Hot Sheet - Buying on Lease Option (Contract For Option to Purchase)

CFO means Contract for Option to Purchase

Q & A about CFO Agreements

Q1. Why is there a demand for Rent to Own Arrangements for clean, 3 to 4 bedroom homes?

• Household debt is at an all       time high (1990 = $4+ trillion, 2003 = $8.5 trillion).
• That debt is 108% of income.
• Bankruptcy filings, up 19% last       year, are topping 1.5 million a year.
• The average U.S.       household with one credit card owes over $8500 in card debt.
• The staggering debt load has       helped the economy.
• Autos, housing, furnishings,       consumer electronics and other segments have prospered.
• Debt has grown faster than       income and that can't continue forever.
• This will create continuing       opportunities for investors.
• The burdens will continue the       bankruptcy filings even with some tightening of the laws being sought by       lenders.
• Foreclosures will also continue       at record levels.
• There will be a supply of bank       owned real estate and possible short sales.
• There will also be a supply of       former owners looking for housing.
• These people will not want       apartment living.
• We have had many former owners       seek lease/ option homes as a means of getting re-established and building       credit.
• Benefits to the Tenant
   

Q2. What are the major benefits  in addition to the equity and security?

• A clean, functional home.
• We deliver a freshly painted and cleaned home,       sometimes with new carpet, tile, and other improvements.
  • The tenants can identify with        the home and they see it as a suitable property to own.   
• Tenants have added improvements, sprinkler systems, dishwashers, and other improvements to increase their use and enjoyment of the property.
• Fixed monthly payments for two years.
  • The payments are set, but they        increase each year.
  • The increase is normally four        or five percent, and is attributed to the ever-increasing taxes and        insurance.
  • There is consolation in the        fact that the increases will not be any larger than stated.
• Fixed credits for care of the home.
  • The credit of $100 per month, or per the contract, will establish a FHA 3% down payment, when combined with the deposit.
  • In doing hundreds of these contracts, we find that these tenants do more maintenance than the average renter, but certainly not all. They will not repair a roof, or replace an air conditioner, except in rare occasions.
• Credit for all deposits.
  • The tenant receives down        payment credit for what would normally be a last month's rent and        security deposit.
  • They view this as a positive use for applying to the down payment, rather than funds wasted for rent and security.
  • When tenants do not buy, which happens about 65% of the time, the funds held for a down payment will be used as the last month's rent, and a security deposit, regardless of what the documents say.
  • When the tenant is unable to buy, and decides to move, they will not pay the last month's rent, or additional security.
  • The-funds held usually cover        the unpaid rent and damages.
• Credit counseling.
  • The lessor can increase or        decrease the number of tenants buying these optioned properties.
  • If they do nothing, and force        the tenant to get their own mortgage financing, some will do that.
  • If the lessor counsels the tenant, and reviews their credit report with them, advises on negative items, and how to remove them, and connects them with an experienced and aggressive mortgage broker, many more will close.
  • I have seen a single parent, with three children, many credit problems, and student loans, work their way through the process and close on a FHA loan.
• A fixed sales price for a set time.
  • The price is usually set at        neighborhood comparable list prices, which the buyer can verify.
  • When the property is sold,        without a Realtor, vacancy, and with fewer repairs, the net to the seller
          has been acceptable, even with an increase in market prices.
  • At this time, we are seeing        10%+ appreciation in many markets, and an alternate pricing formula could        be used.
  • A fixed price could be held        for one year, and an appraised price anytime after the first year.
  • The average of three        appraisals approach could be used to remove risks for either party.

  What are the Major Benefits to the Landlord/Seller?
  There are many  benefits for the sellers, the greatest of which are attitude  and behavior. Other advantages are:

• Above market       income.
  • Lease contract will command a        rent about 10% above the market for a similar property.
  • Tenants will pay that with the        belief that they will eventually benefit from the higher than average        rent.
  • Rent comparables are not an        exact science, and we have always been able to get top        market rents on option properties.
• Greatly reduced       repair expense. 
  • This is a definite benefit for the owner, and we quantify it in an amount of about 30% less maintenance costs than rented houses of the same size.
  • This program definitely does        not eliminate maintenance costs, regardless of claims of option        promoters.
• Tax deferred       income.
  • The option deposit is not        taxable until it is exercised, or abandoned.
  • These funds can be applied to additional purchases or anything desired and paid for on closing by normally reducing the selling price.
• Low turnover.
  • We average between four and        five years tenancy on option properties.
          When the option expires, after two years, we sometimes extend them, or go        to a direct lease.
  • The lessor can always grant        another option at market price, in the future.
  • We have been able to average over 100% occupancy on all properties, due to the advance rent and security deposits and the ability to rapidly re-rent properties.
• Minimal       management effort.
  • Contract for option tenants generally pay well, and cause minimal problems, but certainly not zero. I believe you can manage 35% more option properties than plain rentals, with the same amount of effort.
  • The tenants have something invested, and intend to own the house up until they lose a job, get divorced, or go bankrupt.
• Full retail sales       price.
  • As stated, the selling price        at neighborhood retail, is not a contested item,
          since the buyers do not have the leverage of a cash buyer, when entering        this agreement.
• Property       improvements.
  • The tenants sometimes add improvements for their own use and enjoyment, and we have seen room additions, new carpet, tile, paint, landscaping, storage buildings, and many more installed by tenant optionees.
  • Some of these did not buy the        property, and left the improvements without compensation.
• Pre-set rent       increases.
  • As discussed, the 5% increases are part of the initial lease, and may be above or below the market, depending on inflation, but that is our best estimate.
• No loss of ownership       rights.
  • The contract for option states and restates that an option will be delivered in the future, after the specific performance on the lease and that no right title or interest is passed at the execution of the contract.
  • This concept can be used with        any lease, on any kind of property, of any value.

 

• The Rent To Own management system could produce the greatest income per hour invested compared to any other buy, sell, fix, exchange, mortgage or broker skill you could develop in real estate.

• Any  lease can be used with the lease and contract for option.

• Recently a Commercial CFO was negotiated for a  lease for a multi-million dollar factory. 
• There was a 35 page lease and a one page contract for option.
• The owner was concerned that the tenant, a new corporation, in a new business, could tie up his property in the event of bankruptcy.
• The  contract for option was accepted by all parties and a lengthy foreclosure will  not be required.