Jerry Norton

Creative Financing Strategy - Lease Options Explained
by Jerry Norton

Lease Option Creative Financing Investing

Creative financing is simply structuring seller-financing deals with little to no money down without using traditional bank financing for real estate deals. Lease Option Investing is a creative financing strategy that real estate investors can use. Also referred to as a “Lease-to-Own,” “Rent-to-own” and/or “Lease with Option to Buy.” A lease option consists of two agreements:

1.  Lease Agreement

2.  Option to Purchase Agreement

These 2 agreements may be incorporated in one document or two separate documents. In a lease option agreement, the title to the property remains with the landlord until the tenant exercises his or her option and purchases the property.

In other words, the starting point of this kind of an arrangement is a tenancy, not a property purchase transaction.

Lease Agreement:

The lease agreement, like any other lease, includes the duration of the lease period, the amount of rent to be paid and any repair and maintenance responsibilities of landlord and tenant.

Option to Purchase

The option agreement grants the tenant an option (right) to buy the property within a specified period of time in exchange for a fee (option fee), that is usually paid up front, and/or in the form of a higher-than-market rent (some of which is applied to the property purchase). A tenant who does not exercise the option to purchase is not entitled to a refund of the option fee or any refund in rent.

Lease Option Example

Lease Option To Buy Creative Financing Investing

Let’s look at an example. Let’s say a seller agrees to lease a property for $800/mo with the option to buy the property within 5 years for $120,000. The seller agrees to apply $150/mo towards the purchase. Buyer pays an option fee of $3000 (applied to purchase if exercised)

Now lets say that the tenant/buyer decides to exercise his option on the 3-year anniversary for the agreed upon $120,000 price. He will have a credit for $3,000 (option fee) plus he will have accumulated another $5,400 ($150 per month for 36 months) for a total of $8,400 towards the purchase.

Now, there are a few things to consider when doing a lease option…

Option Fee – Amount:

In order to be contractually enforceable, the option to purchase must be given in exchange for consideration, or value but there is no minimum on the amount. It’s really just a matter of negotiation between landlord and tenant. Depending on factors such as the price of the property, the option fee can range from $1.00 to several thousands of dollars.

Option Fee – Non-refundable:

The tenant has no obligation to buy the property (hence – “option”) but if he or she decides not to exercise the option to purchase the property within the agreed-upon time frame, they forfeit the option money and/or any rent money that would have been applied to the purchase.

Remember, creative financing deals may be a good (or sometimes the only) option available to buyers and sellers of real estate. Real estate rules vary by state, so it is important to consult with an experienced real estate attorney to draft seller financing documents in order to allow for appropriate terms and to protect all parties involved.

If you found this article helpful and/or informative, share it, like it and be sure to explore any of my other articles or videos on real estate investing.

Check out this free training video: How to Use Pending Comps When Analyzing Deals 

Jerry Norton
Jerry Norton is 33 years old and married with 5 children (ages 10, 7, 5, 3, 2) and lives in Lake Orion, MI

He has a Bachelors Degree in Business and is a licensed Real Estate Broker

Jerry has a been a full-time real estate investor since 2004 and just in the last 3 years alone he has done over 200 deals!

Today Jerry owns 2 real estate brokerages and usually has 10-15 fix and flip deals going on at a time in his home market of Oakland County. Jerry also partners on deals with his students throughout the U.S. He does approximately 50 deals a year earning on average 25,000 -$50,000 net profit per deal!

Jerry Norton loves to teach other investors his techniques and systems for fixing and flipping residential properties and has taught thousands of investors from all over the country. When hes not doing deals, he enjoys, boating, wakeboarding, scuba diving, coaching his kids sports events, serving in his church, vacationing and spending time with his family.

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