Buy Unsold, Discounted Inventory from Builders in Distressed Markets Part 2

Yesterday, we talked about the first strategy, outright purchase at a reduced price, that can be used when buying from builders in a distressed market. Today, we will be going over the six advantages to the Lease Option and Lease Purchase strategy.

Another approach would be to lease option or lease purchase from the builder. A lease option is obtaining an option to purchase a contract on a property for a specific period of time. During this time period, you rent the property from the seller. At the end of the option period, you may either purchase the property, renegotiate, or forfeit the option. A lease purchase is obtaining a purchase contract on a property for a time period, during which you also rent; however, during or before the end of the specific timeframe, you are obligated to purchase the house.

Let’s examine each of these advantages in greater detail.

There Are Several Advantages to the Lease Option, Lease Purchase Strategy:
1) Fixed purchase price at onset and capture of appreciation during option period
2) Lower payments
3) No mortgage required!
4) Higher price when selling to a rent-to-own buyer
5) Monthly credit toward principal from builder
6) No requirement to perform on option at end of term (lease purchase would require the purchase—the only difference between the two strategies)

1. Fixed Purchase Price at Onset and Capture of Appreciation During Option Period
You determine the purchase price at the time of the contract and any appreciation during the lease period would be yours to capture as profit.

2. Lower Payments

You should be able to negotiate a monthly rent (your payment) to the builder that is lower than your payment would be if you were to buy the property outright and have to make mortgage payments to a bank. This allows you to place a tenant or rent-to-own buyer into the property to make your payments for you with less likelihood of negative cash flow.

3. No Mortgage Required!

You do not have to obtain a mortgage on the property during this time. As such, you do not incur any loan origination fees at the closing, which saves you several thousand dollars in closing costs. The only down payment you might need to make would be your option fee, which you can typically keep very low, many times nothing at all. This will save your cash so you can do more deals with other builders in the same situation.

4. Higher Price When Selling to a Rent-to-Own Buyer

If you place a rent-to-own buyer in the property, you should be able to collect an option fee from that buyer, which is non-refundable whether the buyer chooses to purchase or not. Additionally, a typical rent-to-own buyer expects to pay a premium for the same home versus a conventional buyer. This allows you to mark up the price (slightly above retail) for an additional profit for yourself.

5. Monthly Credit toward Principal from Builder

You might be able to negotiate a monthly credit from the builder. For each month’s rental payment you can ask for a certain amount (sometimes 100 percent) to be credited toward the end purchase price by the builder, paying your down balance due when you purchase the home. It is not required to offer this credit to your tenant buyer, or if you do, you would credit much less, thereby increasing your profit margin.

6. No Requirement to Perform on Option at End of Term

If you do a lease option and the market fails to appreciate sufficiently during your lease period, you do not have to close on the property or buy from the builder. Lease options can be powerful ways to acquire real estate from motivated builders with very little money out of pocket. Given a lease period of sufficient time, the real estate market is likely to turn around and appreciate again, providing the investor with a nice profit. A lease purchase is a guaranteed purchase that would require you to purchase the home during or before the end of the lease period.


Excerpt from Making Hard Cash in a Soft Real Estate Market Chapter 11, Pages 116-118