Lease Option: How do lease options work and what are the benefits?

How do lease options work and what are the benefits?

Answer: A lease option is an arrangement with you and a seller to exercise the option to buy a piece of real estate property after you have rented it for a specific period. A portion of your rent would be applied toward the purchase if the option is exercised. This is referred to as rent credit, which most institutional lenders will accept as part of the down payment if rental payments exceed the market rent and if a valid lease-purchase agreement is in effect, a copy of which must be attached to the loan application.

If you are a seller, lease options can give you several advantages, especially in a slow market. These include a monthly rent higher than market rent, top-market value for the property and tax-free use of the option consideration until the option expires or is exercised. Also, the renter is more likely to treat the property like an owner, tax-free use of option consideration until the option expires or is exercised.

Read any lease-option arrangement carefully for details on transferring the option and other important concerns. If you have any questions feel free to contact me via e-mail or give me a call @ 508-595-9567.

Real Estate Investing: More Evidence...

New Home Sales Fall in May for 4th Month

AP -

Sales of new homes fell in May for the fourth time in the past five months, providing further evidence of a continued slump in housing.

Just FYI.....

Get started investing today!

Lease Option: Another Reason to Start Using Lease Options

Home Sales Hit Slowest Pace in Four Years

Reflecting further housing troubles, sales of existing homes in the United States fell in May to the lowest level in four years while the median home price dropped for a record 10th consecutive month.

Do you see a trend forming here?

Lease Options: Will Real Estate Agents Do Lease Options?

Lease Option Tip of The Week

The simple answer- absolutely! Contrary to popular belief, real estate agents will do lease options as long as they get paid!
In most states a listing or co-broke piece of property can not generate a commission for real estate professional unless a closing happens; as always there is an exception to every rule. In this case the listing agent would have to go to their broker and get permission to do some kind of fee agreement in place of their commission structure.

As you can plainly see it would be much easier to have this understanding prior to finding a potential deal.

Hope this helps; my all your deals be profitable.

James Gage

Lease Options: Are Lease Options Illegal?

Hello All:

I received a very interesting phone call today from a real estate investor who was exploring lease option investing. He had talked to a few local investors who told him that lease options are illegal and risky! He called me because he found me on the net ( www.jgage.com) and wanted to find out the straight scoop.

I began to explain that lease options are illegal if they are done wrong, which by the way 95% are implemented wrong. You see I continued, most people believe they can read a book or listen to a tape and then it's off to the races. Truth be told, very few people in our society (me included) can take a book and implemented without any help or direction. - that's why I developed my One-on-One Mentoring Program.

As our conversation concluded he asked me what the first thing he should due before getting involved in any real estate strategy? I told him to check with his states guidelines for investors, the Dos and Don'ts can be obtained at that states Attorney Generals Office (which can be fund online). The second part of the answer I don't think he was ready for! You need to get a mentor, whether it's me or someone else - don't go it alone!

Hopefully, this brief post will guide those of you who are trying to go it alone to re-examine your game plan/business model.

To your success,
James Gage

Mark Twain said: "Keep away from people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you too can become great."

Lease Options: Rates on 30-Year Mortgages Jump to the Highest Level in 11 Months

Hello All:

I hate to tell you I told you so, but I told you so! Interest rates are are the move and those of us that invest with lease options are positioned to profit heavily! Why?

1. People will be priced out of the home buying market, thus seller's will be extremley opened minded- more than usual.

2. People who can't buy will have 2 choices: 1. traditional rent situation or 2. Lease Options.

Now is the time to get involved in lease options! Enjoy the article.

James Gage

AP
Rates on 30-Year Mortgages Jump
Thursday June 14, 11:42 am ET
By Martin Crutsinger, AP Economics Writer

Rates on 30-Year Mortgages Jump to the Highest Level in 11 Months

WASHINGTON (AP) -- Rates on 30-year mortgages rose for a fifth straight week, hitting the highest level in 11 months as prospects dimmed further for possible rate cuts from the Federal Reserve.

Mortgage giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages averaged 6.74 percent this week. That was up from 6.53 percent last week and marked the biggest one-week rise in 30-year rates in more than three years.

The five consecutive increases have pushed 30-year mortgages to their highest level since they were at 6.80 percent for the week ending July 20, 2006.

"Mortgage rates moved sharply upward this week," said Frank Nothaft, Freddie Mac's chief economist. "These moves parallel rising yields on Treasury securities as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut."

The benchmark 10-year Treasury bond hit a five-year high of 5.295 percent on Tuesday, sending tremors through Wall Street as investors worried that rising interest rates could further depress the housing sector and also harm corporate profits.

All mortgage rates tracked by Freddie Mac showed increases this week.

Rates on 15-year, fixed-rate mortgages, a popular choice for refinancing, rose to 6.43 percent, up from 6.22 percent last week.

Five-year, adjustable-rate mortgages averaged 6.37 percent, up from 6.24 percent.

One-year, adjustable mortgages rose to 5.75 percent, up from 5.65 percent last week.

The mortgage rates do not include add-on fees known as points. Thirty-year and 15-year mortgages each carried a nationwide average fee of 0.4 point. Five-year, adjustable mortgages carried a fee of 0.5 point while one-year ARMs had a fee of 0.7 point.

A year ago, rates on 30-year mortgages stood at 6.63 percent, 15-year mortgages were at 6.25 percent, five-year adjustable-rate mortgages averaged 6.23 percent and one-year ARMs were at 5.66 percent.

Short Sales: Fact of The Day

More than 30 subprime lenders, including New Century, have gone bankrupt this year!

Foreclosures: Foreclosures Jump 90 Percent Since Last Year

Hello All:

I'm getting to be a broken record, but in the pursuit to provide you my loyal readership, I believe I have a responsibility to provide any and all information from multiple resources to prove that my take and advice on real estate investing is correct. As you can see by this article, it's time to do some short sales.....

Be well,

James Gage

By Julie Haviv

Reuters

NEW YORK (June 13) - U.S. home foreclosures in May jumped 90 percent from a year earlier, reflecting a poor spring housing market and foreshadowing even higher levels later in 2007, real estate data firm RealtyTrac said on Tuesday.

RealtyTrac said there was a national foreclosure rate of one foreclosure filing for every 656 U.S. households during May.

The May foreclosures -- a sum of default notices, auction sale notices and bank repossessions -- totaled 176,137, up 19 percent from April, the firm said in its May 2007 U.S. Foreclosure Market Report.

The number of filings in May was the largest amount since RealtyTrac started tracking foreclosure activity in January 2005.

"After a barely perceptible dip in April, foreclosure activity roared back with a vengeance in May," James Saccacio, chief executive officer of RealtyTrac, said in a statement.

"Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year," said Saccacio. "Certainly not every community nationwide is seeing an increase in foreclosures, but foreclosed properties are becoming more commonplace and adding to the downward pressure on home prices in many areas."

RealtyTrac said there was a national foreclosure rate of one foreclosure filing for every 656 U.S. households during May.

The default rates in the subprime segment of the U.S. mortgage market, which caters to borrowers with poor credit histories, have jumped in recent months as the housing industry has slowed and prices have fallen.

More than two dozen lenders in the subprime mortgage sector have collapsed as rising defaults drove them out of business during a downturn in the housing market.

Market observers are keeping a watchful eye on the subprime crisis because it has triggered broader concerns that the fallout may spread to mainstream lenders and damage the economy.

Nevada, once one of the hottest real estate markets and a favorite among investors, led the nation in May with one foreclosure filing for every 166 households, which was the nation's highest for the fifth month in a row and nearly four times the national average.

Nevada's foreclosure activity, at 5,235 foreclosure filings during the month, rose 40 percent from April and was nearly five times the number reported in May of 2006.

Colorado came in second with one foreclosure filing for every 290 households, which was 2.3 times the national average. Colorado's foreclosure activity, at 6,231 foreclosure filings in May, rose 9 percent from the previous month and was an increase of more than 50 percent from May 2006

The state's foreclosure total was the eighth highest among the states.

California, the largest state, reported foreclosure activity increasing by 30 percent from the previous month and more than 350 percent from May 2006, which boosted the state's foreclosure rate to the third highest in the country.

California documented one foreclosure filing for every 308 households, which as more than twice the the national average.

Florida, Ohio, Arizona, Georgia, Michigan, Indiana and Connecticut were some of the other states with foreclosures rates ranking among the nation's 10 highest in May.

The cities with the nation's top three metropolitan foreclosure rates were all located in California, and three other California cities also documented foreclosure rates among the top 10.

A 49 percent increase in foreclosure activity ensured that Stockton, Cali., would register the nation's highest metropolitan foreclosure rate at one filing for every 88 households, which was nearly 7.5 times the national a average.

Merced, Cali., documented the second highest metro foreclosure rate, one foreclosure filing for every 100 households, followed by Modesto, Cali., with one foreclosure filing for every 118 households. Other California metros in the top 10 were Riverside-San Bernardino at No. 5, Vallejo-Fairfield at No. 6, and Sacramento at No. 7.

Las Vegas at No. 4, Denver at No. 7, Detroit and No. 8, and Miami at No. 10 were other top 10 cities.

Short Sales: Wannabe Buyers Welcome Housing Market Slump, but Lenders Tighten Mortgage Standards

Hello All. Here is just another example of what tough times lie ahead for the housing market; can you see the great opportunity for investors' who implement short sale and lease option strategies? Please read the below article and let me know what you think!

Be well.
James Gage

AP
Wannabe Buyers Welcome Housing Slump
Sunday June 10, 2:16 pm ET
By Alex Veiga, AP Business Writer

Wannabe Buyers Welcome Housing Market Slump, but Lenders Tighten Mortgage Standards

LOS ANGELES (AP) -- Kurt Montufar isn't stressing over the housing slump. He's actually hoping things get worse. Like many wannabe homebuyers who were priced out of the market during the last boom, Montufar spends time these days scanning real estate ads and news reports to determine if it's time to take the plunge and buy.

Foreclosures rising? Great. Cash-strapped sellers pressured into lowering prices because they can't find buyers? Even better.

"Somebody else's misfortune could be my happy ending," said Montufar, 27, a resident of suburban Los Angeles.

Indeed, the advantage is shifting to buyers in many previously high-flying housing markets, as homes take longer to sell and prices level off or begin to fall.

Modest annual declines have been seen in cities such as San Diego, Boston, Las Vegas, Phoenix and Honolulu, according to first-quarter data on existing single-family homes compiled by the National Association of Realtors.

Meanwhile, price gains of just 1.4 percent or less were reported in New York, Chicago and Washington, D.C.

Those numbers have left many people trying to "time" the market to take advantage of the slump. But experts said that can be risky because there is little consensus on how long the current doldrums might last.

In addition, the market forces that helped drive the housing boom -- affordable financing and the alluring prospect of escalating home values -- are no longer a given. Potential price breaks could be wiped out if interest rates rise any higher.

"In general, it is very difficult to time the market," said Raphael Bostic, associate director of the University of Southern California's Lusk Center for Real Estate.

"The real problem with that is you don't know when the floor is until after it's passed. If the floor is right now, you missed it," he said.

Montufar, an asset manager and part-time real estate agent, has little choice about waiting for prices to fall further.

He would like to pay about $500,000 for a home in the San Fernando Valley. However, the properties he has been eying are still priced at about $650,000.

"At this point, I've got no choice but to wait and see ... how low they get so that it gets to a point where I can afford it," he said.

Others have already seized opportunities to buy.

Melanie Scalice, 36, a seventh-grade teacher living in the Boston suburb of Arlington, Mass., saved for years for a home. She decided to jump into the market when local housing prices began to dip after years of double-digit percentage increases.

"The timing has been great," Scalice said. "With prices going down, there's so much for sale that I had a lot to choose from."

Still, she had to go to Fitchburg, some 40 miles from Arlington, to find a home that suited her budget and need for space. She settled on a $199,000 condominium.

Areas outside big markets may still represent the best option for finding an affordable home.

"There are areas where prices will, at worst, stay flat, but probably continue to go up," said Patrick Lashinsky, CEO and president of Emeryville, Calif.-based ZipRealty Inc.

Home prices haven't lost much steam in the Northwest. Seattle's metro area, for example, saw its median price soar 12.3 percent during the first quarter.

In California, where home values more than tripled since 1995, sales have been lagging and price appreciation has slowed or fallen in major metro areas.

Prices have declined sharply in regions that saw major home or condo construction in recent years, such as Riverside, San Bernardino and San Diego counties.

Even if prices fall further, it could be tough for buyers to find affordable financing if interest rates increase much more.

The Federal Reserve raised the federal funds rate from 1 percent to 5.25 percent between June 2004 and June 2006. The rate, which can affect mortgages, has held steady since then.

Meanwhile, the monthly average interest rate for a 30-year fixed mortgage crept from a low of 5.23 percent in June 2003 to 6.26 percent last month, according to mortgage giant Freddie Mac.

In addition, lenders have tightened standards in response to a surge in defaults by subprime borrowers, and a number of subprime lenders have gone out of business altogether.

A number of wannabe buyers are pinning their hopes on foreclosures, which some studies predict will explode during the next two years as adjustable mortgages reset to higher interest rates.

Foreclosure activity jumped 62 percent nationwide in April from the year-ago period, according to Irvine-based RealtyTrac Inc. Among the states with the highest foreclosure rates were Nevada, Colorado, Connecticut, Florida and California.

Gino Barragan of La Puente, Calif., a lifelong renter, was among the hundreds of people who attended a recent auction looking for a good deal on a foreclosed home.

Barragan, 34, was hoping to find a condo costing less than $300,000. He found only one that he liked within his price range.

"I am willing to wait, but I'm keeping my eyes open," said Barragan, a teacher.

Bruce Norris, president of The Norris Group, a real estate investment company, said now might be the best time to purchase a home, if the buyer plans to live there for 10 years.

"I'm not sure that I wouldn't rather pay today's price with today's interest rate than count on a big discount and the wild card that interest rates might be very different," Norris said.

"It would not shock me to have a 10 percent interest rate by the end of this negative cycle," he said.

Urgent : FLASH: PIMCO's bond guru Bill Gross predicts US housing market to be "decimated"

Hello all, James Gage here; when I read this I had to immediately post for your review and consideration. If this is true, it opens up a tremendous opportunity for us as investors; there will be 2 options (forgive the pun) for most people: 1. Become a renter or 2. Lease Option a property. That being said please read the rest of the comments by Bill Gross, and if you have any questions please do not hesitate to contact me.

“These increases in rates over the past few days have placed the 30-year mortgage market at close to 7% in conventional terms,” said Gross, chief investment officer for Pacific Investment Management Co. and manager of the world's largest bond fund.

“This will decimate the housing market if it wasn’t already decimated before, and certainly put the Fed on hold, and maybe allow the Fed to reduce rates…six to nine months from now.”

Lease Option : How To Protect Yourself In A Lease Purchase Deal

by James Gage

First The Good News:

You’re holding a cashier's check made out to you for $5000.00. You also hold in your entrepreneurial hands a contract that will generate $250.00 per month Positive Cash Flow. The deal even gets better it's someone else's property and you have minimal liability with no Tenant & Toilet problems. You call home and tell your significant other to get ready you're going to do the town and he/she is really proud of you! Yes, life is good! You have just created, negotiated and achieved your first Lease Purchase deal of your real estate investor career and now you can envision many more deals of the same kind.

How did you do it ?

You got with the program, worked hard and went out and found a nice 3 bedroom / 2 Bath Home, you know the one with the white fence around it. You have Negotiated the deal so you make money at the beginning of the deal, the middle and at the end. You now control it for the next two years with just one month rent out of your pocket. A Tenant Buyer will be renting to own from you in a Sandwich Lease and placing $5000.00 as non refundable Option considerationin to your pocket. A Sandwich Lease is simply when you rent and control another's property for a specific period of time with all the terms of the purchase pre-negotiated. If you have quality contracts with a specialized assignment clause you may rent this property to another. You should always profit immediately or upfront with what we call option money (a non refundable amount of money paid at the initiation of the deal), have positive monthly cash flow and a possible note or cash when the option is exercised (purchased) !,/p>

Congratulations, you now control the property without the title changing hands and you can sublet, assign, transfer or convey any rights which you have to a third party. Not bad, huh ? Only here comes Murphy's Law...................

The Bad News.

There are many ways your Lease Purchase deal can go wrong UNLESS you take some of the following steps to protect yourself and the deal.

1. Option Money: Always get enough non refundable Option consideration upfront. Nothing beats making money upfront, but better yet getting a substantial financial commitment from your tenant/buyer reduces the likelihood of a problem. Don’t do a Lease Purchase with a Tenant/ Buyer unless they can commit a minimum of Option Money (3 to 5 months rent or more). Remember we want to finance like a tenant and invest like a investor.

2. Contracts: Don’t use generic real estate office or stationary store Lease Purchase contracts. Have a good contract drafted by a competent real estate investor or attorney. It should contain the verbiage that will protect you. I use 7 different and specific Lease Purchase Contracts in my transactions depending on my strategy or position in the deal.

3. Memorandum: Record a Memorandum of Option. This document can be recorded simply and inexpensively and can offer tremendous protection for your rights in the property. You can file these documents at your local Registry of Deeds where the mortgage has been recorded.

Example: The seller tries to sell the same property to another person without you being notified. The memorandum clouds the title and the owner is not able to sell the property without dealing with you first.

4. Credit Check on Tenant/Buyer & Owner: Check the credit of the buyer and the seller. Know as much as possible about the people you're doing business with - knowledge is power.

5. Preliminary Title Check: Do your homework and check out the owner and the property with one of the commercial property on-line services available or better yet contact your local Title company or a professional researcher for information. Do your due diligence.

6. Open Escrow: Open escrow and have escrow instructions issued at the onset of the transaction. It will create a paper trail and show the intent of the parties in the event of a legal challenge.

Special Tip: Try to always use your Escrow/Title Company or Attorney in these matters. It just makes sense to work with people with whom you have established a business relationship. They might just look out for you.

7. Deed: Have the owner place the deed into escrow as soon as possible. In the event you or your Tenant/Buyer wish to close, there will be one less delay.

8. Payment Account: Set up a direct payment account with an escrow company, title company or a bonded/established accountant or firm to pay the bank, taxes, etc.

9. Insurance:

A. Have the Seller make you the loss payee on the insurance policy (if you can).

B. Require the Tenant/Buyer to have renter’s insurance.

10. Property Inspection: Do a property inspection/walk-thru with the Tenant/Buyer and use a complete inspection form that the Tenant/Buyer can sign.,/p>

Note: Take a camcorder video of the property with the Tenant/Buyer and have them sign and date the tape.

11. Honesty: Be upfront and honest in your dealings with all the parties. Hopefully, in turn, they will reciprocate and you will all enjoy a Win/Win deal. Let the seller know that you will be subletting the property to qualified Tenant/ Buyers.

Final Thought: The best way to protect yourself in any Lease Purchase is to deal with all the possible problems before they occur, this is part of the Negotiating process whether with the Seller or the Tenant Buyer. Most real estate investors fail not because of lack of knowledge concerning a strategy, but rather they do not know how to Negotiate. Negotiating is a "Million Dollar Skill" and most people do not know how to do it on a consistent basis, but if you ask most people they have convinced themselves that they are a top notch Negotiator is every avenue of their life. My challenge to you is to take account of your life, success leaves clues if your business/investing is not successful or your just trending water- you do not how to Negotiate adequately. Don't loose your upside potential to anyone or anything.

Hindsight is 50/50, but Foresight is 100%!

James A. Gage. is a best-selling author and internationally-known expert in Lease Purchase, AKA Rent To Own Real Estate Investing and Negotiating. He Mentors One-On-One throughout the U.S. and across the world. James is also director of the Gage Consulting Group, LCC , 800 Main Street, Suite 104 Holden, MA 01520 . http://www.jgage.com

Lease Option: Is there a big difference between a lease option and a contract for deed?

By James A. Gage

The lease option and the contract for deed are both popular methods of creative financing. However, that's where the similarities stop.

First, let's start with the lease option. A lease option is not a sale it is a standard rental agreement with an added perk (the opportunity to purchase). A lease option actually consists of two separate and very different agreements - the lease and the purchase option. The lease is the written agreement under which the property owner allows a tenant to use the property for a specified period of time in exchange for the payment of rent. In the option contract, the seller gives the buyer the exclusive right (or option) to purchase this leased property. Typically the price is set at the time the lease is written, and usually the "option" period is the same as the length of the lease - but this can change especially if you are an investor.

Keep in mind, a lease, just like a sales contract is a "two-sided" agreement. Both the landlord and the-tenant are legally bound to the contract. An option contract, on the other hand, is "one sided". The seller gives the "option", but the buyer is not legally bound to take it. , .

For tax purposes, a lease option is treated the same as any other lease until the option is exercised, then it would be considered a sale.

A contract for deed is a sale. The seller holds legal title to the property as security for payment, while the buyer has "equitable" title. This equitable title gives the buyer the right to live in the property, improve it, rent it and otherwise enjoy all of the benefits of ownership. However, since the buyer does not have legal title, he typically cannot use it as collateral for a home equity loan. When the buyer pays the full amount due under the contract, the seller delivers legal title to the buyer. For tax purposes, the IRS generally treats a contract for deed as a sale, which means the buyer has the tax benefits of ownership. The payments of interest that are made by the buyer in possession are deductible as "mortgage interest," even though the buyer does not have legal title to the property. A contract for deed seller must report the transaction as an installment sale on IRS Form 6252. Once sold, the seller cannot claim depreciation or any other tax benefits of the property. If the buyer defaults on the contract and the seller exercises his legal option to reclaim the property, the tax code treats the transaction as a foreclosure- not where you want to be as an investor.

Which one works best?

To determine which way to go you will need to consider many factors, such as the buyer's situation, the market, and what you need at that time.

Contract for deed has a major downside, you may have to foreclose, which could take a lot more time (and money) than a simple eviction. Also, the entire balance paid on the contract will be due as a capital gain, which could mean a big tax hit if you have a low basis in the property

With a lease option, you, (as the landlord/seller), maintain legal control of the property with the ability to claim depreciation and to defer gains by 1031 exchange. But, along with all these benefits of ownership, you still have all the burdens of upkeep and landlord duties. You want to structure your agreement to ensure that if the tenant fails to purchase the property, you get to keep the non-refundable option money payment and any additional rent that was paid for the option.

Most renters would like to buy, but lack of cash or credit is holding them back. The typical tenant wants to plant flowers and wallpaper, but only to their own home.
Investors like upfront cash and steady monthly income with minimal hassle, but don't want to take a chance on just any credit problem off the street. Therefore, I believe that Lease Purchase AKA Rent To Own is by far a superior way to control real estate, whether a investor or someone looking for a residence.

The aim of this article was to give the reader a basic understanding of the contract for deed Vs lease option approach to real estate hopefully I have accomplished that in the context of this article.

Lease Option: TAXES & LEASE OPTIONS

By James A. Gage

There are some interesting and lucrative advantages of using options as both an optionor and optionee of real estate. Generally speaking, option money is not taxable to the optionor until the option is exercised, expires or is abandoned. I.R.C. Section 1234 (subject to "dealer" rules, discussed below). If it expires or is abandoned, it is taxable to the seller as ordinary income at the time it expires or is abandoned.

A personal residence sold under lease/option may still qualify for capital gains exemption. Under the 1997 Tax Reform Act, gains from the sale of a personal residence seller are exempt so long as the gain is less than $250,000 ($500,000 for married couple). So long as the lease was incidental to the sale, court decisions have held that the property would still qualify as a personal residence and not a rental. See, Solaris v. Commissioner, 776 F.2d 1428 (9th Cir 1985).

The lease and option payments made by the tenant are not tax deductible if the property is used as a residence. If tenant purchases the property, his option payments (including monthly rent credits) become part of his tax basis in the property. The tenant's option payments may be deductible as a capital loss if the buyer is an investor. For example if you lease/option a home to live in, consider using your LLC to take the lease/option, then sublease to yourself individually. If you don't exercise the option from your corporation, have the corporation treat the option money it paid as a loss.

Take A Loss On Your Personal Residence

As you may know, you cannot take a loss on your personal residence if you sell it for less than your basis. You can, however, take a capital loss on an investment property.
Move out of your house and lease/option it to a tenant/buyer for a few years. Report it on your Federal income tax return as a rental on schedule "E." You may now be able to take a loss when the tenant exercises his option to purchase.
Make certain that you make this transaction it look legitimate; the IRS is keenly aware that people in down real estate markets try to "fudge" rental agreements to accomplish a loss on their personal residences.

Watch Out For "Dealer" Classification

If you are an active real estate investor, you should be aware of what the IRS calls "dealer status." If you also buy and sell real estate on a regular basis, you may be considered a "dealer" in real estate properties. A dealer is one who buys with the intent of reselling rather than for investment.

There is no magic formula for determining who is an investor and who is a dealer, but the IRS will balance a number of factors, such as the purpose for which the property was purchased, how long the property was held and how many deals the investor did in relation to other income. If you take option consideration on a "dealer" property, you cannot defer taxation of option consideration under Section 1234 of the Code.

IRS Reclassification

Occasionally, but rarely, the IRS will reclassify a lease/option as a disguised sale. This is more common with equipment leases where the lessee makes rental payments for a number of years then has the option to buy at the end of the term for a nominal amount, such as $1.
The IRS looks at the terms of the deal and the circumstances surrounding the deal to determine whether a sale was intended. For example, if the tenant is paying the taxes and insurance, this looks more like a sale. If a substantial part of the payments on the lease are credited towards purchase, this also looks like a sale. If the option price declines each year rather than increases with the market. . . well, you get the idea - it if looks like a duck and it quacks like a duck, it’s a duck!

Most of the reported cases wherein the IRS reclassified a lease/option as a sale involved long-term leases. Thus, a lease/option of only a few years with your tenant is not likely to be re-characterized as a sale.

Short Sales: How to Contact People in Pre-Foreclosure

by James Gage

Many times a week I get phone calls from investors’ asking me what method should they use to make initial contact with people in pre-foreclosure; should they use letters or pick up the phone?

My take is this, neither! Why copy what your competition do is doing, why not go directly to the horse’s mouth – knock on their door ! There is nothing better then eye ball to eye ball and belly to belly, but Jim , I couldn’t possible due that; I don’t like confrontation. Well, if you know what you’re doing it won’t be confrontational- if you need help don’t hesitate to contact me together we can overcome your problem; I have over 20 plus years of just doing that!

So in summary my first method of contacting individuals in pre-foreclosure is:

1. Door knocking, followed by 2. Phone calls and finally 3. Letters (which 99.9% of the time when received will make its' way to the circle file, aka the trash).