How to avoid payments before you find a tenant/buy

[leecain 0]

Lease/options is a very low risk way of getting into Real Estate investing. When I started, my biggest worry was needing to pay a payment before I found a tenant/buyer to pay it for me (I was flat broke). I started putting the following clause in my Lease/Option agreement, and to date, I have not had to pay a payment out of my pocket.

 

RENT: Tenant/Buyer agrees to pay to the Landlord/Seller, the sum of $ ______ per month, with the first payment beginning thirty days after installment of sub-lease/option, as rent for the property, for the term of this Lease/Option, and during any extensions thereof.

 

This means you don't pay anything until you find a tenant/buyer.

 

Of course, this assumes you have a sub-lease/option clause allowing you to find a tenant/buyer. If this does not fly with the seller, I offer to make the lease/option agreement null and void if he/she finds a buyer before I find a tenant/buyer. That makes it a race where the seller wins regardless of who wins the race. The seller seldom finds a buyer before I find a tenant/buyer.

 

I don't know how this will hold up in court; it's never been contested. :ph34r:

 

If anyone has any other ways of making lease/options risk free, please let us know.

Lee

[man 0]

The two ways Michael has taught us to make it as risk free as possible (its impossible for any type of investing to be risk free) is done in several ways. First off we start payments as far into the future as possible, two months prefferably. The other thing is there is a 30 day cancellation clause in our contracts, which gives us the first 30 days to walk away if we think we won't be able to move the property because something unexpected comes up. And thirdly, theres a clause in the contract stating we can cancel it at any time during the agreement, and not be held responsible for more than 1 months rent. While that is not risk free, I can afford to fork out one months rent if I have to.

[MichaelC 160]

Hello, leecain, and welcome to The Naked Investor. I moved your post from the Cash Flow Cafe forum to our Lease Purchasing forum.

There are a number of ways to avoid the situation you describe of making payments on a vacant property because you have been unable to move it for some reason. Your suggestion is a good one that works fine.

we start payments as far into the future as possible, two months prefferably

As man noted, you can also avoid the problem by giving yourself ample marketing time before the lease begins. For example, if I'm doing a deal today, generally I'll be aiming for an August 1 start date. Now, that could be moved up or pushed back, depending upon the specifics of the deal. If it's a high end property I might need to push it back a month or two. If it's a property I'm confident I can move quickly I might move the start date to July 1.

The other thing is there is a 30 day cancellation clause in our contracts, which gives us the first 30 days to walk away if we think we won't be able to move the property

Actually, the cancellation clause need not be limited to 30 days. It could be 30, or 60, or whatever you can get from the homeowner. But, we should have some agreed to time frame to lessen our risk in the deal by giving us the legal right to back out should we need to.

And thirdly, theres a clause in the contract stating we can cancel it at any time during the agreement, and not be held responsible for more than 1 months rent. While that is not risk free, I can afford to fork out one months rent if I have to.

This particular clause was added by me to deal with the reality of a tenant or tenant/buyer splitting in the middle of the lease. We can protect ourselves prior to the beginning of the lease as discussed above. But, what happens if you suddenly and unexpectedly find yourself with a vacant property in a slow market because your tenant/buyer decided to break the lease? You no longer have the luxury of ample marketing time or a cancellation clause. The prospect of making four rent payments on a vacant property can be pretty daunting. Thus, the addition of a clause limiting our liability to a maximum of one month's rent is a pretty good insurance policy.

All in all, there is no such thing as a 100% risk free real estate transaction. Done correctly though, using well thought out agreements, we can use Lease Purchasing to profit while being exposed to very minimal risks in the process.

[leecain 0]

Thanks Michael;

The initial payments are really the only risk, and you have provided even more safeguards than I use.

I say the initial payments are the only risk because if my tenant/buyer defaults, it means I can get another non-refundable earnest money deposit (option money) from another tenant/buyer.

Of course, part of the first earnest money was put in an emergency fund to cover payments until I find that second tenant/buyer. With today's economy, there are more people looking for homes (that need more time to qualify at the bank) than there are lease/option homes. When I advertise 'Rent to Own', I always get more tenant/buyers than I need.

[MichaelC 160]

When I advertise 'Rent to Own', I always get more tenant/buyers than I need.

With rare exception, I agree wholeheartedly!