Wholesaling Lease Options: Creative Financing Gone Too Far?

Wholesaling lease options has been emerging as a trend among real estate investors, but is this just taking creative financing too far or can it really be profitable?

Wholesaling lease options can and does work and there has likely never been a better time to do it with the rapid pace of appreciation in the current market. That doesn’t mean it is without its pitfalls and complexities though…

How Do Lease Options Work?

Lease options are an essential form of seller financing or rent-to-own. This was an incredibly popular model a few decades ago, though waned in popularity during the recent boom due to the availability of easy credit and 100% financing.

Now that conventional mortgages are tough to come by, sellers are hurting and some are still wary about the direction of the housing market. This has become an incredibly valuable strategy for buying and selling real estate. With the incredible leverage it provides and advantage of enabling investors to control massive amounts of dollars in property, it can be extremely profitable and make flipping houses very easy.

The basic mechanics of lease options involve the use of two legal documents. The first being the lease to grab control and occupancy rights to the property right away with little money out of pocket. The second is the option agreement or purchase contract giving the renter/ buyer the option to execute the contract at any time during a given period, normally for a pre-set price. This allows the buyer to avoid having to qualify for a conventional home loan, yet enables them to get into a property they want right away and often at a big discount.

6 Critical Tips for Wholesaling Lease Options

1. Avoiding the Pitfalls of Chains

With so many real estate investors jumping into the market, it is important to make sure you aren’t stuck in the middle of a long chain with multiple links. For example, if you are lease optioning from someone who is also lease optioning the property and you are attempting to wholesale your lease option, there are a lot of ways in which it could fall apart.

2. Can the Seller Commit?

In these times with so many distressed homeowners and foreclosures, it is crucial to make sure the seller can really commit and hold up their end of the deal. Potential issues can include them being underwater, currently in foreclosure or about to file bankruptcy and making sure there are no ‘clouds’ on title which could prevent them from legally being able to convey the property.

3. Assignability

If you are wholesaling lease options you must ensure that your documents give you the right to assign them in order to achieve no money down deals and to maximize your profits.

4. Due Diligence

Renters very rarely do any due diligence on their prospective residences, but if the property is to ultimately be bought and sold, investors should be doing all the same due diligence they would when purchasing a home.

5. Qualifying for a Mortgage

Whether you are contemplating buying and then flipping the property or are counting on an end buyer who will need a mortgage, you need to make sure that the end party can really qualify for a home loan in time, before the option runs out.

6. Money

Wholesaling lease options can be done with no money down but make sure you are aware of some of the potential catches. Option money can be lost if the option is not executed on time and you need to be aware of local rental laws and the handling of deposits too to make sure you stay out of trouble.

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