The Budgethouse Purchase: Lease Options

California Heyday

During the late 80’s, I was involved in a couple of partnerships. They were set up to buy real estate properties in California during one of the boom times in that state. House prices were increasing at the rate of 2 to 5% per month in the Los Angeles and Orange County areas.

It was a crazy time that seemed to go on forever. Great for selling but really difficult for those who wanted to buy. Especially when many people were losing their ability to qualify for loans as prices moved beyond their thresholds.

I was primarily interested in foreclosures because they were more affordable at the time. Investors were bypassing them in favor of buying newer ready-to-go homes because they were promised a quick profit without having to do any repairs. Cash deals were king. Sellers were focusing on closing quickly without the long delays of waiting for loans to be approved and the deal finalized.

Beach Homes Bonanza

One of the most expensive areas to live in was Newport Beach. Buying an investment property there was normally outside my budget. I did not even consider investing there until things changed one day. I responded to an ad placed by a very young upstart realtor named Kevin McCloskey.

He was more interested in working specialized deals with investors than your typical agent. He also was in touch with many banks taking back properties after home owners defaulted on their loans. In other words, he was involved with making offers to their real estate owned (REO) departments.

He brought two townhouse properties to my attention. One was listed at $100,000 and the other at $200,000. They needed only cleanup , painting, and minor repairs. When completed, I moved forward to sell them without incurring a brokerage fee to complete the deal. The vehicle I used was the Lease Option.

The potential buyer moved in with a large deposit and became a renter of the property. He had the right to exercise the option to buy the townhouse at a fixed price for 1 year. This was especially attractive in Southern California because home prices were escalating through the roof.

The Lease Option Process

The way I worked each deal was as follows:

  1. I first would locate the property either by myself or through a realtor of my choosing. and make an offer to a distressed homeowner or an REO department of a bank.
  2. Next, I would do 10% down deals with funds provided by the partners.
  3. Repairs to the properties would follow.
  4. I would then run ads in newspapers enticing prospects who wanted to buy a home, but were not able to immediately qualify for a mortgage.
  5. They were given the opportunity to move in right away as renters, with the option to buy the property for a fixed price for a full year.
  6. I charged them $5,000 for the right to exercise the option.
  7. If they exercised the option, the $5,000 was credited towards the purchase price. If not, and they moved out, they lost at least $4,000.
  8. The ones that did not exercise the option to buy, were given $1,000 as a refund if they left the property in the same condition that it was received when they moved in. This saved me the expense of cleanup, new carpets, and painting.

The two beach properties were sold via the Lease-option process for $200,000 and $300,000 respectively. The reason I mention them over my other homes was the fact that they generated the most profit above all the deals that I did.

Buying With Options

Today, Lease Options are still very feasible. Especially with sellers are having difficulty unloading their property at the price they want. In a seller’s market, maybe not so much. But escalating home values cause many home owners to shoot for the moon when they want to sell and often the house just sits on the market indefinitely.

If you want to buy a home at today’s prices, but can’t qualify for a loan right away, the Lease Option might be your ticket. Yes you will be paying a higher price, but you get a home right away. If you see yourself qualifying for a loan with upcoming savings or an improved credit score, you can hold the price to your criteria.

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  • Excellent article. I am going through a few of these issues as well..