I recently discovered a new model for investing called Wholesaling Lease Options.
It’s like wholesaling, but doing it with lease options. It’s a little wonky but might work under certain circumstances, so let’s dive into it.
- What are Lease Options?
- What is Wholesaling a Lease Option?
- How to Wholesaling Lease Options
- Is Wholesaling Lease Options Worth It?
- Wholesaling Lease Options Works, For Some…
What are Lease Options?
First of all, we need to understand how a lease option works.
A lease option is when a prospective buyer cannot afford to purchase a property, but they are likely to be able to afford it in 6 to 12 months. Often it’s due to down payment requirements, or a slightly too low credit score.
Whatever it is, after 6 or 12 months of work, they’d qualify for the loan.
So, the seller signs a lease with them and allows them to move in. Simultaneously, they sign an option to purchase at a specified price.
If the buyer pays the rent on time every month, they can choose to exercise the option and purchase the house at any point during the option period. If they miss the rent or the option period expires, the tenant can move out and move on with their lives.
These were amazingly popular prior to the housing bubble but there has been a resurgence in popularity as housing prices continue to move upwards.
What is Wholesaling a Lease Option?
The term wholesaling in real estate isn’t related to what real wholesaling is, but it’s a term everyone uses. Basically, wholesaling is the act of flipping a contract rather than flipping the actual property.
So, wholesaling lease options is simply putting together a lease option, and assigning it to someone else, often the seller.
How to Wholesaling Lease Options
Let’s dive into the step by step on how wholesaling lease options works. It’s actually pretty straightforward and fairly simple.
While it may be simple, there are a ton of steps involved and each step can be difficult. So, make sure you understand the whole process before going out and trying to do this!
1) Finding Sellers
You do use your normal channels to find motivated sellers. I prefer using a wholesaling website which is cheap and easy. I recently put together an article about how to put together your first wholesaling website and how you can do it in under 45 minutes.
The other way to generate leads is through direct mail marketing.
The key demographic is someone who wants to sell their property, but wouldn’t sell it for 70-75% of the after repair value minus repairs. They still might be motivated to sell, maybe can’t list it on the MLS, but it’s still in rentable condition.
Instead of throwing away these leads like a normal wholesaler would, you can see if the seller is open to the lease option.
2) Put it Under an Option to Lease Option
This is where it’s a little wonky. You aren’t putting an option to purchase, you’re creating an option to make a lease option.
So, you’re not under obligation to pay for the lease or anything, but you have the right to create the lease option at a specific price, should you be able to find the right person.
3) Find a Qualified Buyer
In order for the wholesaling lease option to work, you need a qualfied buyer, sort of.
A fully qualified buyer would just buy through traditional channels. You’ll need someone that is almost qualified but not quite there yet. You need someone who is willing to lease first and work toward being able to purchase.
These people might have at 580 credit score but plenty of savings.
Or, perhaps a person with a 650 credit score but don’t have the $15,000 down payment they need.
Whatever it is that is holding them back from homeownership, it should be able to be fixed in the next 6-12 months.
4) Sign the Lease Option and Assign it to the Seller
This step consists of a few moving parts.
First, you’ll sign the lease option with the new tenant/buyer. You’ll collect the option fee (your payment), and the first/last/security or whatever is required.
You’ll give the rent and security deposit to the seller, and assign the contract to them.
Now the seller is directly responsible to the tenant/buyer, and you’re out of the equation.
5) Help The Tenant Repair Their Credit
To make sure the deal works out and you don’t ruin your reputation, it’s best to make sure they are working with a good mortgage broker, credit repair company, or financial coach to make sure they are getting to where they need to be in the next 6-12 months.
Is Wholesaling Lease Options Worth It?
Just by reading through the steps, you can tell this clearly works. It’s no different than your standard Lease-Option which has been used for decades all around the country.
It’s also no different than your typical wholesale, which has been done for decades all around the country.
So, why don’t more investors wholesale lease options?
I can think of two reasons – the amount of work is high and the total pay is low.
So, it might be worth it if you’re very new to the game and just need to offset some of your marketing costs, but I don’t think this is a great option for experienced investors.
Let’s dissect why before I get a bunch of angry emails and comments.
Both Wholesaling & Lease Options Are a Lot of Work
Anyone who says that wholesaling is investing is lying to you. Wholesaling is a TON of work, but you can make a ton of money.
It’s also a LOT of work to find the right buyer for your lease option. But, the seller can make a lot of money too.
The reason wholesalers make a lot of money is because they are essentially taking a portion of the profits on the deal. The houseflipper makes a ton and the wholesaler is just taking a cut off the top.
The better the deal, the more they can make.
A seller using lease options can get at or above market value for their home. They can also collect rent in the mean-time rather than letting it sit vacant to sell. So, they are winning.
But, if you want to wholesale lease-options, your check comes from the prospective buyer/lessor.
This is not a wealthy house flipper that is building your fee into their rehab budget. This is someone who can’t afford to pay their credit card bills or afford a down payment.
How much of a fee do you think you’ll be able to get? While I’m sure you can work out a couple thousand on a deal, I feel like that just pays for your time and not much more.
Wholesaling Lease Options Works, For Some…
Like I said, I think this technique works for the right person – a new investor who is trying to cut their teeth and just get started.
It might also work for the right person with a huge network of potential lease option buyers, and someone with a big marketing campaign already. If the time commitment is low, then why not make a few more deals to offset that marketing budget.
What about you? Have you ever used a lease option and have you ever wholesaled one?