Lease Option Question....
I will preface my dumb question by informing all who read it that I am a newbie!!
Correct me if I'm wrong but, in a L/O situation, I will find a property that I think has potential and is in need of some maintenance or sprucing up. Then I ask the owner to carry a mortgage and continue to make monthly payments on the property while I search for a buyer at a price higher than I negotiated with the seller?! What does the seller have to gain by doing this versus simply selling it himself and get out from any payment obligation? What about if I'm in buyer's market?
From what I understand, L/O is the way to go to keep out of pocket expenses to a minimum. Am I way off base here??
Please help me understand this method!!
Thanks,
Chris
In a lease-option situation you find a motivated seller. The property could be in perfect condition, the seller just needs to be motivated.
In a lease-option situation, you sign a lease agreement with the owner who becomes your landlord. You also sign an option to purchase the property at some time in the future at the price you agree on today.
You now have a property where you are the tenant-buyer in a lease option situtation. The owner's mortgage stays in his name, he continues to make the monthly mortgage payments. You pay the owner-landlord rent until you exercise your option to purchase the property. When you exercise your option to purchase, you bring new financing to the table to complete the purchase.
You can sublet the property to your subtenant for more rent than you are paying your landlord-owner. You can sell the property outright at a higher price than your option price. You can give your subtenant an option to purchase at some time in the future at a price higher than your option price.
The seller might be motivated to enter this arrangement because he does not have time to sell before he has to move, can not afford two house payments, divorced and has to downsize, or any other reason you can think of that creates urgency in the seller's mind.
I just want to make sure you realize what "seller carry back" means.......
When you ask a seller to carry back, you are not asking him to continue making the mortgage payments, you actually are asking the seller to be the bank. The seller actually carries the mortgage note like a bank, where you make a monthly mortgage payment at a set interest rate. This sets the owner up to foreclose if you miss a payment, just like a bank. The motivating part for the owner is he makes interest on a note receiveable secured by real property. All motivations in this type of deal depends on how savvy you and the owner are when structuring your transactions. Good luck. 8-)
tinkabout,
You are correct, but in a typical lease option situation the landlord-seller will already have his own mortgage loan in place. The landlord-seller is not carrying back any financing for the tenant-buyer (yet), just collecting rent until the tenant-buyer decides to exercise his option to purchase.