Acquiring Properties cont’d

Another way you can acquire property is with lease options . Once again, check with your lawyer to make sure you are doing this correctly. You may need some money for this.

Here is what you are looking for. Find someone who wants to sell their house but is upside down. In other words, they owe more than the house is worth or about the same as what it is worth but they still need to pay closing costs. Even better, they might have lost their job and really want to move. (If they owe too much more than the value, it may not be a good deal because you want to eventually be able to sell the house for a profit.) The other consideration is what are rents in the area. Because you need the rent to be higher than the monthly mortgage amount.

You then write a quit claim deed with the owner which transfers ownership of the property but not the mortgage, but with the promise that you will pay the mortgage. (The rules vary by state and in places have gotten a bad name because some people have misused them and taken advantage of people. Use a lawyer to make sure you do it right.) Or you could write an option to buy the house written in a way that gives you control of the house.

You then find someone to rent the house. But you do this as a lease option. Typically you would want someone with bad credit because of a large hospital bill, a divorce, job loss etc. but who is starting to bounce back. They have good income, maybe savings, but because of the hit to their credit, they can’t get a mortgage for another year or two. They would lease the house with an option to buy.

You can get an option fee or downpayment which can be fairly large. This is usually non-refundable. The rent is also higher than market rent because the amount above the market rent goes towards the downpayment for the house as well. John Reed did a nice article on the problems with lease options.

So after 1-3 years,  whatever the term, the lessee will need to buy the house or the option terminates.

In this way, you can control a house and generate cash flow without actually buying it in the traditional sense.

The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.