A doctor has a new home built for himself. His old home is worth $200,000 and he owes $125,000. He has $75,000 of equity. He is not behind on payments, and he did not need the $75,000 cash out to buy the new home. His old home is sitting vacant and the Realtor has not sold it yet. He qualified for both house payments at the bank and he can technically afford both, but who wants to make an extra house payment?
Although he is motivated to sell because he's paying out of pocket every month to own a vacant property, this type of seller is not going to simply give you the deed and let you take over the mortgage. No way is he going to give up all of his $75,000 in equity, and no way are you going to pay that much cash out of pocket.
When you lease option this house, he gets most of his equity back - although it won't happen until you sell the property. The deal might work like this: You option the property for $195,000, and make payments to the seller that equals his total mortgage payments. You sell the property on an 18-month lease option for $228,000 with payments to match. You get cash flow plus $33,000 in profit when your tenant-buyer buys the property; the seller gets his payments taken care of for a few years, and then gets the bulk of his equity out. And in the meantime, he doesn't have to worry about management, vandals, frozen pipes, and all the other things that owners of vacant houses have to deal with.
Touring a potential Lease Option home.
Additional resources on the topic of Lease Purchase and Lease Option.
Excerpt taken from Investing in Real Estate with Lease Options and "Subject-to" Deals, Chapter 4, Pages 59-60.
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