By James Gage
As the real estate market evolves and changes, there are fewer mortgage loans available and fewer people who qualify as the factors for qualification become more stringent. Having less than perfect credit puts, a cramp on the ability to obtain the necessary financing for a traditional home purchase, but that does not mean that fewer people want to settle into a home and become a homeowner. Real estate investors are learning that they can benefit from this situation and make a profit by offering nontraditional means of obtaining a home to those with credit that is not well established or is less than satisfactory to a mortgage lender.
Lease options, aka rent to own homes, are a great source of income for the creative real estate investor who wishes to make money while helping those who cannot get into a home with their own credit to realize their dreams of owning a home. Lease options work much like a leasing a vehicle, only on larger terms. It benefits the tenant buyer who cannot obtain a mortgage to purchase the home by offering them the opportunity to build their credit and make the choice to purchase later while also assisting the investor by maintaining an additional source of income for the duration of the lease period.
When a car is leased, there is a nonrefundable deposit paid to the dealership that equals a percentage of the car's value. This is also done in a lease purchase or rent to own agreement and is referred to as the Nonrefundable Option Payment, securing the tenant buyer's ability to choose whether or not to purchase the home at the end of the lease contract agreement. As with a vehicle, there is a lease contract signed in which the tenant buyer agrees to make a payment of a certain amount each month for a predetermined length of time, usually 12 months. This can be done in a manner that includes payments to be credited toward the purchase of the house or not, depending on how you want to set up the lease.
Finally, at the end of a car lease, the driver has the option to finance the remainder of the "balloon payment" owed on the vehicle in order to purchase it or to turn it back over to the dealership. In real estate, when working with a rent to own or lease option contract, this is referred to as the Option to Purchase contract, in which the tenant is given exclusive rights to purchase the real estate property without you offering it to the highest bidder first without obligating them to purchase when the lease is up.
If the option contract was signed so that the payments made during the lease period were credited toward the purchase of the home, the tenant buyer will need to obtain a mortgage loan equivalent to the remainder of the purchase price originally agreed upon. If there were no rental credits, the tenant buyer will need to obtain the entire purchase amount.
Lease options and rent to own housing are excellent ways for a real estate investor to make a lot of money because there are three different sources of money coming in, all of which add up to a sum greater than the original investment by far. You put little money into the purchase, and in exchange, you receive an up-front payment, monthly installments, and finally a purchase payment equal to an amount greater than you paid. I structure all of my deals so I get paid at the beginning of the deal, the middle of the deal, and at the end of the deal – what more could an investor want !