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The Dangers of the Lease Option to Buy Deal

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The lease option to buy deal is seeing a resurgence in this tough
real estate market, and since lease option money can easily be lost
buyers need to know how to negotiate through this rough terrain. A lease
option to buy basically is a deal where the tenant of a property pays
money up front for the option to buy the property they have been leasing
after a set term. In the meantime they pay rents and other fees of
being a tenant and also can put money towards the purchase price.Sound
confusing? It's really not. Let's run through an example. Joe Tenant
does not have the money or financing to buy a piece of commercial real
estate from Sally Landlord. He thinks that in three years he will have
the money so he signs a lease to buy agreement with her. He pays $5000
to purchase the option to buy in three years. In addition he pays rent
every month as well as $200 towards the purchase price. He has the right
to buy the property after three years, but is not obligated to. If Joe
decides to not buy the property all of the lease option money he put
into the deal is gone.Ok, a little less mysterious right? If
worked out properly the lease option to buy deal can be beneficial to
both parties. The seller gets income upfront from the buyer as well as a
tenant who has a vested interest in the property. The buyer gets first
shot at buying the property and also gets a forced savings plan in the
form of the extra lease option money paid every month.There are
many facets of this deal that can make it difficult if not paid
attention to. First, a property owner should never look at this kind of
deal as a way to make income if they have no interest in selling the
real estate. Not only is this unethical but it is also bad business.
Secondly, the lease option money and terms of the deal must be worked
out in advance if the buyer wants to avoid getting the dirty end of the
stick. The buyer needs to have the purchase price, lease term and what
money will be paid monthly to insure that the deal remains a good move
for them.The buyer must prepare themselves for the fact that they
may not be able or want to buy the property at the end of the
agreement. The seller must also realize that they need to protect
themselves from a situation like this by making sure some sort of
security deposit is set aside. Many investors over look security
deposits because the tenant has a vested interest in the property. Yet,
if they decide they don't want to buy their vest interest goes out the
window and the seller may find themselves having to pump money into
keeping the property up.With the lease option money on the line
and the purchase of property in the balance make sure you talk to legal
experts in your state. Lease to buy laws and regulations differ from
state to state and you want to make sure your legal bases are covered.

If you want to learn more about lease
option money and how to invest in commercial real estate, request
your free copy of the 5-part video series "Commercial Real Estate Investing
For Beginners."You'll learn how to find, analyze, and fund
commercial real estate deals, just like the members of The Real Wealth
Company do!
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12/2/2015 2:15:53 AM UTC