Selling manufactured homes through a lease option was very popular throughout the 70’s and 80’s because it allowed alienation clauses to be avoided within mortgages. Now, they remain popular for a different reason. In fact there are three separate lease option documents available. It should be noted that every state has its own laws, so a real estate lawyer’s advice should be sought by a buyer before signing an agreement with a seller.
The nature of a lease option is that the buyer of the manufactured home pays its seller in order to obtain the right to buy the property at a later date. The option could be for any amount – from quite high to as low as one dollar.
With a lease option, the amount of money the seller is paid by the buyer could be significant or quite small. These two parties must agree to a purchase price either immediately or after the option is complete at the market value. This amount is considered to be highly negotiable, but buyers will typically want to decide upon a set purchase price once at the time that the lease option is taken out.
Throughout the length of the lease option, the property is leased by the buyer from the seller for a rental fee that has been decided upon in advance. Though the term of the lease option can be negotiated, it will generally fall somewhere between one and three years in length.
It should be noted that any money that is paid in rent from the buyer to the seller throughout the term of the lease option is not considered a part of the down payment toward the final purchase. That being said, part of each of the rental fees will generally be applied to the purchase price.
As the lease option does ensure that the property cannot be purchased throughout the length of its term, the money paid into it is typically non-refundable. If, at the end of the lease option’s term, the buyer doesn’t take advantage of the lease option, it simply expires as there is no obligation to actually buy the property upon its completion.
If you’re thinking of entering into a lease option agreement (as either the buyer or the seller), the best advice that you can get comes from an experienced real estate lawyer who will be able to explain all of the documents you’ll need as well as your rights so that you’ll be making an informed and legal decision that will be mutually beneficial.
Real Estate Lesson...
From Jack Miller: The ideal candidate for an Option is a person who doesn't want to move out of his home, but can't afford it. This also applies to investors who have fallen in love with negative cash flow houses that they want to hang onto until the market comes back. In contrast to Lease/Options, even though they provide fewer benefits, pure Options enable investors and speculators alike to control the profit on a property without the risk of loss of large sums of invested capital and effort that ownership of a highly leveraged could demand.
Because there's no need for management or maintenance, Options also make it feasible to invest out of your own area when you can find opportunities that offer higher returns. You don't have to know anything about management or maintenance. All you have to do is to give the Option-seller money, or if you don't have much money, a continuing source of income, to supplement his payments. Sure, that's negative cash flow, but your negative cash flow will be rewarded with a very high yield on the investment.
Here's an example:
Suppose you found an owner in desperate straits who was paying $2700 per month on two mortgages on a $500,000 house. One is for $300,000 and the other is an equity line of credit for $60,000. He is chronically running about $300 short each month and has been using his line of credit to make up the shortfall. He is making only minimum payments on his credit cards and is accruing almost 30% interest on the unpaid balance. He is sinking fast and doesn't know what to do; but you do.
You offer to make up his $300 payment shortfall until he sells the house - or for five years max - in return for a 5-year Option to buy. Your Option contains a formula that divides all his equity 50/50 anytime in the next five years that he sells his house. In the worst case, you'll pay out $18,000 over five years to get half of his current equity, or $70,000. If he sells the house sooner, you'll get the same profit, but you'll pay out less. If the house appreciates at 5% per year, you'll be adding a little over $1000 per month in equity at a cost of $300. The figures will surely vary, but do you think there are any Roth IRAs or Pension Plans out there that in areas with less future potential that might like to fund these payments in return for half of the profit? Mine would!
You'd think that sophisticated owners and hard-bitten builders would be wise to your scheme and turn you down. To see why they might agree, walk a mile in their shoes. They've got a major investment with no way out other than to go deeper and deeper into debt with no real hope that things will improve any time soon. At some point, they'll reach their debt limit and lose their houses and their equity; and more than anybody else, they know it.
In my area, a home builder has been advertising ZERO DOWN PAYMENT, ZERO INTEREST, ZERO PAYMENTS FOR 3 YEARS on houses priced at boom levels. What's he up to? Although his ads don't reflect this, he's advertising to sell a house with a Lease/Option. With 40 or 50 vacant houses sitting idly waiting for buyers who won't even look at his models, he's eating taxes, maintenance, security, insurance, and heating and cooling bills. He can use the contracts for those who can qualify for a loan to buy it at his price to get a little slack from his own lender. If that person buys the house at the end of three years, he's saved a lot of his invested capital whereas if the lender takes the houses back, he's lost everything. If the buyer reneges on the contract and walks away, at least the builder has saved all the costs of operation that the buyer paid, including landscaping.
Who would enter into this deal? Anybody who wanted to live in a new house with new appliances, carpets, luxury amenities, etc.; all for the cost of taxes, insurance, and maintenance. This deal is a blessing for the person who can then sell his lower priced home, and use the sale proceeds to help pay for his lifestyle.
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