One creative thanks to start investing in land is to use a lease option. the most important advantage of using lease options to take a position in land is –control. This method of investing, basically gives the investor the proper to possess — be on top of things of — and take advantage of a property without owning it.
A real estate lease option contract may be a combination of two documents.
The lease a part of the contract is where the owner agrees to allow you to lease their property, while you pay them rent for a stated period of your time . During the lease period, the owner can’t raise the rent, rent it to anyone else, or sell the property to anyone else.
The option a part of the contract represents the proper you bought to shop for the property within the future, for a selected price. If you opt to exercise your choice to buy, the owner has got to sell it to you at the negotiated price. the choice a part of the contract obligates the vendor to sell to you during the choice period — but it doesn’t obligate you to shop for . you’re only obligated to form rental payments as agreed during the lease period.
When the lease option contract is written and structured properly, it can provide tremendous benefits and advantages to the investor. If the lease option includes the “right to sub-lease”, the investor can generate a positive income by renting the property to a tenant for the duration of his lease, or lease option the property to a tenant-buyer for positive income and future profits. If the lease option includes a “right of assignment” the investor could assign the contract to a different buyer for a fast profit.
Lease option land investing, may be a flexible, low risk, highly leveraged method of investing which will be implemented with little to no money.
It is highly leveraged because you’re ready to gain control of a property and take advantage of it now–even though you do not own it yet. the very fact that you simply don’t own it, also limits your personal liability and private responsibility. as long as you opt to get the property by exercising your “option to buy”, would you’re taking title to the property.
Little to no money
The real estate investor’s cost to implement a lease option contract with the owner requires little to no money out of pocket, because it’s entirely negotiable between investor and owner. Also, there are a spread of the way the choice fee are often structured. It are often structured on an installment buying , balloon payment or other agreeable arrangement between both parties. the choice fee can even be as little as $1.00.
In order to secure the property for purchase at a later date, tenant-buyers typically pay a non-refundable option fee of roughly 2%-5% of the negotiated future price to the vendor . counting on how the lease option agreement is written and structured, the investor could possibly use the tenant-buyer’s option fee money to pay any option fee owed to the owner.
Lease option land investing may be a flexible method of investing because the terms of the agreement, like payment amounts, payment dates, installments, rate of interest , interest only payment, balloon payments, price and other terms are all negotiated between seller and buyer. Responsibilities of both parties also are negotiable. as an example , if the investor doesn’t want to act within the capacity of a landlord, he could specify within the lease option agreement that tenant-buyer are going to be liable for all minor maintenance and repairs and therefore the original seller will remain liable for any major repairs.
Financially Low Risk
It is low risk financially, because if the property fails to travel up enough in value to form a profit, you’ve got the purchased the proper to vary your mind and let the “option to buy” expire. albeit your tenant-buyer decides to not buy the property, you’ve got profited by a positive monthly income from the tenant-buyer’s rent payments, and upfront non-refundable option fee.
Let’s check out an example of a lease with choice to buy structured during a way that the investor profits in 3 separate phases of the investment.
Profit #1: non-refundable option fee
Future sales price negotiated with the present owner is $125,000 with an option fee of twenty-two of the sales price. Option Fee you owe the owner is $2,500. the longer term sales price you set for your tenant-buyer is $155,000 and therefore the option fee is 4% of the sales price. Option fee the tenant-buyer owes you is $6,200. You collect $6,200 from tenant-buyer and pay $2,500 to the owner and your profit = $3,700
Profit #2: monthly income from rental payments
The Monthly rental payment you negotiated with the owner is $1,000. You set the monthly payment at $1,250 per month for your tenant-buyer. monthly you collect $1,250 from your tenant-buyer and pay the owner $1,000 monthly . Your profit is $250 monthly positive income during the lease period.
Profit #3: is about up when the lease option contract is initially written
The third profit is that the difference within the negotiated future price with the owner, and therefore the future price set for your tenant-buyer. for instance the property goes up in value to appraise for a minimum of $155,000. Your tenant-buyer decides to exercise their choice to buy. you purchase the property from the owner at $125,000 then sell it to your tenant-buyer for $155,000. $155,000 – the $125,000 you pay to the owner = $30,000 profit.
Of course the key to creating lease option land investing work, is finding motivated sellers and buyers. Finding these motivated sellers and buyers should not be difficult. The continuing down turn within the land market, has created an outsized number of sellers who can’t sell their property and buyers who can’t get financing to shop for . the vendor could possibly get a good offer to be paid within the future, by selling their property to a true estate investor on a lease option basis. a possible tenant-buyer could obtain home ownership, without having to qualify through traditional home equity credit guidelines.
One disadvantage of lease option land investing, involves the tenant or tenant-buyer possibly defaulting on monthly rental payments. this is able to make it necessary for the investor to return up with money out of pocket to pay the owner, and possibly need to proceed with eviction process. However, there are certain provisions which will made, and also various “contract clauses”, which will be included within the lease option agreement, to discourage buyers from defaulting on payments.
If the investor fails to try to to “due diligence” before getting into a lease option agreement, he could find yourself with a property that’s unmarketable. There might be variety of liens thereon , issues involving ownership of the property or it’d be in foreclosure. By diligently performing research before getting into a lease option agreement, the investor can avoid these mistakes. a couple of things the investor could do is– perform background and credit checks on both the vendor and buyer, search public records in regard to ownership and property status, or do a title search.
Despite the few disadvantages, lease option land investing continues to be a superb thanks to invest in land with little to no money and low financial risks. It also remains to be a superb thanks to gain control of a property you do not own, to get income now, and possible future profits on flexible terms.
Bottom line– you do not need to miss out on the lucrative profits being made by investors in today’s land market
The more you understand creative land investing strategies, and apply them now, the more profits you’ll make in today’s land market. Don’t postpone getting the important estate investing education you would like — to achieve today’s land market.