Lease Options for Investors

green info 32How does a lease-option work?

This video has more information. The money a tenant puts down (OPTION FEE) plus a portion of their monthly payment (RENT CREDIT) is applied towards the purchase of the home.

What will be the purchase price? 

Purchase agreements come in 2 flavors: Appraised Value or Set Price.

Appraised Value – A price determined by a licensed real estate appraiser at the end of the lease. The benefit with this method is that the property will be purchased at a fair value. The disadvantage of course is that the property value could dramatically decrease. An alternative method is to have the buyer and seller select an appraiser and use the average of the 2 appraisals.

Set Price – A price agreed by you and the buyer/tenant. The benefit with this method is that you will have peace of mind as to what the price will be at the end of the lease.

Which type of contract is best?

Neither. There is no guaranteed way to avoid taking a loss at the end of a lease-option contract. HOWEVER, your chances of losing money are minimal as less than 10% of lease-option tenants ever exercise their option to purchase.

How does Limestone get compensated?

We get 50% of the option fee. The option fee is a non-refundable FEE required to secure a purchase agreement. The option fee is determined by you. We take 50% of the option fee unless it falls below $1000. For example, if the option fee is $4000, Limestone gets $2k and you get $2k. If the option fee is only $1000, we take all of that option fee. You can get a general feel of option fees by looking at our inventory.

green info 32How long is a typical lease?

Generally buyer/tenants want a 2 year lease with the option to purchase. Our job is to bring you a prospective buyer/tenant. You decide if the deal is right for you.

Do you do background checks?

Minor. The only thing we check for is eviction or extensive civil litigation. Those 2 are our biggest trouble makers. We have discovered that folks who put a bunch of money down with the intention of purchasing a home make better tenants. Here are the five reasons we don’t do a full blown background check.
1. Anyone interested in doing a lease-option has bad credit. If they had good credit they wouldn’t need to do a lease-option.
2. We have over 300 people each day looking at our properties because they have money and want to move fast.
3. Folks who pay double market deposits and a premium over market rent generally don’t want to lose their investment.
4. 80% of our lease-option candidates are moving from out of state and don’t have a background to check.
5. Having managed properties for over 20 years, we have learned that money talks and background checks are dubious at best.

What is the downside to a lease-option?

You can lose money if real estate prices fall in an appraised value contract or you could lose opportunity if you have a property increase in value over the set price contract.  There is no guaranteed way to make money in real estate. In a lease/purchase, both parties are gambling. Anyone who can promise you a profit is pulling your leg.

Will my buyer/tenant have pets or be a smoker?

Probably. This person has intentions of buying your home. If you have problems with this then you need to go back to making less money with a straight rental. The only exception to this rule is condo/townhouse restrictions. If your property has restrictions, let us know now so we can save everyone a bunch of time.

Can I do my own background check before accepting financial terms?

No. Most investors think they can predict the behavior of a buyer/tenant based on their profession or background. They had a bad experience with a renter and think they can use the same principles for another buyer/tenant. Statistically, a buyer/tenant who puts down a huge chunk of money up front and pays a premium per month is better than a straight renter. After a deal closes, you can ask them as many questions as you like but we don’t recommend opening Pandora’s Box.

green info 32Can I market my property while you try to get me a tenant?

Yes. We believe that our services cannot be matched and do not make our investors sign “exclusive agreements.” If you find a tenant before we do, we just ask that you are courteous and tell us immediately that you have found a tenant. WARNING: Nearly all of our competitors have exclusive contracts which means you will have to compensate them even if we find a tenant. The biggest mistake you can make is to place a tenant and hide it from us. A simple phone call, text or email is fine – we don’t take it personally.

Do you charge anything up front to market my property?

No. We only make money if we find you a tenant. If you want us to collect rents for you, we charge 5% of the gross. Since your buyer/tenant is paying for the first $500 in repairs, it is not necessary to pay us for managing your money.

Why do most of your investors do lease-options?

They get better tenants, more money, less turnover and the tenants are responsible for the first $500 in repairs after the initial move in.

green info 32What am I responsible for during the lease?

Taxes, garbage and sewer since these can potentially cause liens on your property. You don’t want anyone else responsible for them. EXCEPTION:  North Las Vegas has included water as a part of the sewer bill. This is has created some confusion among our clients. If your property is in North Las Vegas, your tenant will pay both and you will get notified if the tenant doesn’t pay the bill.

What do I do if my property has a pool?

We require that the pool is professionally cleaned on a weekly basis. We have seen too many pools destroyed. You just simply ask $100 more per month to handle it.  By including a flat fee in the monthly (about $100) you can eliminate a lot of confusion. We don’t care what company you pick to clean it.

What do I do if my property has really nice vegetation and I went crazy and planted grass in the desert?

We require properties with grass in an HOA be professionally cut / blown on a weekly basis. You have no idea how many love letters from HOAs we have accumulated over the years. One investor nearly lost his house because he insisted the tenants take care of it.  You just simply ask $100 more per month to handle it.  By including a flat fee in the monthly (about $100) you can eliminate a lot of confusion. We don’t care what company you pick to deal with it.

Why is your system so effective?

We have over 4,500 tenant/buyers who want a rent to own. By increasing our network of agents and continually add prospective tenant/buyers (since 2006). We have marketing down to a science. It is also not unusual for a competitor that we trust to call you and negotiate a deal.

Can I stop using your services at any time?

Yes. We don’t take it personally. If you find a renter, decide to sell the property or give it to your sister, we just don’t care. What tweaks us are people who have it rented for 2 weeks and didn’t have the courtesy to tell us. A phone call, text or email is all it takes. Peace be with you. By the way, we have the right to fire you as well. If we find out that you are unethical or make everyone’s life difficult, we will mail you your keys.

How fast can you find a tenant?

The speed at which we place a tenant is a function of price. If for example, you want to charge $3k for a small house that’s about to cave in, we will never find a tenant for you. After we see the property, we can give you a price where we think we can move the property within 6 weeks. If you want the property to move faster, you can lower the price.

Is it easier to find a renter than a lease/option tenant?

No. There is more competition in the standard rental market. Since we already have a line of over 4,500 buyer/tenants looking for a lease-option, we are able to fill lease-option properties fast. We move them so fast, we have very little inventory.

Can I review your lease-option contracts?

Please!!! Every month some newbie investor wastes our time because they really didn’t read this page or our contracts. You can save yourself 2 mortgage payments if you read it now. Give it to your lawyer, accountant, real estate agent, mortgage broker and anyone else you feel necessary to bless it.

Is it easy to evict a buyer/tenant if they are not paying?

Yes. Tenants are evicted every month for non-payment. One of the benefits of Nevada is that eviction processes favor property owners. Tenant/buyers are warned in advance that there is no mercy and that they will lose all their money if payments are not made on time.

green info 32What do I need to do while you are marketing my property?

Stay in touch! The biggest problem we have is investors who leave town and don’t tell us in advance. If you are missing in action while we have an interested tenant/buyer, we will give them to someone who is paying attention. Every month, some investor loses 2 months of income because they went MIA at a critical moment.

Who is responsible for repairs?

There is a 30 day grace period after a tenant moves in. After that 30 days, your tenants are responsible for the first $500 in repairs per year. If something greater than $500 crops up, you are on the hook to get it repaired in a rapid fashion. Generally, tenants will call us first and then we will call you with recommendations and complete access to our vendor list.

How smooth is the move in process?

There is always a little bit of turbulence as most buyer/tenants don’t have the luxury of doing a walk-through prior to moving in. If your utilities are not on, they don’t have the opportunity to confirm that the appliances or A/C work properly. Standard procedure is to give them 30 days to make sure everything is working. If there are problems, you will be required to fix them and/or compromise to bring the property up to specifications. After the first 30 days, your tenant/buyers will pay the first $500 in repairs.

Do you really help buyer/tenants purchase a home?

Yes. We provide free one on one counseling. We even check in on them from time to time to give them words of encouragement and offer free advice on personal financial matters. We sincerely want them to own a home and do what we can to help. These people are our customers for life. HOWEVER, we don’t do the work for them. Despite our efforts, 90% of our buyer/tenants don’t exercise their option to purchase because they did not actively clean up their credit and maintain a steady income, or simply decided Las Vegas isn’t for them.

Should my buyer/tenants purchase renter’s insurance?

No. Insisting that your buyer/tenants purchase renters insurance is just a battle you don’t need to fight. The only benefit to you is that it covers your appliances. Since you followed my advice and only purchased used appliances, who cares? Do you really want to kill a deal over a $150 dishwasher?

Who receives monthly payments?

You have 2 options. You can collect the money or you can have us collect it. We only charge you 5% if you want us to.

Should monthly payments go through an escrow account?

Not necessarily. An occasional buyer/tenant will insist on it. The lease-option business is riddled with owners who take money and then stop paying the mortgage. Only a few buyer/tenants insist on this approach because just one late payment will destroy a purchase agreement.

Do you charge anything at the end of the lease?

Yes. These transactions are complex and require a lot of skill. The cost for us to make this work is $1000 and is highly recommended. Since you are not paying a traditional commission of about 6%, you are saving big here.

green info 32What if the buyer/tenant doesn’t exercise their option to purchase?

There are a million “what if” scenarios. Generally, if a tenant leaves a property in good order, we let them ride off into the sunset and don’t send the constable. If they elect to extend the option, it’s in your best interest to keep similar terms and let them continue. If a buyer/tenant rides off into the sunset, they forfeit the option fee and rent credits.

What is the best way for me to avoid losing money?

Unless you have experience managing a property, you will probably want to have us collect your rent for a modest 5%. Every year, we get a “softy” investor who lets the tenant ride a few months without paying rent. If you don’t have any experience dealing with tenants, that 5% will save you money in the long run.

What does the escrow process look like?
We offer to walk both parties through escrow for a flat $1000 (each pays $500). If the buyer wants to hire another agent to represent them, we still charge $1000 to the seller and the buyer has to pay their agent whatever they agree to. This process requires experience and it’s not option to both parties to be unrepresented. Once everyone agrees to who is representing who, this is what happens:

  1. The buyer must prove the ability to purchase with a lender letter.
  2. If the property is an appraised value contract, the property is appraised by the seller.
  3. A standard purchase agreement is generated to reflect the credits the buyer has accumulated. We structure this contract to benefit the buyer according to the lender’s needs.
  4. We prefer to go into escrow with First American Title as they have a lot of experience with this and their fees are modest.
  5. The lender orders an appraisal. An addendum is created to modify the purchase agreement to be the average of both appraisals. There is usually a little tweaking of the contract again so that the buyer gets all their credits.
  6. The seller doesn’t come out of pocket, credits will appear on the closing statement.
  7. Escrow closes and a clean title is transferred to the buyer / tenant.

Here is what you should know:

  • In most cases we are working for both parties and we do everything in our power to be fair and neutral.
  • If the seller / investor attempts to throw the buyer under the bus, we will fight for the buyer. It was difficult for them to get this far so there is no need to make it more difficult.
  • A standardized GLVAR purchase agreement is generated so that title and the lender understand all the specifics. There are a lot of details in that contract and we use a “boiler plate” agreement where the seller pays sales tax and escrow fees are split evenly.
  • Since rent credits are subject to lender requirements, we sometimes need to move the credits to either lower the price or make it a part of the down payment. Either way, we make sure the buyer gets their credits they have built up.
  • We don’t make any money off the title company or the lender. The $1000 is for all that work we have to put into closing escrow (about 20 hours of work). The buyer is welcome to have someone else represent them and/or they can pick their own lender. HOWEVER, this is a very complex process and we have seen many occasions where the buyer throws themselves under the bus by hiring someone who doesn’t know what they are doing.