I Won’t Make That $25,000 Mistake Twice : Real Estate Investment Tips

October 13, 2008 | By | Reply More

No matter how good you come out on a property, leaving $25,000 on the table leaves a slight sting. And that’s exactly what happened when our first lease option tenant buyer cashed us out. It all came down to a few sentences in our lease option agreement in the purchase price section. Ever since then, we vowed never to make that same mistake again.

What is a Lease Option

A lease option is when someone rents a property from you for a specified time frame (just like a normal lease), but they also have the option to buy the property. We have found numerous benefits over the years by utilizing lease options as our primary exit strategy as opposed to a straight rental.

The $25,000 Mistake

The purchase price section of our lease option agreement is structured in a way so that you lock the tenant buyer in at a specific price.

Here is how it reads:

4. PURCHASE PRICE AND METHOD OF PAYMENT: The initial agreed purchase price of the Property shall be: ____________________________ ___________________ Dollars, (U.S.) ($___________), until the _______ day of ________________, 20___, then shall increase by _______________ percent (____%) per calendar month thereafter until the exercising of this Option, to be paid in cash or its equivalent, less a credit of _______________________________ Dollars ($______________) and an additional credit of ___________________ Dollars ($_____________) per month credited each month in advance on or before the _______ day of each month, (“Monthly Option Payment”). Buyer’s obligation to close shall not be contingent upon Buyer’s ability to obtain financing. Optionee/Buyer shall pay any and all loan and sale closing costs.

(for information on the real estate investing contracts that we use, check out Louis Brown’s website)

In the first blank, we had locked the tenant buyer in at $239,900 for the first year. They were in a three year lease option and after year one,  the purchase price went up by 6% annually. By the time they bought the property, it had appreciated very well and was worth far more than their purchase price . . . To the tune of us leaving $25,000!!! on the table.

As a side note, the last couple blanks are for the down payment and any rent credits you are giving the tenant buyer.

The Solution

We no longer lock a tenant buyer in at a certain price. Why risk leaving a pile of money on the table if you don’t have to?

In the first blank, we simply write, “See Special Stipulations.” We do not write in a price or a percentage that it will increase, but do still fill out the blanks for down payment and rent credits.

In the special stipulations, we write,

Purchase price to be determined by appraisal at the time of purchase to be no less than $ X amount. Appraisal to be ordered by the seller and paid for by the buyer.”

And we’re done! Had we structured our first lease option in this manner, we would have walked away from closing with an extra $25,000 in our pockets.

A couple things to point out . . . we make sure to put “to be no less than $ X amount,” just in case we get a low appraisal. And we also specify that we are the ones ordering the appraisal to protect ourselves.

When you lease option property, always keep in mind that you are the one in the driver’s seat. You make the terms, not the tenant buyer.

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