Last week we talked about traditional seller-financing scenarios. In those cases, the buyer actually bought and owned the property while the seller became a lender. Lease options are the exact opposite. The seller retains ownership of the property and become a landlord.

Firstly, sellers will need to be comfortable with becoming a landlord. But once that hurdle is overcome, these are great deals. It starts with the seller signing a master lease with the investor. A master lease is one where the tenant (in this case, the investor) can “sub-lease” the property to a standard tenant in a standard lease who will actually occupy the home. Normally, there is a spread in the monthly rent where the investor is making some cash flow.

This takes responsibility for maintaining the property off the hands of the seller, which is the reason most sellers go for this deal. It also provides some cash flow to them, and may defer taxes in some situations.

The second half of this deal is the option to purchase. The option agreement gives the investor the right, through an option fee, to purchase the home sometime in the future. This can lock down a good price in an appreciating market.

A lease option “sandwich” is a deal where once the investor has a master lease and option, he then subleases the property and assigns the option agreement to the tenant/future buyer. Often the investor collects a bigger option fee than he paid to the seller, so he gets cash now in addition to the rent cash flow.

In this situation, the seller retains ownership so there would be no due on sale clause issue. However, there are some other issues that do arise when the final tenant/buyer goes to exercise their option. That’s beyond this blog as we’re just trying to overview the different types of structures.

For more information, please see my website link below!

Jeffrey S. Breglio, Esq.
Breglio Law Office and REI Mastery U
www.reimasteryu.com
jeff@bregliolaw.com
(801) 560-2180