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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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7/2/2015 5:27:28 AM UTC