Negotiating Lease Options

By Brian Kline | November 4, 2015

Rent to own homes or lease options are a fantastic method to buy and sell properties without investing your own money. While there are too many variations to lease options to discuss in detail, we will cover the key areas to consider for negotiation. When structuring your rent to own home contract with the seller, you need to understand which of these criteria is most important for him or her:

  • Price
  • Length of Contract
  • Monthly Payments
  • Option Credits - How much of each rent payment goes towards the down payment
  • Mortgage Buy Down โ€“ The principal adjustment
  • Automatic Renewal Periods

By knowing which criteria the sellers of lease options are most concerned with, you can create a win-win scenario by giving them what they want and getting what you want. I prefer win-win much more than a compromise. You also want to do the same thing for your end buyer.

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Photo Credit: Pelican Landing Apartments via Compfight cc

Rent to Own Homes - Contract Clauses

As an investor, it's important that you have certain clauses in your rent to own homes contracts that reduce or eliminate your risks.

Some investors first engage in an option lease contract with a seller and then find a willing buyer for rent to own homes they don't yet own. This is a sandwich lease option where you control the property without owning it. As an investor, you shouldn't get yourself locked into leasing the home until you have an end buyer willing to sign a lease option contract.

In addition to the seller criteria discussed above, you should include terms that limit your risk. An important clause allows you to terminate the lease option within 60 days with written notice to the owner. This is an escape clause for rent to own homes contracts where the owner turns out to be difficult to deal with or when other unexpected problems come along.

Another clause you want to use even more frequently makes your lease commitment begin only after you find a tenant willing to sign a contract for a lease option (the second half of a sandwich lease option). This eliminates the possibility of you having to pay rent while looking for a tenant.

Another stipulation you want is for your lease option period to be slightly longer than your tenant's option period. You must control the property when the end buyer's contract expires.

One last clause is a strong maintenance and repairs clause. The end buyer desires to be a homeowner and being a homeowner means maintaining the property. Your end buyer should be responsible for everything except the most expensive repairs.

Rent to Own Homes - Let the Cash Flow Begin

Once you have both lease option contracts in place, you'll receive a steady passive income stream for the length of the end buyer's rent to own homes contract. Clearly, you want to be paying less rent to the seller than the buyer is paying to you. You collect the difference each month while minimizing your risks and expenses.

By finding the tenant before you have to start paying rent, you can also collect the option contract payment from the end buyer. Use a portion of this to pay your option to the seller and you're in the deal for no money and actually take away some cash.

If you're paying $750 to the owner for rent and the buyer is paying you $1,000, you'll profit $250 each month. Even if $150 of the buyer's rent is credited towards a down payment, you aren't concerned because it's nonrefundable if they don't exercise the purchase option.

Please leave a comment if this article was helpful or if you have a question.

BioAuthor bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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