What is a Lease Purchase ? By Claude Diamond J.D.
A Lease Purchase goes by many names such as ‘rent to own’ and ‘lease with an option to
purchase’. Definition: A Lease Purchase is a Rental or Lease and a Purchase Agreement
combined (and sometimes split) with the ability or right to purchase or control specific terms
of an agreement while the property is being rented. Lease Purchases are also known as ‘rent
to owns’ or ‘lease option agreements’, and to you they can mean opportunity. One can
actually negotiate all of the terms of a potential sales price, length of rental, rent credit, escrow
instructions, maintenance and just about anything that you can conceive of. In this way, it is
the same as a conventional Real Estate purchase. A Lease Purchase is an investor’s or first
time potential homeowner’s dream come true! It can enable an investor to actually control a
property without owning it.
Let’s look at just a few ways we can utilize Lease Purchasing.
A. Rent the property: The property can be rented to another.
B. Sell the Property: The property can be sold in almost the same way as if you own it.
C. Sandwich Lease: Sublet it to another giving rent credit and an option to purchase.
D. Assign the contract: Take the deal you negotiated and sell or assign the contract to another.
E. Live in it ourselves: Live in the property, enjoy it and defer the closing until another day when it
is a more opportune time to close on the transaction.
The investor who is knowledgeable in Lease Purchasing can have the seller delegate their property
right via an assignment clause. This can enable the investor the ability to purchase the home at some
future date.
A Lease Purchase is absolutely the best way to control real estate.
If utilized properly, Lease Purchasing can eliminate many of the negatives normally attributed to
real estate purchasing and investing.
Lease Purchasing for the 21st Century©
Chapter I-2
Lease Purchase contracts are essentially rental agreements with the choice or right of purchasing the
same property for some pre-negotiated terms. With a Lease Purchase, you can have all the benefits
of home ownership and control without many of the costs, hassles and liability. A Lease Purchase
can make your rent money work for you instead of making your landlord rich.
On the next page we have a chart which will illustrate what it will actually cost you to continue
renting year after year and getting nothing in return except temporary use of a dwelling.
Lease Purchasing for the 21st Century©
Chapter I-3
RENT EXPENDITURE ANALYSIS
Monthly Rent 1st Year 2nd Year 3rd Year 4th Year 5th Year
$ 500. $ 6,000. $12,000. $18,000. $24,000. $ 30,000.
$ 600. $ 7,200. $14,400. $21,600. $28,800. $ 36,000.
$ 700. $ 8,400. $16,800. $25,200. $33,600. $ 42,000.
$ 800. $ 9,600. $19,200. $28,800. $38,400. $ 48,000.
$ 900. $10,800. $21,600. $32,400. $43,200. $ 54,000.
$1,000. $12,000. $24,000. $36,000. $48,000. $ 60,000.
$1,100. $13,200. $26,400. $39,600. $52,800. $ 66,000.
$1,200. $14,400. $28,800. $43,200. $57,600. $ 72,000.
$1,300. $15,600. $31,200. $46,800. $62,400. $ 78,000.
$1,400. $16,800. $33,600. $50,400. $67,200. $ 84,000.
$1,500. $18,000. $36,000. $54,000. $72,000. $ 90,000.
$1,600. $19,200. $38,400. $57,600. $76,800. $ 96,000.
$1,700. $20,400. $40,800. $61,200. $81,600. $102,000.
$1,800. $21,600. $43,200. $64,800. $86,400. $108,000.
$1,900. $22,800. $45,600. $68,400. $91,200. $114,000.
$2,000. $24,000. $48,000. $72,000. $96,000. $120,000.
Lease Purchasing for the 21st Century©
Chapter I-4
Look for the figure that is closest to your own rent and get out the crying towels. Now don’t
get me wrong, I love renting, but make sure that you are profiting by it. Never rent without a
purchase option and if you currently are renting it is time to make some changes. Be creative,
make your Landlord a Lease Purchase Offer and you’ll both win.
Why do Lease Purchases Work?
Controlling real estate through Lease Purchasing is probably the best keep secret in real estate.
All of the “0” down gurus and their seminars are dying to separate you from your money
with worn out tapes and books! They just have not gotten it ! The typical boring and archaic
way people were (and still are) taught to control properties was to find a property that is in
distress, purchase it with some crazy type of creative finance and put in sweat equity or have
the owner carryback a mortgage. In essence, you were supposed to put 10 or 20% down for
a loan, then spend more money for repairs, then advertise and by some miracle you would get
a tenant, have PCF (positive cash flow) and appreciation would take care of the rest. This is a
fallacy because sooner or later you will run out of money, patience or the economy will take a
downturn. Believe me I know, I was doing just that for years.
What if I showed you the most powerful method ever devised for obtaining profits and control
in real estate? You would not have the responsibility of a mortgage, taxes, insurance,
homeowner fees and best of all no maintenance. WOW !!!!!! Controlling real estate through
Lease Purchasing, whether it’s for your own home or as an investment property, is by far the
superior method of finance. Lease Purchasing helps to remove the traditional adversarial
relationships that exist between buyer and seller and produces greater profits.
Let us examine. In the traditional purchase of a property, a seller must get as much as they can and a buyer tries to pay as little as possible. Then come all the problems of banks, escrows, etc. With a Lease Purchase we can easily avoid these usual headaches. A Lease Purchase buyer, in many cases, can offer to pay full price on the home of their choice if the seller is willing to be flexible with the terms. The seller is happy because they have essentially sold their home, at a future time, and will receive payments to cover their expenses in the meantime. Everyone gets what they want. Best
of all, there is no need at this point to go to a bank and hassle with qualification. In many cases, if the buyer maintains his credibility by scrupulously paying his rent on time the seller will carry back the mortgage or extend the lease option. Now, isn’t this much easier than the typical way people are taught to purchase real estate? (See the Chart below).
RENT OWN LEASEPURCHASE
MONTHLY COST $ 900. 00 PITI*
DOWNPAYMENT $ 900. 00
1St YR. CASH PAID $10,800.
1St YEAR EQUITY $ 0
*principle, interest, taxes, insurance
On a home with a sale price of $125,000.00, a 10% deposit and with a payment of $1000.00 per month (including principle, interest, taxes and insurance) who is getting the most bang for their buck? Obviously, it’s the Lease Purchaser who found a motivated seller and who negotiated a market rent with only two months option consideration and 50% rent credit per month. The traditional renter in a competitive market might only be paying $900.00 per month, but has nothing to show after paying $10,800.00 in rent for the year !!!
The Seller/Landlord with the Lease Purchase has a small positive cash flow if you factor in the
$1800.00 option consideration and the tax benefits. If no realtor is involved that will save another 3-6% in sales commission. The Lease Purchase Buyer, however, has truly reaped the benefit of the bargain. For only $2700.00 (1st month rent + 2 months option consideration) compared with the original buyers $12,500.00 down payment, our Lease Purchase buyer is controlling the home with a greater percentage of equity accumulated in one year, less downpayment and lower monthly payments. The understanding and application of the principles of leverage are utilized to their
greatest potential in Lease Purchasing. Let’s now examine the various viewpoints of the seller,
buyer and investor.
From the Sellers’ Viewpoint:
If you are a seller and the market demand is very low for your property, the best way to get your full asking price would be to Lease Purchase your home. Since you are being flexible on your terms you are entitled to get your full asking price and a higher than average or premium rent for
your property.
CASH FLOW:
1. Money up front
2. Money during
3. Money after the sale
1. When you find a prospective buyer/tenant you normally receive option consideration. This is a non-refundable amount, that in many cases, can be several months rent. We have had properties that yielded thousands of dollars up front. This money goes right into your pocket and this bears repeating Option Consideration is non-refundable (See Contract Chapter) if you state it correctly in your agreement.
2. The seller normally credits a portion of the monthly rent and therefore she is entitled to receive a higher rent for the privilege of granting the Lease Purchase. In most traditional contemporary real estate transactions, unless a great deal of money is used as a downpayment to reduce the mortgage, the payments are usually too high for the property to have PCF (positive cash flow) from its rental.
In a Lease Purchase, since you are allowing the buyer the opportunity to purchase the property at some pre-arranged terms, you are entitled to charge above market rent. Use your own common sense, but if the phone isn’t ringing then you’re probably asking too much.
3. If and when the buyer wishes to utilize her option then you will hopefully receive your capital profits when escrow closes. If the buyer, however, allows the option to expire you also win since you can begin the whole process all over again and either renegotiate the contract or find a new tenant. In either case, you receive more option consideration for the same property. If the property sells, then you use your profits and reinvest it to find another house. The potential for profit for the seller is fantastic since a well negotiated deal will always reap profits at every stage of the Lease Purchase.
Sellers’ Advantages
1. Top sales price (usually no haggling).
2. Large available market of buyers at all times.
3. Better quality tenant.
4. Higher rent than usual for market.
5. Non-refundable option consideration.
6. Maintenance can be delegated.
7. Seller remains on deed.
8. Seller retains tax shelter.
9. No long vacancies.
10. Great cash flow.
11. No realtor commissions to pay ( 3-6% savings).
12. No management headaches.
13. Tax advantages.
14. No closing costs.
15. Safer than conventional rentals.
Lease Purchasing for the 21st Century©
Want to learn more ?
Then go to http://www.TheLeasepurchase.com or just give Claude a call; he really answers his own phone 800 324 4652
