Many investors are scared away from investing in real estate because of the sensational news stories that depict crying homeowners in front of their foreclosed homes and heated discussions about plummeting house prices, making it seem as though the real estate doomsday will never end. Although, yes, housing prices have declined, and yes, the number of foreclosures has risen, there are still opportunities in real estate to make money.
Signs indicate that the economy is stabilizing; unemployment is slowly starting to improve, and depending on what city you are in, fewer people are defaulting on loans than in 2008. Although the economy is still slow and many people are still unemployed, growth is starting to pick up. Slowly but steadily we are coming out of the recession, and there are ways to capitalize on this trend.
A great opportunity to sell a home in this market is through a lease- option contract. This entails two separate contracts. The first contract is the option contract which usually requires a non-refundable fee minimum of 3-5% of the purchase price of the property. I usually require at least 5% of the purchase price of the home. In my opinion, the more the resident can put down, the better. The option agreement allows the resident the exclusive right to purchase the property at a specified price within a specified time frame. The option fee is credited towards the purchase price of the home, but if the resident does not or cannot exercise their option within the specified time frame, the resident forfeits the option fee.
The second contract is a standard lease agreement for the same specified time frame as the option agreement. The ability to exercise the option agreement is contingent upon the resident fulfilling all of the duties of the lease agreement- mainly paying rent on time and maintaining the property. Maintenance of the property is the responsibility of the resident and at their expense.
Any time during the option period, the resident has the exclusive right to purchase the home. This approach allows the resident a specific time frame to clean up any issues preventing them from securing a bank loan, but still providing them the opportunity to secure the home they wish to purchase.
There are many nuances and variations of the lease-option approach. There are also potential pitfalls for both the resident and the investor that are beyond the scope of this post. But if executed with specific metrics and standards in place, this strategy can provide a tremendous win-win for both parties involved.
This is a great approach for people who have tarnished credit due to job loss, bankruptcy, or a foreclosure who are now getting back on track and starting to show a positive history. This approach allows the resident to get into a home ownership position and provides the investor cash flow each month, with what I call, chunks of cash at the end. A true win-win for both in my opinion.
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Based out of Indiana, Jay Redding is a real estate entrepreneur, with experience in single family and multi-family investing.
