Lease Purchase Options

Let me just come right out and state it at the top here: Lease Purchase Options are a complete rip off. I’m sorry!

To understand why, you need to view it from the eyes of the people that invented it, the Real Estate Investors.

The Investor has an investment property to rent. He’s looking to make a little positive clash flow from it by charging more for the lease payment than his mothly costs. Or maybe he’s just looking to break even on a monthly basis with hopes to cash in years later when he can sell the property for a higher price. Or maybe a combination of both.

Nothing wrong with either of these strategies, both carry a fair amount of risk and are honorable business tactics.

Now, enter the investor that’s looking for much quicker returns. He’s not happy with either slow-boring-honest method so he invents an exponentially more profitable deal – The Lease Purchase Option. Here’s how it works:

• You agree to a one or two year lease.
  
• You pay a large Purchase Option Payment up front, like $10k-20k, for the right to purchase the property at the end of the lease.
  
• You agree to a set purchase price for the property at the beginning of the lease.

The Investor is playing the odds that in 12-24 months, you will still be unable to purchase the property and he can pocket your Lease Option Payment.

These odds are very solid and probably somewhere around 100%. Also, the future purchase price is typically set high and you have no negotiation power on this, its just set by the investor in the Lease Option contract.

Sometimes the Investor will offer further enticement by allowing some small percentage of your lease payment to go towards the purchase price. He’s taking the same non-risk of this ever happening with no worries! In fact, he doesn’t even need to set any of this money aside. He’ll just reduce the inflated future sales price by the small total amount, should the deal ever get to that point.

So what do you do?

If you need to lease a property, forget about the Lease Option to Purchase. Just negotiate the best one or two year lease that you can. In the future, if you decide you want to purchase the property, just make the owner an offer to purchase – at any time during the lease.

If the owner really wanted to sell, you’re in, and with no competition. You can also negotiate on the price as you’re the one making the offer. If the owner does not want to sell, then the Lease Option route would of probably been quite painful, one way or another. Nothing like trying to work with an unwilling seller!

One last note. If you decide to make an offer on a lease property during the lease term, keep in mind that you are probably saving the owner six or seven percent commission normally paid to Real Estate Brokers, so factor that into your offer.