the owner needs to cover the mortgage and other expenses.
- The purchase price at which you can buy a property in the future.
- The term of the contract — after which you must return the property if you did not use the opportunity to purchase.
An advance payment is required for the agreement to become legally binding. It can be, for example, only 1% of the property’s value or be fixed, for example, 2-5 thousand dollars.
What is the benefit of the Lease option agreement?
- You are investing very little money. Only remuneration — less than 1% of the property value instead of 3.5%. Or, especially, 20% of the down payment when applying for a mortgage. This means that you do not need to qualify for a mortgage and do not need to confirm income.
- You earn money every month by renting someone else’s home. The owner pays for major repairs.
- If the property’s value exceeds the agreed purchase price, you can buy it and get cash. But if that doesn’t happen, you can return the property — making money off the rent in the meantime! Minimal risks — you don’t owe anything to anyone. On the contrary, the seller is blocked by the terms of this transaction and cannot sell the house to another. Even if they found a buyer the next day after the conclusion of the contract with you.
- Lease option agreement allows you to buy property at any time during the deal term and not just at the very end. Also, however, you can sell the contract anytime — there are no restrictions.
What is the benefit for the homeowner?
Suppose the owner has negative equity. It means they owe more on the mortgage than they could get by selling the house. That is, they do not have the opportunity to pay off the mortgage, and even more so to hire a realtor for sale — after all, they will have nowhere to pay, and there is no equity in the house. As long as they continue to live in this house, and the bank has no claims, this is not a big problem. But if they need to move to another place urgently… troubles will begin.
The owner cannot make a quick sale by offering below market price because it will not be enough to pay off the mortgage and the realtor’s services. A person needs the funds to pay the bank and agents to be able to sell their house at market value.
Is a conventional lease an excellent option for the owner? No: they would rather get rid of the property now or at least have the confidence to sell later. When faced with a choice between two unfavorable options, sometimes the owner will choose the lesser of the two evils. In these situations, there is potential to earn significant money through these contracts.
How to find a homeowner for a lease option agreement?
Let’s draw a portrait of a person who might be interested in a Lease options agreement:
- They are getting divorced.
- Because of their work, they are forced to move to another place.
- The owner’s family has grown.
- They lost their job and can’t pay their mortgage.
- Due to various economic or mortgage crises, options for owners with negative equity sometimes fall on the market.
And here you can face the main disadvantage. It can be challenging to find such an applicant — usually groups with real estate ads, where people are looking for solutions to their mortgage problem, help here.
What other problems may you have under the Lease option agreement?
- The owner defaults on the mortgage (even though you pay them enough to cover each month), and foreclosure sets in.
- The owner refuses to let you buy out at the end of the contract. They can force you to sue him and spend money. To avoid such circumstances, it is essential to establish a suitable agreement.
- Real estate maintenance does not pay for itself and negates your profit from the contract.
- You will need a lawyer to ensure everything is done correctly and the agreement protects you as much as possible.
What is important to remember when concluding a contract?
- Duration of the contract: the longer the contract term, the more capital growth on the secondary lease you will earn.
- The purchase contract price of the property: the lower, the better, so you are more likely to win even if the market goes down.
- Down payment: the less, the better, so you can invest with minimal losses.
- Monthly payment: This is likely the amount the owner will cover their mortgage expenses.
Lease option agreement. Conclusion
A lease option agreement can be a profitable way to make money — if you have the time to find motivated sellers. You can earn income from houses you don’t even own and can buy back in the future. But, of course, there are enough problems — after all, you will have to manage many processes and look for good lawyers.
You can ask any mortgage questions during a consultation at LBС Mortgage — our experts are always ready to tell you about your benefits. And show you ways that will help you buy a home and make money on it.