Lease Options can be dangerous.
That's why we endorse the CFO, or Contract for Option to Purchase, designed by Mark Warda, JD.
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Contract For Option to Purchase
PLEASE BUY THE BOOK FROM MARK WARDA at www.Warda.net
You as an Owner, or Landlord, or FSBO:
Offer to seller finance by granting a Contract for Option to Purchase to a Tenant-Buyer.
- Benefits to the Tenant
Major benefits in addition to the equity and security are: - 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.
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 reducin~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 withtbe lease and contract for option.
- We recently consulted on a commercial lease for a multimillion 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.
PLEASE BUY THE BOOK FROM MARK WARDA at www.Warda.net
