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moneynfast

Lease options

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Michael lets say I am subleasing a house and I am living in a apartment, and my tennants just leave the house. What do I need to do next? Do I move in that house, and leave my apt, and just forit a months rent or do I try to find a lease tennant real fast. My fear of subleasing is that, if i am paying rent, and my tennants move out before they exercise there option. I will be stuck with apt rent, and a rent payment on the house that I lease from the seller. Please clear this up for all of us thanks.

 

Michael

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The way to avoid or at least protect against that happening is to take as large as an up-front option payment as possible. Remember the option payment is forfieted if they move out or decide not to excercise thier option. People with more money invested in the lease option are less likely to abandon the property. Don't forget that for the most part people that are going to lease option from you are serious buyers not ordinary renters. They are more likely to treat the property as thier own. Another suggestion is to seriously do your due diligence when finding your tenant buyers and thouroughly check thier references before signing them up. Include in your contract that they are to give you a ninety day notice before either excercising thier option or moving out. And finally, begin now to advertise for tenant buyers. Even if you don't have any properties available now you will begin to steadily build a file of people anxious to own thier own homes though your lease option program. That way if your tenant buyers move out unexpectedly a few phone calls should have your next buyers in thier within days not months.

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Michael,

 

Would you ever collect a security deposit on the lease to mitigate damage and vacancy if the tenant/buyer unexpectedly terminates their agreement?

 

Coming from a landlord mindset, I would think "renters" would expect to pay a security deposit with their lease, but would offer resistance to a "large" (non-refundable) option consideration. In your experience, aren't most tenant/buyers former tenants taking a small step toward homeownership?

 

Dave

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moneynfast, enero2k hit the nail on the head. I would like to add a few things, too.

Keep in mind, tenant/buyers are usually quite a bit different than your typical tenant, who might view the landlord as the bad guy taking their money every month.

On the other hand, a tenant/buyer will, if logic prevails, take care of a property as if it's their own because that is their intent when entering the Option to Purchase Agreement. Taking care of a property includes maintenance and repair, and timely payments.

Of course, this doesn't guarantee perfect results every time. Anyone who tells you they have never had a problem with a tenant or with a tenant/buyer is lying. You can minimize the likelihood of problems with careful screening of your prospects, as enero2k suggested. And having a database of potential tenant/buyers is certainly a good thing, too, for when you need to cover your butt in a hurry.

Keep in mind that if a tenant/buyer elects to skip out you have already collected a sizeable amount of option consideration upfront, (you did, right?), which should help ease your pain.

Finally, you'll find in this business that the difficult half of the equation is securing the properties to offer to tenant/buyers. Once you have the property available, a well worded ad offering a generous rent credit will usually have the phone ringing off the hook.

The bottom line is that while an occasional vacancy may occur while you are in the midst of a sandwich lease, my experience has been that is the exception rather than the rule. Do not allow this fear to prevent you from becoming an active lease purchase investor in your community. Be aware of all the possibilities, and be prepared to deal with any situation that presents itself, and you'll be successful.

One other thing..........if you find that you do not want to be in the middle of these type deals, instead of subleasing a property you can always assign, or flip, the contract for quick cash and no headaches. That's the beauty of lease purchasing.

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Dave, yes, the option of collecting a security deposit in addition to option consideration is one that is available to you. In fact, there are those who say doing so helps your cause if a tenant/buyer takes you to court and tries to claim an equitable interest in the property for any reason. The argument is that if someone gave you a security deposit then that would indicate they are tenants. (Let me also say here that I have never had a legal action against me by a tenant/buyer. As such I have never felt the need to cover myself as described above.)

The other issue with collecting a security deposit is that it sometimes is not practical. If a tenant/buyer gives me, say, $5000 option consideration plus the first month's rent prior to possession, it can be difficult to collect another $1000 or $1200 security deposit on top of that. At least that has been my experience.

If you can collect it, more power to you. If not, you're running about normal.

You're right that renters associate a security deposit with their possession of a rental. However, I make it my duty to let them know they have additional responsbilites as a tenant/buyer, but they also receive benefits by entering a lease with a purchase option. If I have done a good job of explaining these advantages to them, collecting option consideration, (the equivalent of three to six months rent is my target), is an accepted term.

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Hi Everyone:

 

This is specifically for Michael C.

 

Michael, you mention $5,000 as option money. Is this the norm? If so, do you have problems collecting that amount?

I dont mean to sound like a 'doubting Thomas' but it seems somewhat steep but I do understand the logic behind the higher amount.

Is there any situations where you would go lower? Say $1,000 as option consideration? Is your formula based only on 3-6 months rent up front or is there any other method/s?

Thanks again Michael for being diligent with everyone (and mine too) questions!! Greatly appreciated! .

 

Sincerely,

 

Andrew Ikeda

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Hello, Andrew. I can't say that $5K option money is the "norm". I've accepted less when necessary, and I've been surprised and been offered more than I expected, (as I mention in my book, Andrew, the value of keeping quiet :ph34r:).

While I say that the equivalent of three to six months rent is my target amount of option money, the marketplace ultimately tells you what to expect. If you have a property for Rent to Own, and all your prospects are offering in the $2000 to $3000 range, you'd be wise to listen.

My philosophy is do the deal quickly and with as little aggravation as possible. Then, move on to the next one or two or five. There's profits in volume, much more so than holding out for an additional $1500 or so.

Also, another factor in how much option money you might receive is determined by the value of the property. Obviously, a $500,000 property will garner more than a $150,000 property.

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