Investment Strategy #5: Subject To/Lease Options

Here's one of the more creative deals you can put together. Lets say somebody is having a hard time selling their home. It's been on the market for several months and they need to get rid of it. What if you came along and offered not to buy the house immediately, but to buy it some time in the next couple years. Along with that, you offer to pay all their mortgage payments for them until you did buy the house. Not only that, but you'd give them a couple thousand dollars as well. Would that sound good to the home owner? Usually that sounds fine to them, but how does the investor make money on this?

To make this work, the investor has the owner move out (they often have already) and finds someone else to move in. The someone who moves in is not a renter, but someone who is looking to buy the house. This is called a lease option buyer--instead of buying the house right away, the buyer gets to live in the house for a year and then decide to buy or not. This is great for buyers who would like to own a house but want to try out the house or the neighborhood first, or they need some time to improve their credit, or any number of reasons they can't or don't want to buy right off. The nice part is that anyone who is thinking about buying the house they're living in will generally take much better care of a house than a regular renter.

Here's where the money is made: when someone moves into a house with an option to buy that house, as opposed to laying out money to buy the house immediately, that option costs money. Usually several thousand. The investor can give part of the option money to the current home owner (the one who owns the home but has moved out) and keep the rest. Lease option buyers usually pay a bit more per month than regular renters do, so if a lease option buyer pays $1,200 per month and the mortgage is only $1,000 per month, the investor can make mortgage payments and still pocket $200 a month. Lastly, when the investor offers to buy the house within a couple years, they set the price at the current market value (meaning if the owner is asking $200K, the investor will buy the house for $200K but not for a year or more). When the lease option buyer decides to buy a year or two later, the house will have appreciated $10K~$50K or more. If the lease option buyer wants to buy the house for $230K, the investor will first buy the house from the owner for $200K and then sell it to the lease option buyer for $230K, making $30,000 on the deal.

If the lease option buyer decides not to buy, the investor just finds another potential buyer, collects another lease option fee, makes money each month on anything over the mortgage payment, and gets two years worth of house appreciation instead of one when it sells.

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