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What are Lease options for Real Estate Investing? And can they be used effectively in Oklahoma City to create passive income?
Selling your houses under the lease options real estate investing is a way for a tenant-buyer to lease your house while they are becoming qualified to purchase your house. You enter into a lease agreement and an option to purchase an agreement with the tenant-buyer.
From a financial standpoint, lease option investing also has an element of “Cash Now” because tenant-buyers may get financed to purchase some, but not all, of these properties.
And that’s the rub. Optimistically, you can plan on roughly 1/3 of your tenant buyers to purchase the property. So more often than not, it’s NOT a win for the tenant-buyer. I used to engage in these transactions, but no longer do for this reason among others that I will discuss below. This article assesses the lease option strategy as a way of creating passive income in the Oklahoma City metro area.
Example of Lease Options Real Estate Investing
The Purchase
An elderly lady who fell prey to a financial internet crime lost everything. She was in default on both a first and a second mortgage of her home. The first mortgage holder was foreclosing on the property when she called our office to see if I was interested in purchasing her property. We negotiated a settlement with both mortgage companies and bought the property for $61,000 even though she owed over $90,000, which was more than the full market value.
Did we swindle this old lady? Absolutely not. She had already been swindled. It was just a matter of time before the mortgage company foreclosed on her property. We helped remove the stress of mortgage companies hounding her for payment. We helped her move on from a bad situation.
We financed the purchase with an interest-only loan from a private lender at 7% interest. We also helped that elderly lady into a retirement home.
The Sale
After we closed on the purchase of the house, we entered into a lease option agreement with a couple. The couple agreed to an option price of $90,000. They put up $2,500 as a non-refund able option fee and paid $795 per month for rental. They were able to finance and close on the house within 18 months of our purchase. We did nothing to the house other than clean it. We walked away from the closing with almost $30,000.
Recommended: How to Finance Rental Property With a Mortgage Broker in OKC
Beginning Real Estate Investors can do Lease Options
These properties usually don’t require more than paint and carpet when you purchase them. They are also in demand.
How Much Money Can You Make?
Real Estate Lease options help you accumulate a retirement nest egg in two ways. First, when a tenant-buyer doesn’t get financing and decides to move, these become essentially rental properties from a practical standpoint. Second, when a tenant-buyer gets financed, you have a “Cash Now” event. You should be able to make 10% to 20% profit when the tenant-buyer obtains their financing. Properties in the $50,000 to $100,000 range should need you $10,000 to $20,000 in profit.
What are the Biggest Advantages of Doing Real Estate Lease Options?
Buyer’s Credit: A tenant-buyer credit does not have to be excellent to actually close a loan when selling a house under a lease option. There is time to fix credit problems while they are living on the property.
Payments: You have someone making your mortgage payments while you are waiting for the property to sell.
Upkeep: The tenants usually take care of minor maintenance and repair items.
What are the Biggest Disadvantages of Doing Real Estate Lease Options?
Control: You don’t have any control over whether the tenant will actually buy the house or not.
Damage: A tenant can tear up the property and decide to move. A lease option property can be as demanding as a rental property for cash infusions to keep it going (i.e., vacancy and repairs).
Legal Issues: There are more opportunities to encounter legal issues when doing a lease option investing if you are not careful. For example, if the tenant-buyer stops paying the rent, you certainly can take them to eviction court. However, if the judge finds out the tenant-buyer has an ownership interest, you will have to do a foreclosure. Take it from someone who has done three foreclosures – they are expensive and time-consuming. And even if the tenant-buyer just hands over the keys, in my opinion, you still have legal issues with that property because technically the tenant-buyer has an ownership interest in the property.
Here: What Owners & Tenants Should Know About Oklahoma Eviction Process?
The Paperwork: The paperwork is not trivial. Make sure your paperwork is correct.
Contact OKC Home Realty Services, Property Management Company in OKC if you are looking for a trustworthy manager to take care of your rental properties
Popular FAQs on Lease Options Real Estate Investing
Where do you find the paperwork to do Oklahoma lease options?
There is an Oklahoma Real Estate Commission form you can find on www.orec.ok.
In Oklahoma, can a tenant buyer who stops making their payment simply be evicted from the property?
Not necessarily. You may wind up doing a foreclosure on your tenant buyers because the judge will likely find that they have an ownership interest in your property.
Are leases with the option to buy agreements illegal in Oklahoma?
No. As long as the paperwork is drafted in a legal manner.
Author
Scott Nachatilo is an investor, property manager and owner of OKC Home Realty Services – one of the best property management companies in Oklahoma City. His mission is to help landlords and real estate investors to manage their property in Oklahoma.
