INVESTMENT STRATEGY
LEASES & OPTIONS
The Basics of Leases and Options THE MARKET FOR LEASES AND OPTIONS IS IMPROVING, ATTRACTING INVESTOR INTEREST. IT’S ALSO AN OPPORTUNITY FOR YOU TO EARN REVENUE BY COACHING INVESTORS ON THE HOW-TOS.
By Bruce Kellogg
rom 1980 to 2020, mortgage rates dropped from a peak
when they want to purchase but want to do so sometime later. They give the owner an “option consideration” for the right to purchase the property, on mutually agreed terms, on or before a specified future date. Option consideration is frequently cash, but it could be personal property (e.g., a used tractor or even “personal service” whereby the future buyer fixes up the property before buying it). If the option is not exercised, the owner is entitled to keep the consideration. A good practice is to obtain a quitclaim deed and record it if the option is not exercised. This cleans up the title. Options are particularly useful for reserving properties without them appearing on the public record until the options are exercised. Developers do this to accumulate parcels without “tipping off” other players in the market they are buying. An individual can negotiate an option in an appreciating market and exercise the option later without the costs of ownership in the meantime. It’s an excellent way to speculate, and fortunes can be made this way.
LEASE-OPTION A lease-option involves
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of near 18% to a low of about 3% due to the federal government’s monetary and fiscal actions. This trend is reversing somewhat; as a result, leases and options are gathering investor interest. National trainers and coaches are offering courses to teach investors the fundamentals involved in building a business based on leases and options. On the next page is a photo of 13 books on these subjects. They also are listed in the sidebar, “Resource Library.”
leasing and taking possession of the property being optioned. Before exercising the option, the prospect can occupy the property as a residence or lease to a subtenant. This is a way to “tie up” a property to take advantage of an appreciating market. Another possibility is to enter into a contract-of-sale with an owner, and then lease-option the property to a tenant. If or when the tenant exercises the option, they pay off the contract-of-sale, and you realize the profit. Optional consideration from the tenant can be used for the down payment on the contract-of-sale, resulting in a (nearly) cashless transaction. This strategy can be used repeatedly as a business model. It’s important to keep two key points in mind: 1 Always make sure the option and lease agreements are separate documents so a judge cannot order the refund of the option consideration to the tenant by characterizing it as a rental deposit. Using
An internet search would doubtless produce more.
Let’s take a look at some of the basics of leases and options, so you can decide whether you want to learn more and, ultimately, pursue the opportunity to coach others. OPTION TO PURCHASE An option confers the right, but not the obligation, to do something. Real estate examples include the option to purchase, option to lease, option to renew, option to extend, and so on. Usually, a prospective buyer negotiates an option to purchase
different dates for the documents helps too.
42 | think realty magazine :: november – december 2023
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