Control Property without Ownership, Credit, Minimal Cash

By: Adrien Brody

It's time to learn how to use your brain, not your bank account, to take control of a property and make money from it without ever actually buying it. Options are a smart and simple way to control property--especially highpriced real estate--with little or no cash. Options can generate lump sum profits, longer-term cash flow, or both--it's all in how you structure the deal.

It's not difficult, but it does require planning and attention to detail. The biggest challenge in using options is that most buyers, sellers, and real estate agents don't understand them. So you have to know them well enough to be able to explain the process and clearly present the pros and cons.

Options can be used in any business where real property, goods, or services are bought and sold. Essentially, an option is a one-way right to purchase property under specified terms. Only the seller is required to perform; the buyer has a choice. Once the option is exercised, the agreement becomes a binding bilateral contract between the buyer and seller.

As you learn the techniques, though, you're going to see other business applications for options, and your ability to profit from them is limited only by your imagination.

Here's a hypothetical situation that is common in actuality, where a basic lease option in a residential real estate agreement would be the perfect solution. Sam Smith owns a three-bedroom, two-bath home as an investment and is open to either renting or selling the property.

If he rents it, he'll have the cash flow and will build equity. If he sells it, he'll have the lump sum profit to reinvest. Rents for similar properties in the area are $900 to $1,000, and Sam could probably sell the house in the current market for $105,000 to $108,000. His mortgage is $92,000.

Bob and Barbara Green like Sam's house and want to buy it, but they don't have enough cash to put down to get the mortgage payments as low as they want. So Sam offers to rent the house to them under a lease option agreement like this: The Greens will pay a refundable security deposit of $1,000 and a nonrefundable option consideration of $4,000, and will rent the house for two years for $1,100 per month. Of the monthly rent, $330 will be applied to the purchase price of the house if the Greens choose to buy it.

At the end of the two-year lease, the Greens have the option to purchase the house for $114,000, using the initial option consideration and the $330 per month, which totals $11,920, as a substantial portion of their down payment.

Lease option buyers enjoy a number of benefits. They can "test drive" the home before purchase; they have a lower up-front cash requirement than they would if they were buying outright; the rent credit builds up a forced savings account for the down payment; although the total monthly payment might be slightly above market rates, the net rent (the amount applied toward rent after the rent credit is subtracted) is generally lower than a comparable straight rental; and the purchase price is locked in. The term of a typical lease option deal is between one and three years, so the tenants have plenty of time to build their down payment credit.

If the Greens decide to exercise their option, they will be able to buy the house with the majority of their down payment created primarily through the rent that they would have had to pay on a place to live anyway. If, for any reason, they decide not to exercise their option--maybe there's an unexpected job transfer in the picture, or they decided they don't like the neighborhood or the house after all--they treat the end of the lease as any rental situation. They can renew the lease or move.

In the meantime, Sam has been collecting above-market rent for his property and building equity by paying down his mortgage with the rent. He has already collected (and probably reinvested) a $4,000 nonrefundable option consideration.

If the Greens buy the house, Sam will net more than $10,000 at closing. If they don't, Sam is able to keep their option consideration and the profits from renting the house at above-market rates, and he still has the property to either rent or sell to someone else.

It's a win-win situation for everyone, and it's just one example of how options can make you wealthy.

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