WEBVTT 00:00:00.000 --> 00:00:02.740 Welcome back to the Deep Dive. Today, we are 00:00:02.740 --> 00:00:05.379 opening up a file that sits right at the intersection 00:00:05.379 --> 00:00:09.179 of real estate dreams and honestly, sometimes 00:00:09.179 --> 00:00:12.919 contract nightmares. It really does. It's a topic 00:00:12.919 --> 00:00:15.619 that sounds incredibly simple on the surface, 00:00:15.759 --> 00:00:18.800 but the deeper you look, the more complex and... 00:00:20.190 --> 00:00:22.510 Fascinating it becomes. It is a fascinating area. 00:00:22.550 --> 00:00:25.329 It's really where human psychology, you know, 00:00:25.329 --> 00:00:28.250 our hopes and fears about homeownership meets 00:00:28.250 --> 00:00:30.890 hard property law. We are talking about the lease 00:00:30.890 --> 00:00:33.409 option. You might know it as rent to own. It's 00:00:33.409 --> 00:00:35.890 this sort of magical bridge concept where you're 00:00:35.890 --> 00:00:37.590 renting a house, but you have this golden ticket 00:00:37.590 --> 00:00:40.109 to buy it later. Right. It sounds like the perfect 00:00:40.109 --> 00:00:42.469 solution, right? You can't buy yet. Maybe the 00:00:42.469 --> 00:00:44.329 bank said no. Maybe you're new in town, so you 00:00:44.329 --> 00:00:46.640 rent, but you lock it in. It feels like having 00:00:46.640 --> 00:00:48.859 your cake and eating it, too. It sounds perfect 00:00:48.859 --> 00:00:51.240 on paper. And I mean, for some people, it is 00:00:51.240 --> 00:00:53.200 exactly the tool they need. It's like a surgical 00:00:53.200 --> 00:00:55.119 instrument that can cut right through some very 00:00:55.119 --> 00:00:57.679 specific financial barriers. But for others, 00:00:57.780 --> 00:01:01.090 it can be a trap. And not just a minor inconvenience 00:01:01.090 --> 00:01:03.530 kind of trap. We are talking about a trap where 00:01:03.530 --> 00:01:06.269 you can lose years of savings and end up with 00:01:06.269 --> 00:01:09.170 absolutely nothing to show for it. Exactly. And 00:01:09.170 --> 00:01:11.269 that's our mission today. We are going to unpack 00:01:11.269 --> 00:01:13.109 the mechanics of this. We aren't just skimming 00:01:13.109 --> 00:01:15.810 the surface. We are looking at the contract law, 00:01:16.010 --> 00:01:19.189 the investor strategies, and the specific risks 00:01:19.189 --> 00:01:21.670 that come along with it. We are drawing from 00:01:21.670 --> 00:01:24.390 a really detailed breakdown of real estate contracts 00:01:24.390 --> 00:01:27.810 to understand what makes a lease option valid 00:01:27.810 --> 00:01:31.010 and frank. what makes it so dangerous. We have 00:01:31.010 --> 00:01:32.650 a lot of source material to get through from 00:01:32.650 --> 00:01:35.730 legal breakdowns to investor playbooks on how 00:01:35.730 --> 00:01:38.049 to leverage these deals for profit. And we have 00:01:38.049 --> 00:01:40.069 to start with the definitions because words really, 00:01:40.209 --> 00:01:43.049 really matter here. In this specific niche of 00:01:43.049 --> 00:01:45.430 real estate, if you use the wrong word, you might 00:01:45.430 --> 00:01:47.689 be describing a completely different legal reality 00:01:47.689 --> 00:01:50.209 with totally different obligations. They do. 00:01:50.450 --> 00:01:52.189 Okay, so let's start with the initial definition. 00:01:52.870 --> 00:01:55.390 Broadly speaking, what are we looking at? A lease 00:01:55.390 --> 00:01:58.629 option is, at its core, an agreement between 00:01:58.629 --> 00:02:01.709 a property owner and a tenant. But it's actually 00:02:01.709 --> 00:02:04.269 two agreements sort of bundled into one. OK. 00:02:04.450 --> 00:02:06.969 First, you have the lease. That's the standard 00:02:06.969 --> 00:02:08.469 rental agreement that gives you the right to 00:02:08.469 --> 00:02:10.689 live in the property. Simple enough. Right. I 00:02:10.689 --> 00:02:13.930 pay rent. I get to live there. Exactly. Second, 00:02:14.150 --> 00:02:16.909 you have the option. And this is a separate legal 00:02:16.909 --> 00:02:19.610 concept that says after a certain period, the 00:02:19.610 --> 00:02:22.389 renter can buy the property at a specific price. 00:02:22.629 --> 00:02:25.900 That word can. is doing a lot of heavy lifting 00:02:25.900 --> 00:02:28.000 there, isn't it? It is doing all the heavy lifting. 00:02:28.039 --> 00:02:30.759 It's the whole ballgame. Right. And this leads 00:02:30.759 --> 00:02:32.719 us to the first major distinction we have to 00:02:32.719 --> 00:02:35.139 make before we go any further. The difference 00:02:35.139 --> 00:02:37.319 between a lease option and a lease purchase. 00:02:37.699 --> 00:02:41.159 Yes. I used to think these were synonyms. I think 00:02:41.159 --> 00:02:43.740 most people use rent to own as this big catch 00:02:43.740 --> 00:02:46.319 -all term for both. Most people do. They use 00:02:46.319 --> 00:02:49.520 them interchangeably, but legally they are worlds 00:02:49.520 --> 00:02:51.419 apart. And if you sign the wrong one thinking 00:02:51.419 --> 00:02:53.689 it's the other... you could be in for a world 00:02:53.689 --> 00:02:55.789 of hurt. So what's the difference? A lease purchase 00:02:55.789 --> 00:02:58.810 is exactly what it sounds like. It binds both 00:02:58.810 --> 00:03:02.389 parties. You are leasing the property, yes, but 00:03:02.389 --> 00:03:05.169 you have also signed a purchase contract that 00:03:05.169 --> 00:03:07.189 says you must buy it at the end of the term. 00:03:07.530 --> 00:03:10.530 You are obligated. So let's play that out. If 00:03:10.530 --> 00:03:13.009 I sign a lease purchase and two years later I 00:03:13.009 --> 00:03:15.629 lose my job, or maybe the market crashes and 00:03:15.629 --> 00:03:17.710 the house is suddenly worth half of what I agreed 00:03:17.710 --> 00:03:20.449 to pay, I'm still on the hook to buy that house. 00:03:20.960 --> 00:03:23.759 Correct. You are legally bound. The seller is 00:03:23.759 --> 00:03:25.939 bound to sell to you, and you are bound to buy 00:03:25.939 --> 00:03:28.340 from them. It is a bilateral agreement. It's 00:03:28.340 --> 00:03:30.340 a two -way street. And if I walk away? If you 00:03:30.340 --> 00:03:32.300 walk away, the seller can sue you for breach 00:03:32.300 --> 00:03:34.780 of contract. They can technically sue for something 00:03:34.780 --> 00:03:37.379 called specific performance, which means a court 00:03:37.379 --> 00:03:41.060 could literally force you to buy the house. More 00:03:41.060 --> 00:03:42.819 likely, though, they'll sue you for damages. 00:03:43.039 --> 00:03:45.099 You don't have an exit ramp. Okay, that sounds 00:03:45.099 --> 00:03:47.780 incredibly stressful. It removes all the flexibility 00:03:47.780 --> 00:03:50.159 that makes this idea so attractive in the first 00:03:50.159 --> 00:03:52.460 place. It does. It's a much more rigid instrument. 00:03:52.719 --> 00:03:55.719 So how is a lease option different? A lease option 00:03:55.719 --> 00:03:59.039 is unilateral. It's a one -way street, but in 00:03:59.039 --> 00:04:01.740 a good way for the buyer. The seller is bound. 00:04:02.039 --> 00:04:04.139 They must sell it to you at the agreed price 00:04:04.139 --> 00:04:06.479 if you decide you want it. They can't just wake 00:04:06.479 --> 00:04:08.219 up tomorrow and decide to sell it to their cousin 00:04:08.219 --> 00:04:10.139 for a better price. They're locked in. They're 00:04:10.139 --> 00:04:14.379 locked in. But you, the tenant buyer, you have 00:04:14.379 --> 00:04:16.680 the option. You have the choice. You can exercise 00:04:16.680 --> 00:04:19.319 your option to buy it, or you can just walk away. 00:04:19.850 --> 00:04:22.589 So I hold all the cards, at least on the buy 00:04:22.589 --> 00:04:25.129 or not buy decision. In terms of that final decision 00:04:25.129 --> 00:04:27.949 making, yes, you control the destiny of that 00:04:27.949 --> 00:04:31.230 deed. But, and this is a big but, to get those 00:04:31.230 --> 00:04:33.990 cards, you have to pay for them. And that is 00:04:33.990 --> 00:04:36.569 where we get into the real mechanics of the deal. 00:04:36.730 --> 00:04:38.970 Okay, let's get into that. We've identified seven 00:04:38.970 --> 00:04:41.709 critical elements that make up these deals. And 00:04:41.709 --> 00:04:43.490 the first one is exactly what you just hinted 00:04:43.490 --> 00:04:46.040 at. It's called valuable consideration. Sounds 00:04:46.040 --> 00:04:48.360 very official. Right. And this is just contract 00:04:48.360 --> 00:04:51.399 law 101. For an option to be valid, something 00:04:51.399 --> 00:04:53.740 of value, usually money has to change hands. 00:04:53.860 --> 00:04:56.579 You can't just shake on it and say, hey, I might 00:04:56.579 --> 00:04:58.620 buy this from you in a couple of years. That's 00:04:58.620 --> 00:05:00.740 just a conversation. It's just a conversation. 00:05:01.139 --> 00:05:04.220 It's not a legally enforceable contract. You 00:05:04.220 --> 00:05:06.300 have to actually buy the right to buy the house 00:05:06.300 --> 00:05:09.459 later. And this payment is the option fee. And 00:05:09.459 --> 00:05:11.800 this isn't a security deposit, right? I feel 00:05:11.800 --> 00:05:13.779 like that's a really common misconception. People 00:05:13.779 --> 00:05:16.110 think, oh, I'll get that back. It is the most 00:05:16.110 --> 00:05:18.329 common misconception and it's a dangerous one. 00:05:18.529 --> 00:05:21.990 A security deposit is refundable. It is your 00:05:21.990 --> 00:05:24.910 money held in trust by the landlord to cover 00:05:24.910 --> 00:05:28.009 potential damages. If you don't trash the place, 00:05:28.149 --> 00:05:30.629 you get it back when you move out. Simple enough. 00:05:30.870 --> 00:05:33.129 The option fee is generally non -refundable. 00:05:33.290 --> 00:05:35.889 Need to hear that again. Non -refundable. You 00:05:35.889 --> 00:05:38.569 are purchasing a thing of value, the exclusive 00:05:38.569 --> 00:05:41.089 right to buy that property at a set price for 00:05:41.089 --> 00:05:44.310 a set time. Once you pay that fee, the seller 00:05:44.310 --> 00:05:46.410 cannot sell that house to anyone else during 00:05:46.410 --> 00:05:48.730 the option term. You have bought that exclusivity. 00:05:48.850 --> 00:05:50.769 So if I change my mind and decide not to buy 00:05:50.769 --> 00:05:53.250 the house? The seller keeps the money. No questions 00:05:53.250 --> 00:05:55.930 asked. Because they took their house off the 00:05:55.930 --> 00:05:58.430 market for me. They missed out on other potential 00:05:58.430 --> 00:06:00.589 buyers during that time. They had an opportunity 00:06:00.589 --> 00:06:04.110 cost. Exactly. They upheld their end of the bargain 00:06:04.110 --> 00:06:06.709 by holding the property for you. You paid for 00:06:06.709 --> 00:06:09.199 that service. So how much money are we talking 00:06:09.199 --> 00:06:11.540 about here? If I want to do this, what's the 00:06:11.540 --> 00:06:13.480 price of admission? Well, it varies a lot. It's 00:06:13.480 --> 00:06:16.000 a negotiation. If you are the seller, you want 00:06:16.000 --> 00:06:18.779 as much as possible to ensure the buyer is serious. 00:06:18.879 --> 00:06:21.220 You want them to have significant skin in the 00:06:21.220 --> 00:06:23.620 game. So they won't walk away easily. Precisely. 00:06:23.620 --> 00:06:27.279 So typically you see sellers asking for 3 % to 00:06:27.279 --> 00:06:29.800 5 % of the purchase price. Okay, so on a $400 00:06:29.800 --> 00:06:34.899 ,000 house, that's $12 ,000 to $20 ,000 up front. 00:06:34.959 --> 00:06:37.629 That's real money. It is. It's not pocket change. 00:06:37.810 --> 00:06:40.110 It's a serious commitment. Now, on the other 00:06:40.110 --> 00:06:43.110 side, if you are the buyer or maybe a savvy investor 00:06:43.110 --> 00:06:45.490 acting as the buyer, you want to pay as little 00:06:45.490 --> 00:06:48.209 as possible. Of course. And technically, legal 00:06:48.209 --> 00:06:50.269 consideration can be a token amount. It could 00:06:50.269 --> 00:06:53.970 be $100. It could even be $10. Seriously. I could 00:06:53.970 --> 00:06:55.689 lock up a half million dollar property for under 00:06:55.689 --> 00:06:59.209 bucks. Legally, yes. Courts have upheld options 00:06:59.209 --> 00:07:02.550 with what they call nominal consideration. practically 00:07:02.550 --> 00:07:05.129 speaking. Good luck getting a seller to agree 00:07:05.129 --> 00:07:07.329 to that unless they're very, very desperate or 00:07:07.329 --> 00:07:09.930 you are an incredible negotiator. Yeah. But the 00:07:09.930 --> 00:07:12.029 principle is that something of value must be 00:07:12.029 --> 00:07:15.649 paid to make the contract binding. Okay. So we've 00:07:15.649 --> 00:07:19.029 paid our fee. We have our option. Now, element 00:07:19.029 --> 00:07:22.910 number two, the purchase price. How do we decide 00:07:22.910 --> 00:07:25.579 what I'm going to pay for this house? Two or 00:07:25.579 --> 00:07:27.360 three years from now. There are really two schools 00:07:27.360 --> 00:07:29.699 of thought on this. The less common way is that 00:07:29.699 --> 00:07:31.540 you agree that the price will be determined by 00:07:31.540 --> 00:07:34.439 an appraisal at the time of purchase. So in two 00:07:34.439 --> 00:07:36.800 years, whatever a licensed appraiser says it's 00:07:36.800 --> 00:07:39.600 worth, that's what I pay. Which seems fair, I 00:07:39.600 --> 00:07:41.480 guess, but it's not very exciting. It basically 00:07:41.480 --> 00:07:44.040 just defers the negotiation and removes any upside 00:07:44.040 --> 00:07:46.040 for me as the buyer. Exactly. It removes the 00:07:46.040 --> 00:07:48.829 speculative element. It's safe. But it's not 00:07:48.829 --> 00:07:51.569 why most people do this. The more common method 00:07:51.569 --> 00:07:53.470 and the one that really attracts people to lease 00:07:53.470 --> 00:07:56.350 options is agreeing on the purchase price at 00:07:56.350 --> 00:07:58.430 the inception right at the very beginning. This 00:07:58.430 --> 00:08:00.769 is the gamble. This is a total gamble on the 00:08:00.769 --> 00:08:03.189 future of the real estate market. Let's say the 00:08:03.189 --> 00:08:06.370 house is worth $300 ,000 today. The seller might 00:08:06.370 --> 00:08:08.569 say, OK, I'll give you an option to buy it in 00:08:08.569 --> 00:08:10.829 three years, but the price is going to be $320 00:08:10.829 --> 00:08:13.310 ,000. OK, so they're hedging. They're betting 00:08:13.310 --> 00:08:15.870 on at least a little bit of appreciation. They're 00:08:15.870 --> 00:08:18.149 trying to capture future appreciation. They assume 00:08:18.149 --> 00:08:20.170 the house will be worth more later, so they want 00:08:20.170 --> 00:08:22.829 to lock that in. But if I'm the buyer, I'm betting 00:08:22.829 --> 00:08:26.009 the market is going to go crazy. I'm hoping that 00:08:26.009 --> 00:08:29.009 in three years that house isn't worth $320 ,000. 00:08:29.269 --> 00:08:32.529 It's worth $350 ,000 or even more. Right. And 00:08:32.529 --> 00:08:35.490 if you're correct and it is worth $350 ,000, 00:08:35.669 --> 00:08:38.269 you get to execute your option to buy it for 00:08:38.269 --> 00:08:41.509 $320 ,000. The moment you close, you instantly 00:08:41.509 --> 00:08:44.129 have $30 ,000 in equity. You've beaten the market. 00:08:44.309 --> 00:08:46.669 That's the dream scenario. But let's look at 00:08:46.669 --> 00:08:49.210 the flip side. What if the market tanks? What 00:08:49.210 --> 00:08:50.830 if there's a recession and the house is only 00:08:50.830 --> 00:08:53.610 worth $280 ,000 in three years? Then you walk 00:08:53.610 --> 00:08:56.710 away. Just like that. Just like that. You lose 00:08:56.710 --> 00:08:59.470 your option fee. Your $10 ,000 or whatever it 00:08:59.470 --> 00:09:02.549 was is gone. But you aren't stuck buying a house 00:09:02.549 --> 00:09:05.250 for $40 ,000 more than it's worth. That's the 00:09:05.250 --> 00:09:07.629 safety valve of the option versus the purchase. 00:09:08.330 --> 00:09:10.409 You weren't underwater on a mortgage because 00:09:10.409 --> 00:09:11.889 you never had to take out the mortgage in the 00:09:11.889 --> 00:09:14.409 first place. I see. It's like buying a stock 00:09:14.409 --> 00:09:16.730 option, really. You're betting on the future 00:09:16.730 --> 00:09:19.289 value, and your risk is capped at the premium 00:09:19.289 --> 00:09:21.830 you paid. That's a perfect analogy. Your risk 00:09:21.830 --> 00:09:24.350 is limited to the option fee. Okay. Element number 00:09:24.350 --> 00:09:29.210 three, the timeline, the duration. How long do 00:09:29.210 --> 00:09:31.649 these things last? In residential real estate, 00:09:31.750 --> 00:09:34.830 the typical term is one to three years. But there 00:09:34.830 --> 00:09:36.990 is a huge trap here for the tenant buyer, and 00:09:36.990 --> 00:09:38.970 the source material is very, very clear on this. 00:09:39.070 --> 00:09:41.179 What's the trap? A short -term lease option, 00:09:41.399 --> 00:09:44.240 say two years or less, is often unwise for the 00:09:44.240 --> 00:09:46.639 buyer. Really? Two years feels like a long time 00:09:46.639 --> 00:09:48.620 to me. It feels like it, but life and financial 00:09:48.620 --> 00:09:50.799 recovery move fast. Usually the person entering 00:09:50.799 --> 00:09:52.600 a lease option is doing it because they have 00:09:52.600 --> 00:09:55.879 some kind of hurdle to overcome. Right. Bad credit, 00:09:56.000 --> 00:09:58.879 no down payment. Yep. Something is stopping them 00:09:58.879 --> 00:10:01.259 from buying today. Exactly. And fixing those 00:10:01.259 --> 00:10:04.100 problems takes time. If you have bad credit, 00:10:04.220 --> 00:10:06.039 you need to clear up disputes on your credit 00:10:06.039 --> 00:10:09.419 report. Each dispute can take 30 to 45 days. 00:10:09.659 --> 00:10:12.960 You need to build a new positive history of on 00:10:12.960 --> 00:10:15.200 -time payments. And most lenders want to see 00:10:15.200 --> 00:10:18.340 at least 12, sometimes 24 months of that. So 00:10:18.340 --> 00:10:20.779 if the term is only a year, the clock runs out 00:10:20.779 --> 00:10:22.460 before they can even get their financial house 00:10:22.460 --> 00:10:25.299 in order. Precisely. The option expires. They 00:10:25.299 --> 00:10:28.019 lose that non -refundable fee and they are right 00:10:28.019 --> 00:10:30.200 back at square one, maybe even worse off because 00:10:30.200 --> 00:10:32.279 they're out that cash. So if you are the buyer, 00:10:32.419 --> 00:10:35.139 you want as long a term as you can possibly negotiate. 00:10:35.220 --> 00:10:38.259 You want runway. That makes sense. OK, you mentioned 00:10:38.259 --> 00:10:40.740 rent credits earlier. That's element number four. 00:10:40.840 --> 00:10:42.980 And I think this is the part that really sells 00:10:42.980 --> 00:10:46.059 people on the whole idea. It makes it feel like 00:10:46.059 --> 00:10:48.899 your rent money. isn't just dead money disappearing 00:10:48.899 --> 00:10:51.759 into a landlord's pocket. That is the psychological 00:10:51.759 --> 00:10:54.240 hook. It's a powerful one. The idea is that a 00:10:54.240 --> 00:10:56.299 portion of your monthly rent goes toward your 00:10:56.299 --> 00:10:58.899 down payment or the purchase price. But let's 00:10:58.899 --> 00:11:01.019 look at the math because it's rarely as simple 00:11:01.019 --> 00:11:03.139 as it sounds. You aren't usually paying just 00:11:03.139 --> 00:11:05.519 market rent. You're paying a premium on top of 00:11:05.519 --> 00:11:07.480 it. Right. Let's use the example from the source. 00:11:07.779 --> 00:11:10.320 Let's say fair market rent for a particular house 00:11:10.320 --> 00:11:13.200 is $1 ,000 a month. In a lease option scenario, 00:11:13.419 --> 00:11:17.279 the seller might charge $1 ,100 or $1 ,200. Okay, 00:11:17.360 --> 00:11:19.220 so it's more expensive than just renting down 00:11:19.220 --> 00:11:21.720 the street. Correct. And that extra amount is 00:11:21.720 --> 00:11:25.399 the rent credit. So in the source example, the 00:11:25.399 --> 00:11:28.899 market rent is $1 ,000. The seller charges $1 00:11:28.899 --> 00:11:32.480 ,100. That extra $100 is then credited back to 00:11:32.480 --> 00:11:34.759 the buyer at closing. So wait, in that example, 00:11:34.759 --> 00:11:37.259 I'm paying $100 over market to get $100 credit. 00:11:37.480 --> 00:11:40.639 That's a wash. In that simple example, yes. But 00:11:40.639 --> 00:11:43.059 often it's structured more favorably. The seller 00:11:43.059 --> 00:11:45.700 might charge $1 ,100 but offer a $200 credit. 00:11:46.059 --> 00:11:48.620 Ah, okay. So I'm paying a $100 premium to get 00:11:48.620 --> 00:11:50.720 a $200 benefit. That's a better deal. It is. 00:11:50.740 --> 00:11:52.340 It functions like that forced savings plan we 00:11:52.340 --> 00:11:55.600 mentioned. Over two years, that $200 a month 00:11:55.600 --> 00:11:58.899 adds up to $4 ,800 off the purchase price or 00:11:58.899 --> 00:12:01.159 towards your closing costs. It makes the tenant 00:12:01.159 --> 00:12:03.299 feel invested. They aren't just renters anymore. 00:12:03.360 --> 00:12:05.320 They start to see themselves as future owners. 00:12:05.580 --> 00:12:08.200 But it's important to remember. The base rent, 00:12:08.340 --> 00:12:11.879 that $1 ,000, usually covers the landlord's mortgage, 00:12:12.139 --> 00:12:15.580 taxes, and insurance. The credit is really coming 00:12:15.580 --> 00:12:18.120 from the premium you pay. That's almost always 00:12:18.120 --> 00:12:20.840 the case. It's not free money. Which leads us 00:12:20.840 --> 00:12:24.539 to element five, occupancy and rights. I assume 00:12:24.539 --> 00:12:27.009 the tenant actually lives there. In a typical 00:12:27.009 --> 00:12:29.970 rent -to -own scenario with a family, yes, they 00:12:29.970 --> 00:12:32.289 live there. But the contract needs to be very 00:12:32.289 --> 00:12:34.950 specific about their rights. Can they sublease 00:12:34.950 --> 00:12:37.690 a room? Probably not. Can they sell the option 00:12:37.690 --> 00:12:40.789 itself to someone else? Ooh, now that's interesting. 00:12:40.970 --> 00:12:43.350 It is. And that becomes a huge, huge deal when 00:12:43.350 --> 00:12:45.269 we start talking about investors later on. But 00:12:45.269 --> 00:12:47.750 for a standard family, yes, they are moving in 00:12:47.750 --> 00:12:49.549 and making it their home. And once they move 00:12:49.549 --> 00:12:52.620 in, things get... Weird compared to a normal 00:12:52.620 --> 00:12:55.059 rental. I'm in six. Maintenance. This is the 00:12:55.059 --> 00:12:57.500 big shift in mindset and responsibility. In a 00:12:57.500 --> 00:12:59.899 normal rental, if the toilet breaks or the roof 00:12:59.899 --> 00:13:01.980 starts leaking, who do you call? The landlord. 00:13:02.139 --> 00:13:04.789 It's their house, their problem. Right. But in 00:13:04.789 --> 00:13:07.350 a lease option, the psychology is different. 00:13:07.470 --> 00:13:10.590 You are practicing being the owner. So the contract 00:13:10.590 --> 00:13:13.110 often shifts the burden of maintenance, or at 00:13:13.110 --> 00:13:16.110 least a portion of it, to the tenant buyer. So 00:13:16.110 --> 00:13:18.529 I'm paying rent every month, but I'm also the 00:13:18.529 --> 00:13:20.769 one fixing the garbage disposal when it jams. 00:13:21.200 --> 00:13:24.340 Often, yes. The contract might say the seller 00:13:24.340 --> 00:13:26.919 is responsible for major structural things like 00:13:26.919 --> 00:13:29.940 the foundation or the roof, but the tenant handles 00:13:29.940 --> 00:13:32.720 everything else. Or maybe there is a deductible, 00:13:32.740 --> 00:13:35.179 like the tenant pays for the first $100 of any 00:13:35.179 --> 00:13:37.799 repair and the landlord covers the rest. But 00:13:37.799 --> 00:13:40.320 either way, it's more responsibility on the tenant. 00:13:40.750 --> 00:13:42.850 Much more. And from the seller's perspective, 00:13:43.070 --> 00:13:45.570 this is a fantastic deal. No more 3 a .m. calls 00:13:45.570 --> 00:13:48.169 about a leaky faucet. Their life just got a lot 00:13:48.169 --> 00:13:50.570 easier. But for the tenant, it's a real risk. 00:13:50.750 --> 00:13:53.289 You could pour thousands of dollars into fixing 00:13:53.289 --> 00:13:55.970 up a house that you end up not even buying. Imagine 00:13:55.970 --> 00:13:59.490 spending $5 ,000 on new floors or a water heater, 00:13:59.570 --> 00:14:01.470 and then your financing falls through at the 00:14:01.470 --> 00:14:03.850 last minute. You just donated those floors and 00:14:03.850 --> 00:14:05.429 that water heater to the landlord. You don't 00:14:05.429 --> 00:14:07.110 get that money back. It's a tough pill to swallow. 00:14:07.679 --> 00:14:09.559 It really is. Okay, so we had the mechanics down, 00:14:09.659 --> 00:14:12.559 the fee, the price, the timeline, the credits, 00:14:12.659 --> 00:14:15.480 occupancy, and maintenance. Now, I want to pivot 00:14:15.480 --> 00:14:19.240 to the people who use these mechanics like a 00:14:19.240 --> 00:14:22.580 chessboard, the investors. Yes. Because this 00:14:22.580 --> 00:14:24.379 isn't just for families trying to buy a home. 00:14:24.480 --> 00:14:27.200 This is a huge, well -established strategy for 00:14:27.200 --> 00:14:30.139 real estate investors. Absolutely. The investor 00:14:30.139 --> 00:14:32.000 strategies are fascinating because they take 00:14:32.000 --> 00:14:34.960 these simple mechanics and layer them to create 00:14:34.960 --> 00:14:38.000 incredible leverage. They essentially detach 00:14:38.000 --> 00:14:41.259 the utility of the house living in it from the 00:14:41.259 --> 00:14:44.080 financial control of the house. The source describes 00:14:44.080 --> 00:14:47.059 something called the sandwich strategy. Now, 00:14:47.059 --> 00:14:48.980 I'm getting hungry, but I'm assuming this isn't 00:14:48.980 --> 00:14:51.019 about lunch. No, it's about being the middleman. 00:14:51.139 --> 00:14:53.840 You are the meat in the sandwich positioned between 00:14:53.840 --> 00:14:56.710 two other parties. Okay, so break it down. How 00:14:56.710 --> 00:14:58.950 does this sandwich work? OK, imagine an investor 00:14:58.950 --> 00:15:01.389 finds a distressed seller. Maybe the house is 00:15:01.389 --> 00:15:03.190 a little rundown and hard to sell, or maybe the 00:15:03.190 --> 00:15:05.190 seller just needs out. They got a job in another 00:15:05.190 --> 00:15:07.169 state. They can't cover two mortgages. They're 00:15:07.169 --> 00:15:09.850 desperate. A motivated seller. A very motivated 00:15:09.850 --> 00:15:13.029 seller. The investor goes to the seller and enters 00:15:13.029 --> 00:15:16.590 into a lease option with them. So. The investor 00:15:16.590 --> 00:15:19.309 is now technically the tenant buyer. But the 00:15:19.309 --> 00:15:21.330 investor has no intention of ever living in that 00:15:21.330 --> 00:15:24.450 house. None at all. And the contract they sign 00:15:24.450 --> 00:15:27.250 explicitly gives the investor the right to sublease 00:15:27.250 --> 00:15:29.970 the property and assign the option. So what do 00:15:29.970 --> 00:15:32.409 they do next? They turn around and find someone 00:15:32.409 --> 00:15:35.029 who does want to live there. Exactly. They find 00:15:35.029 --> 00:15:37.610 a tenant buyer, a family who wants to live in 00:15:37.610 --> 00:15:39.690 the house but can't get a mortgage just yet. 00:15:39.889 --> 00:15:42.370 So the investor is the tenant to the original 00:15:42.370 --> 00:15:45.350 owner? and they become the landlord to the new 00:15:45.350 --> 00:15:48.129 resident. Precisely. They are sandwiched right 00:15:48.129 --> 00:15:50.590 in the middle, and they make money on the spread 00:15:50.590 --> 00:15:52.570 in multiple ways. Okay, let's walk through the 00:15:52.570 --> 00:15:54.629 math example from the source, because seeing 00:15:54.629 --> 00:15:56.429 the numbers really clarifies this. It can get 00:15:56.429 --> 00:15:59.330 a little confusing. Sure. So let's say the investor 00:15:59.330 --> 00:16:01.230 enters an agreement with the original seller 00:16:01.230 --> 00:16:04.330 for a purchase price of $100 ,000. That's the 00:16:04.330 --> 00:16:06.490 price the investor can buy it for. Let's say 00:16:06.490 --> 00:16:08.809 they agree to pay the seller $800 a month in 00:16:08.809 --> 00:16:12.149 rent. Okay, so $100 ,000 price is locked in. 00:16:13.049 --> 00:16:15.090 And they're paying out $800 a month. Correct. 00:16:15.629 --> 00:16:18.090 The investor then maybe does some light cosmetic 00:16:18.090 --> 00:16:21.090 work. Let's say they spend $20 ,000 fixing it 00:16:21.090 --> 00:16:24.769 up. New paint, new carpets, clean up the landscaping. 00:16:25.230 --> 00:16:27.990 Now, because of that work, the fair market value 00:16:27.990 --> 00:16:31.450 of the house jumps to $135 ,000. So they've created 00:16:31.450 --> 00:16:34.769 $15 ,000 in equity, effectively. The value is 00:16:34.769 --> 00:16:38.149 $135K. Their purchase price is $100K. And they 00:16:38.149 --> 00:16:41.309 put in $20K of work. Right. But instead of buying 00:16:41.309 --> 00:16:43.090 it themselves and going through the hassle of 00:16:43.090 --> 00:16:45.509 getting a loan, they sell the right to purchase 00:16:45.509 --> 00:16:48.769 to a final buyer. They market the home as a rent 00:16:48.769 --> 00:16:52.210 to own for $135 ,000. And they find that family 00:16:52.210 --> 00:16:54.230 who can't get a loan yet. Yep. They find a family 00:16:54.230 --> 00:16:56.889 who puts down, say, a $5 ,000 non -refundable 00:16:56.889 --> 00:17:00.190 option fee and agrees to pay $1 ,200 a month 00:17:00.190 --> 00:17:02.429 in rent. Wait. Okay. Hold on. Walk me through 00:17:02.429 --> 00:17:03.970 the cash flow there because there are a few things 00:17:03.970 --> 00:17:06.029 happening at once. Okay. So first, the investor 00:17:06.029 --> 00:17:08.450 collects that $5 ,000 option fee from the family. 00:17:08.630 --> 00:17:10.930 That's immediate. cash in their pocket that might 00:17:10.930 --> 00:17:12.829 cover their own option fee to the original seller 00:17:12.829 --> 00:17:15.789 and then some. Got it. Upfront profit. Then every 00:17:15.789 --> 00:17:17.650 single month they have cash flow. They collect 00:17:17.650 --> 00:17:19.890 twelve hundred dollars from the family. They 00:17:19.890 --> 00:17:22.210 turn around and pay the original seller their 00:17:22.210 --> 00:17:24.170 eight hundred dollars and they keep the four 00:17:24.170 --> 00:17:25.829 hundred dollar difference. That's the monthly 00:17:25.829 --> 00:17:27.829 spread. The sandwich filling. That's the sandwich 00:17:27.829 --> 00:17:30.289 filling. That's pure monthly profit. And then 00:17:30.289 --> 00:17:32.549 there's the big payday at the end. When the family 00:17:32.549 --> 00:17:34.529 finally gets their mortgage. Right. Let's say 00:17:34.529 --> 00:17:36.369 in two years the family gets their mortgage approved. 00:17:36.630 --> 00:17:39.750 They buy the house for the agreed upon $135 ,000. 00:17:40.369 --> 00:17:42.970 The closing happens. The original seller gets 00:17:42.970 --> 00:17:45.660 their $100 ,000 that was promised to them. And 00:17:45.660 --> 00:17:47.559 the investor? The investor gets the remaining 00:17:47.559 --> 00:17:50.759 $35 ,000. From that, you'd subtract their $20 00:17:50.759 --> 00:17:53.900 ,000 in rehab costs. So their back -end profit 00:17:53.900 --> 00:17:57.660 is $15 ,000, plus the $5 ,000 option fee they 00:17:57.660 --> 00:18:00.660 collected up front, plus the $400 a month they 00:18:00.660 --> 00:18:03.259 made for two years, which is another $9 ,600. 00:18:03.660 --> 00:18:06.150 So the original seller gets their price. The 00:18:06.150 --> 00:18:08.650 final buyer gets the house they wanted. And the 00:18:08.650 --> 00:18:10.849 investor walks away with a pretty hefty profit 00:18:10.849 --> 00:18:14.029 for being the middleman. Exactly. The investor 00:18:14.029 --> 00:18:16.710 controlled a valuable asset and profited from 00:18:16.710 --> 00:18:19.009 the appreciation and the value add of the rehab, 00:18:19.230 --> 00:18:21.910 all without ever actually taking title to the 00:18:21.910 --> 00:18:24.710 home. It's a way to control assets with very 00:18:24.710 --> 00:18:26.890 little of your own money and without the liability 00:18:26.890 --> 00:18:29.210 of actually owning them. That sounds brilliant, 00:18:29.289 --> 00:18:32.890 but it also sounds really risky. What if something 00:18:32.890 --> 00:18:34.859 goes wrong in the middle of all that? There are 00:18:34.859 --> 00:18:37.819 significant risks, huge risks. The biggest one 00:18:37.819 --> 00:18:40.119 for the investor in this scenario is the title 00:18:40.119 --> 00:18:42.019 to the property. What do you mean? You are putting 00:18:42.019 --> 00:18:45.000 $20 ,000 of your own rehab money into a house 00:18:45.000 --> 00:18:47.799 you do not own. What if the original seller, 00:18:47.960 --> 00:18:49.859 the one you have the deal with, has a secret 00:18:49.859 --> 00:18:52.140 tax line you didn't know about? What if they 00:18:52.140 --> 00:18:54.140 go bankrupt? What if they're going through a 00:18:54.140 --> 00:18:56.299 messy divorce and the spouse suddenly refuses 00:18:56.299 --> 00:18:58.859 to sign the deed? What if they just can't transfer 00:18:58.859 --> 00:19:00.779 clear title when it's time to buy? Then your 00:19:00.779 --> 00:19:02.619 deal with the final family is dead. Yeah. And 00:19:02.619 --> 00:19:05.500 you lose your $20 ,000. You lose the entire improvement 00:19:05.500 --> 00:19:08.799 budget and you have a very, very angry final 00:19:08.799 --> 00:19:11.740 buyer who paid you an option fee for a house 00:19:11.740 --> 00:19:14.319 you can't deliver. You could be facing serious 00:19:14.319 --> 00:19:17.099 legal action for fraud or breach of contract. 00:19:17.500 --> 00:19:20.380 The source mentions an alternative for this specific 00:19:20.380 --> 00:19:23.720 risk, something called subject to. How is that 00:19:23.720 --> 00:19:26.599 different? Yes. If an investor is going to do 00:19:26.599 --> 00:19:29.789 a major rehab. I'm talking anything more than 00:19:29.789 --> 00:19:32.509 just paint and carpet. A lease option is usually 00:19:32.509 --> 00:19:34.730 way too risky for the reasons we just discussed. 00:19:34.970 --> 00:19:38.589 They might prefer a subject to transaction. This 00:19:38.589 --> 00:19:41.190 is where the investor actually takes the title. 00:19:41.309 --> 00:19:43.670 The deed transfers into their name immediately, 00:19:43.869 --> 00:19:46.970 but the existing mortgage stays in the original 00:19:46.970 --> 00:19:49.970 seller's name. So they actually own the house. 00:19:50.009 --> 00:19:52.009 So their renovation money is safe because they 00:19:52.009 --> 00:19:54.769 own the asset they're improving. Correct. They 00:19:54.769 --> 00:19:57.410 hold the deed. It's much safer for the rehab 00:19:57.410 --> 00:19:59.630 money. Now, it carries a whole different set 00:19:59.630 --> 00:20:01.750 of risks, like the banks due on sale clause. 00:20:02.009 --> 00:20:04.589 But that's a topic for another deep dive. For 00:20:04.589 --> 00:20:06.529 lease options, the rule of thumb for an investor 00:20:06.529 --> 00:20:09.410 is don't rehab a house you don't own unless the 00:20:09.410 --> 00:20:10.809 numbers are small enough that you can afford 00:20:10.809 --> 00:20:13.049 to lose them completely. OK, that's a good rule. 00:20:13.150 --> 00:20:15.250 Yeah. There is another investor strategy mentioned, 00:20:15.410 --> 00:20:17.690 which is the buyer investor. This is less about 00:20:17.690 --> 00:20:20.069 being a middleman and more about using sweat 00:20:20.069 --> 00:20:22.980 equity. This is a fantastic strategy for someone 00:20:22.980 --> 00:20:26.480 who is handy, but maybe a little short on cash 00:20:26.480 --> 00:20:28.640 for down payment. Let's say you want to buy a 00:20:28.640 --> 00:20:30.940 house, but you don't have that 20 % down payment 00:20:30.940 --> 00:20:33.099 sitting in the bank. Right. Common problem. You 00:20:33.099 --> 00:20:35.039 find a seller with a house that's structurally 00:20:35.039 --> 00:20:38.859 sound, but ugly. It needs work. You agree to 00:20:38.859 --> 00:20:41.019 a lease option with that seller. You move in. 00:20:41.200 --> 00:20:43.779 And instead of saving for a down payment. I use 00:20:43.779 --> 00:20:46.079 my cash to buy materials and fix the place up 00:20:46.079 --> 00:20:49.200 myself. Exactly. You use your savings for lumber, 00:20:49.420 --> 00:20:52.319 paint, new light fixtures. You do the work yourself 00:20:52.319 --> 00:20:54.700 on weekends. You're increasing the value of the 00:20:54.700 --> 00:20:57.099 house with your own labor. You're building sweat 00:20:57.099 --> 00:20:59.880 equity. That's the term. When your option term 00:20:59.880 --> 00:21:02.339 is up, the house is now worth significantly more. 00:21:02.720 --> 00:21:05.039 When you go to the bank to get the loan, the 00:21:05.039 --> 00:21:08.019 loan -to -value ratio, the LTV, looks much better 00:21:08.019 --> 00:21:10.619 because the house appraises for a higher value. 00:21:12.779 --> 00:21:15.579 your cash down payment for your sweat. I love 00:21:15.579 --> 00:21:17.779 that. It's like bootstrapping your way into home 00:21:17.779 --> 00:21:20.259 ownership. It feels very, I don't know, American 00:21:20.259 --> 00:21:22.460 dream -ish. It's a great way to get started if 00:21:22.460 --> 00:21:24.960 you have more time and skill than cash. Okay, 00:21:25.059 --> 00:21:27.440 we have looked at the mechanics and the investors. 00:21:27.859 --> 00:21:30.259 Now I want to look at the motivation matrix. 00:21:30.900 --> 00:21:33.980 Why do people do this? Why not just keep renting 00:21:33.980 --> 00:21:37.349 or wait until you can buy traditionally? Let's 00:21:37.349 --> 00:21:39.549 start with the buyer. We mentioned bad credit, 00:21:39.670 --> 00:21:42.089 but the source lists a whole bunch of other reasons. 00:21:42.309 --> 00:21:45.049 It's not just about bad credit. Sometimes it's 00:21:45.049 --> 00:21:47.910 about unprovable income. Business owners are 00:21:47.910 --> 00:21:50.289 a classic example. How so? You might have just 00:21:50.289 --> 00:21:52.569 started a new business. It's doing great. You 00:21:52.569 --> 00:21:54.430 have plenty of cash flow. Business is booming. 00:21:55.319 --> 00:21:58.819 But banks, they're very conservative. They typically 00:21:58.819 --> 00:22:01.539 require a two -year tax history showing stable 00:22:01.539 --> 00:22:03.640 income before they'll give you a mortgage. Right. 00:22:03.700 --> 00:22:05.920 So the bank sees you as a high risk, even if 00:22:05.920 --> 00:22:07.920 you're making a ton of money, just because the 00:22:07.920 --> 00:22:10.759 income isn't seasoned. Exactly. So a lease option 00:22:10.759 --> 00:22:13.299 buys you that two -year window. You can secure 00:22:13.299 --> 00:22:15.359 the house you want for your family now. You lock 00:22:15.359 --> 00:22:18.000 in the price and you just wait for your tax returns 00:22:18.000 --> 00:22:20.099 to catch up to your business reality. That's 00:22:20.099 --> 00:22:22.799 a great use case. What about relocation? That's 00:22:22.799 --> 00:22:25.289 a huge one. Imagine you're moving your family 00:22:25.289 --> 00:22:28.390 to a new city for a job. You don't know the neighborhoods. 00:22:28.509 --> 00:22:30.490 You don't know if the schools are actually as 00:22:30.490 --> 00:22:32.730 good as their websites claim or if they just 00:22:32.730 --> 00:22:34.289 look good on Zillow. You don't know where the 00:22:34.289 --> 00:22:36.230 good grocery store is. You don't know anything. 00:22:36.410 --> 00:22:39.170 Do you really want to commit to a 30 -year mortgage 00:22:39.170 --> 00:22:42.630 and plant roots on day one? Probably not. You 00:22:42.630 --> 00:22:44.890 want to test drive the city first. A lease option 00:22:44.890 --> 00:22:47.589 lets you do that. You lock in a house you like 00:22:47.589 --> 00:22:50.299 in a neighborhood that seems promising. If you 00:22:50.299 --> 00:22:52.460 find out six months later that the commute is 00:22:52.460 --> 00:22:54.920 an absolute nightmare or the neighbors, you know, 00:22:54.920 --> 00:22:57.599 run a drum circle at 2 a .m. every Tuesday. You 00:22:57.599 --> 00:22:59.940 can bail. You can walk away. You'll pay a price 00:22:59.940 --> 00:23:01.839 for that flexibility. You lose the option fee. 00:23:01.980 --> 00:23:04.460 But that's often way cheaper than buying a house, 00:23:04.579 --> 00:23:06.839 paying thousands in closing costs, realizing 00:23:06.839 --> 00:23:09.660 you hate it, and then paying a 6 % commission 00:23:09.660 --> 00:23:12.680 to a realtor to sell it again a year later. That 00:23:12.680 --> 00:23:15.259 makes a lot of sense. It's risk mitigation for 00:23:15.259 --> 00:23:17.259 the buyer's lifestyle, not just their finances. 00:23:17.950 --> 00:23:20.289 There was also a specific note in the source 00:23:20.289 --> 00:23:24.690 about VA loans. Yes, this is a very clever niche 00:23:24.690 --> 00:23:28.410 strategy. VA loans are fantastic, often zero 00:23:28.410 --> 00:23:31.650 down payment, but they have very strict appraisal 00:23:31.650 --> 00:23:33.789 standards about the physical condition of the 00:23:33.789 --> 00:23:35.890 property. What kind of things? Peeling paint, 00:23:36.130 --> 00:23:39.490 a bad roof, a missing handrail on a staircase, 00:23:39.930 --> 00:23:43.369 broken windows. Any of these can be a deal killer 00:23:43.369 --> 00:23:46.630 for a VA appraisal. The house has to meet certain... 00:23:46.970 --> 00:23:49.569 minimum property requirements. So classic fixer 00:23:49.569 --> 00:23:51.670 upper isn't going to qualify for a VA loan. Right. 00:23:51.769 --> 00:23:55.569 So a savvy veteran might use a lease option to 00:23:55.569 --> 00:23:57.589 move into the house, use their own money and 00:23:57.589 --> 00:24:00.450 time to fix those specific checklist style issues 00:24:00.450 --> 00:24:03.210 during the lease term. And then once the house 00:24:03.210 --> 00:24:05.269 is up to code and will pass the inspection, they 00:24:05.269 --> 00:24:07.950 trigger the VA loan to buy it. Exactly. It bridges 00:24:07.950 --> 00:24:09.930 that gap between the current condition of the 00:24:09.930 --> 00:24:11.849 house and the strict requirements of the bank. 00:24:11.970 --> 00:24:13.910 That is really smart. OK, let's flip the table. 00:24:13.970 --> 00:24:16.009 Why does a seller do this? If I have a house. 00:24:16.269 --> 00:24:18.250 Why don't I just put a sign in the yard, sell 00:24:18.250 --> 00:24:20.789 it, and take the cash? Usually it's because they 00:24:20.789 --> 00:24:23.829 can't. Or at least they can't easily. Maybe the 00:24:23.829 --> 00:24:25.750 market is really cold and there are no buyers. 00:24:25.990 --> 00:24:28.150 Maybe the house has some issues that make it 00:24:28.150 --> 00:24:31.190 hard to sell traditionally. A lease option opens 00:24:31.190 --> 00:24:33.990 up a much, much larger pool of potential buyers. 00:24:34.250 --> 00:24:36.230 Because you're not just marketing to people who 00:24:36.230 --> 00:24:38.869 can get a bank loan today. You're marketing to 00:24:38.869 --> 00:24:41.769 basically... Anyone who can afford the monthly 00:24:41.769 --> 00:24:44.529 payment, even if their credit is shot. You expand 00:24:44.529 --> 00:24:47.309 your market tenfold, so it solves the unsellable 00:24:47.309 --> 00:24:49.289 house problem. But there's more to it than just 00:24:49.289 --> 00:24:52.049 desperation. Oh, absolutely. There's a maximization 00:24:52.049 --> 00:24:54.670 component. There's a common rule in this business. 00:24:55.309 --> 00:24:58.069 Price or terms, pick one. I like that. Explain 00:24:58.069 --> 00:25:00.329 what that means. If a buyer comes to you with 00:25:00.329 --> 00:25:03.109 all cash and wants to close in two weeks, they 00:25:03.109 --> 00:25:05.049 have all the leverage. They're going to demand 00:25:05.049 --> 00:25:06.869 a discount. They get a low price because they 00:25:06.869 --> 00:25:10.079 offer perfect terms. Cash is king. But if a buyer 00:25:10.079 --> 00:25:12.940 needs terms, if they need time, flexibility, 00:25:13.160 --> 00:25:15.880 or seller financing like a lease option, then 00:25:15.880 --> 00:25:18.619 the seller has the leverage. The seller can demand 00:25:18.619 --> 00:25:21.279 a premium price. So if I'm giving you three years 00:25:21.279 --> 00:25:23.460 to get your act together and buy my house, I'm 00:25:23.460 --> 00:25:25.920 going to charge you full retail plus maybe a 00:25:25.920 --> 00:25:27.660 little more for the trouble. Exactly. You get 00:25:27.660 --> 00:25:30.059 your price. On top of that, you're keeping that 00:25:30.059 --> 00:25:33.200 non -refundable option fee. On top of that, you're 00:25:33.200 --> 00:25:35.579 likely getting above market rent every single 00:25:35.579 --> 00:25:38.799 month. And if the tenant ultimately doesn't buy, 00:25:39.019 --> 00:25:41.440 you keep all that money and just start the process 00:25:41.440 --> 00:25:44.299 over with someone new. It can be very, very profitable. 00:25:44.519 --> 00:25:47.599 And there's a point in here about eviction versus 00:25:47.599 --> 00:25:50.440 foreclosure. This seems like a critical legal 00:25:50.440 --> 00:25:52.880 safety net for the seller. It is absolutely crucial. 00:25:53.500 --> 00:25:56.180 If you sell a house to someone using traditional 00:25:56.180 --> 00:25:58.839 seller financing where you act as the bank and 00:25:58.839 --> 00:26:01.500 hold the mortgage and that buyer stops paying 00:26:01.500 --> 00:26:03.720 you. You have to foreclose on them. You have 00:26:03.720 --> 00:26:06.599 to foreclose. Foreclosure is a long, complicated 00:26:06.599 --> 00:26:09.960 and very expensive legal process. Depending on 00:26:09.960 --> 00:26:12.099 the state, it can take months or even years to 00:26:12.099 --> 00:26:14.119 get your property back. But in a lease option. 00:26:14.380 --> 00:26:16.599 They are not an owner. They are technically a 00:26:16.599 --> 00:26:20.069 tenant. If they stop paying rent, you don't foreclose, 00:26:20.089 --> 00:26:22.450 you evict them. And eviction is generally much 00:26:22.450 --> 00:26:24.970 faster and cheaper. Much faster, much cheaper. 00:26:25.289 --> 00:26:28.549 It's governed by landlord -tenant law, not mortgage 00:26:28.549 --> 00:26:31.109 law. You can often get your property back in 00:26:31.109 --> 00:26:34.029 30 to 60 days. It's a massive difference in risk 00:26:34.029 --> 00:26:37.190 management for the seller. It is. But speaking 00:26:37.190 --> 00:26:39.750 of risk, we really need to get to the dark side 00:26:39.750 --> 00:26:42.509 of this. We've painted a picture of a flexible, 00:26:42.690 --> 00:26:46.150 useful tool, but there are some serious red flags 00:26:46.150 --> 00:26:49.730 and... as the source calls them bank realities 00:26:49.730 --> 00:26:52.670 that can blow these deals up for the buyer this 00:26:52.670 --> 00:26:54.430 is the most important part of the conversation 00:26:54.430 --> 00:26:57.329 i think the biggest hurdle is what we call the 00:26:57.329 --> 00:26:59.809 financing hurdle and it's specifically about 00:26:59.809 --> 00:27:02.029 those rent credits we talked about earlier this 00:27:02.029 --> 00:27:04.109 is the excess credit rule right yes and this 00:27:04.109 --> 00:27:06.720 is where so many of these deals go to die right 00:27:06.720 --> 00:27:09.339 at the finish line. So the buyer and seller, 00:27:09.500 --> 00:27:11.460 they have this nice agreement. I'm paying you 00:27:11.460 --> 00:27:14.779 $1 ,500 a month in rent, and we agree that $500 00:27:14.779 --> 00:27:16.980 of that is going toward my down payment. Okay. 00:27:17.039 --> 00:27:18.700 Sounds good. It's in the contract. It's in the 00:27:18.700 --> 00:27:20.660 contract. They shake hands. They sign it. It's 00:27:20.660 --> 00:27:23.380 all good. For two years, the buyer makes every 00:27:23.380 --> 00:27:25.299 payment on time. And now they're ready to buy. 00:27:25.519 --> 00:27:27.539 They're ready. They walk into the bank with their 00:27:27.539 --> 00:27:29.700 contract and their payment history and say, look, 00:27:29.839 --> 00:27:32.759 I saved up $12 ,000 in down payment credits. 00:27:33.299 --> 00:27:35.240 And the loan officer looks at it and says, hold 00:27:35.240 --> 00:27:38.630 on a second. What is the fair market rent for 00:27:38.630 --> 00:27:41.130 this house? And if the bank's appraiser comes 00:27:41.130 --> 00:27:44.089 back and says the fair market rent is, say, $1 00:27:44.089 --> 00:27:47.170 ,500. Then the bank looks at the buyer and says, 00:27:47.289 --> 00:27:49.029 you didn't save anything. You just paid rent. 00:27:49.630 --> 00:27:52.730 The bank, the underwriter specifically, will 00:27:52.730 --> 00:27:55.190 typically only allow the amount paid above fair 00:27:55.190 --> 00:27:57.390 market rent to count as a down payment. Whoa. 00:27:57.609 --> 00:28:00.410 So if I was paying exactly market rent and the 00:28:00.410 --> 00:28:03.009 seller just gifted me a credit on paper, the 00:28:03.009 --> 00:28:05.809 bank just ignores it. Often, yes. They view it 00:28:05.809 --> 00:28:08.690 as a seller concession or a gift, not as true 00:28:08.690 --> 00:28:11.069 cash equity from the buyer. And all of a sudden, 00:28:11.130 --> 00:28:13.369 that buyer who thought they had $12 ,000 for 00:28:13.369 --> 00:28:15.910 their down payment and closing costs has zero. 00:28:16.150 --> 00:28:18.890 They're short. The deal falls apart. The option 00:28:18.890 --> 00:28:21.410 expires and the seller keeps everything. That 00:28:21.410 --> 00:28:23.690 is absolutely devastating. That's two years of 00:28:23.690 --> 00:28:25.910 planning down the drain. So if you are a buyer, 00:28:26.049 --> 00:28:27.930 you need to make sure your total payments are 00:28:27.930 --> 00:28:30.910 documentably above the market rent if you want 00:28:30.910 --> 00:28:33.230 any of it to count. Absolutely. It has to be 00:28:33.230 --> 00:28:35.490 crystal clear that you are paying a premium specifically 00:28:35.490 --> 00:28:38.490 for the equity. It's even better if you write 00:28:38.490 --> 00:28:41.049 two separate checks each month, one for rent 00:28:41.049 --> 00:28:44.130 and a second one for option payment. Documentation 00:28:44.130 --> 00:28:46.589 is everything. Then there are the outright predatory 00:28:46.589 --> 00:28:49.230 practices. The source mentions a strategy called 00:28:49.230 --> 00:28:51.900 the churn. This is the really ugly side of the 00:28:51.900 --> 00:28:54.759 business. Some unscrupulous investors or landlords 00:28:54.759 --> 00:28:57.799 will specifically scan for tenants who have absolutely 00:28:57.799 --> 00:29:00.240 no realistic chance of ever qualifying for a 00:29:00.240 --> 00:29:03.619 loan. So they know from day one that the tenant 00:29:03.619 --> 00:29:06.799 has terrible credit, no savings, unstable income. 00:29:07.000 --> 00:29:10.000 Right. They know this person will fail. But they 00:29:10.000 --> 00:29:12.400 sell them the dream of homeownership. They take 00:29:12.400 --> 00:29:15.500 a big non -refundable option fee, maybe $5 ,000 00:29:15.500 --> 00:29:19.160 or $10 ,000. Then they set a very short term, 00:29:19.259 --> 00:29:22.220 maybe six months or a year, knowing full well 00:29:22.220 --> 00:29:24.480 the tenant can't possibly fix their credit and 00:29:24.480 --> 00:29:26.680 save for closing costs in that time. The term 00:29:26.680 --> 00:29:30.009 runs out, the tenant can't buy. The landlord 00:29:30.009 --> 00:29:32.910 keeps the fee. They evict the tenant for not 00:29:32.910 --> 00:29:35.269 exercising their option or just let it expire 00:29:35.269 --> 00:29:37.690 and then they put a new sign in the yard and 00:29:37.690 --> 00:29:40.410 find the next victim to pay another $5 ,000 fee. 00:29:41.230 --> 00:29:44.329 They just churn through people harvesting option 00:29:44.329 --> 00:29:47.150 fees without ever having any intention of actually 00:29:47.150 --> 00:29:49.950 selling the house. That is incredibly cynical. 00:29:50.029 --> 00:29:52.309 It's preying on people's desperation. It is. 00:29:52.410 --> 00:29:54.410 And that's why that unilateral nature of the 00:29:54.410 --> 00:29:56.549 contract is so important to understand from both 00:29:56.549 --> 00:29:59.549 sides. A good seller is hoping you succeed. A 00:29:59.549 --> 00:30:01.849 predatory seller is betting you won't. It's an 00:30:01.849 --> 00:30:04.390 adversarial position in some ways. And just be 00:30:04.390 --> 00:30:07.170 clear, if the buyer defaults, if they stop paying 00:30:07.170 --> 00:30:10.210 rent halfway through the term, what happens then? 00:30:10.640 --> 00:30:13.440 The whole thing collapses. The relationship reverts 00:30:13.440 --> 00:30:15.819 instantly to a simple landlord -tenant relationship. 00:30:16.039 --> 00:30:18.440 The option part of the contract is voided. So 00:30:18.440 --> 00:30:20.299 you lose everything. You lose the option fee. 00:30:20.420 --> 00:30:22.059 You lose all the rent credits you've accumulated. 00:30:22.539 --> 00:30:25.000 You are just a tenant who is behind on rent and 00:30:25.000 --> 00:30:27.140 is now facing eviction. It's a very high -stakes 00:30:27.140 --> 00:30:29.200 game. It is. You have to go in with your eyes 00:30:29.200 --> 00:30:31.539 wide open. So let's synthesize this. We've covered 00:30:31.539 --> 00:30:33.579 a lot of ground. The mechanics of the fee and 00:30:33.579 --> 00:30:35.859 the price. The sandwich strategy for investors. 00:30:36.619 --> 00:30:38.980 The motivations for both buyers and sellers. 00:30:39.960 --> 00:30:43.980 And the very serious risks. What is the big overarching 00:30:43.980 --> 00:30:46.339 takeaway here? I think the takeaway is that a 00:30:46.339 --> 00:30:49.180 lease option is a powerful and flexible tool, 00:30:49.359 --> 00:30:52.779 but it's not a standard rental. It is a sophisticated 00:30:52.779 --> 00:30:54.900 financial instrument that happens to be wrapped 00:30:54.900 --> 00:30:57.859 inside a lease agreement. You can't treat it 00:30:57.859 --> 00:31:00.819 casually. For the buyer, it's a potential pathway 00:31:00.819 --> 00:31:02.779 to ownership when the front door seems locked. 00:31:03.180 --> 00:31:05.680 But it comes with a non -refundable cover charge, 00:31:05.900 --> 00:31:08.880 that option fee, and a very strict deadline. 00:31:09.319 --> 00:31:11.420 And for the seller, it's a way to move difficult 00:31:11.420 --> 00:31:13.680 property and maximize your financial return. 00:31:14.099 --> 00:31:16.799 But it requires managing a tenant who, in their 00:31:16.799 --> 00:31:19.119 mind, is already an owner, which can create its 00:31:19.119 --> 00:31:21.480 own set of challenges. I want to leave the listeners 00:31:21.480 --> 00:31:23.660 with a final thought, something to chew on. We 00:31:23.660 --> 00:31:25.319 talked about how the tenant buyer often takes 00:31:25.319 --> 00:31:27.319 on the burdens of maintenance. They're the one 00:31:27.319 --> 00:31:29.140 fixing the roof, painting the walls, replacing 00:31:29.140 --> 00:31:31.339 the dishwasher. Right. It makes me think about 00:31:31.339 --> 00:31:34.059 the very nature of ownership. In a lease option, 00:31:34.400 --> 00:31:37.470 you are technically just a tenant. But you are 00:31:37.470 --> 00:31:40.089 bearing the burdens and the costs of an owner, 00:31:40.210 --> 00:31:43.230 but you don't yet have the security of holding 00:31:43.230 --> 00:31:46.650 the title. You are paying in a very real way 00:31:46.650 --> 00:31:51.190 for the potential of future equity. That's a 00:31:51.190 --> 00:31:53.190 really profound way to put it. You're not just 00:31:53.190 --> 00:31:55.789 renting a house. You're renting hope. Exactly. 00:31:55.809 --> 00:31:57.910 And the question you have to ask yourself is, 00:31:57.990 --> 00:32:00.839 is the price of that potential? The option fee, 00:32:00.920 --> 00:32:03.119 the higher rent, the unexpected repair costs. 00:32:03.259 --> 00:32:05.819 Is it worth the risk that that hope never becomes 00:32:05.819 --> 00:32:07.960 a reality? That is the multi -thousand dollar 00:32:07.960 --> 00:32:10.480 question every single tenant buyer has to answer 00:32:10.480 --> 00:32:12.880 for themselves before they sign that check. And 00:32:12.880 --> 00:32:14.640 a question for you to consider before you ever 00:32:14.640 --> 00:32:17.079 sign on the dotted line. Read the fine print, 00:32:17.160 --> 00:32:18.980 everyone. Thanks for diving deep with us today. 00:32:19.140 --> 00:32:20.500 My pleasure. See you next time.