Case Study A

This is my lease option story... 

After years of looking in of the wrong places I found the ultimate lease option.   Two acquaintances were contemplating selling a rental house they jointly owned.  One of the owners did not want to sell because of the capital gains taxes he'd incur, so I pitched him a lease option arrangement.  After some discussion, both owners agreed to let me have a lease option on their house.  Here are the particulars:

• 2 year term.
• $5,000 down and due on the 1st anniversary.
• Option price of $425,000 (about 7% more than market value)
• I was responsible for all maintenance and repairs.
• 100% of monthly lease payment of $1,350 per month goes toward reducing principle.

This was a great deal!  The house is located in Lake Tahoe where house values rise at double digit rates.  So I locked in a price of $425,000 which is way more than I could have afforded at the time, but by the term's end $42,400 was deducted off the original selling price.  We also did a lot of home improvements as we could afford.  A little sod outside, new floorings, appliances, paint, etc. was painless and helped increase the value of our home to over $500,000.  I only owed $382,600 - that meant that I have over $117,000 in equity in the house - the mortgage was easy. 

Case Study B

A young couple was looking for the perfect house to buy.  Once they thought they had found it, they asked the owners if they could do a lease option just to make sure it was the right house.  

Here are the particulars:

• 1 year term.
• $20,000 down.
• Option price of $525,000 (about 5% below market value)
• 20% of monthly lease payment of $1,850 per month goes toward principle.

They basically knew they wanted to buy but the lease option gave them some time to get a feel for the house as well as securing a mortgage.  After 4 months they were able to borrow $550,000 for the house.  They paid off the balance and had money left over for improvements.

Case Study C

A young couple was looking for a condo or apartment to rent.  They found a nice two bedroom condo they could afford.  The landlord asked if they were interested in an option to buy.  He only wanted an extra $200 to count as an option down payment.  They decided to accept his offer.  

Here are the particulars:

• 1 year term (renewable with lease)
• $200 down.
• Option price of $85,000 (about 8% more than market value).
• $100 of monthly lease payment to reduce principle.

It did not sound like a great deal at the time, but a friend had advised them to take the deal, it would pay someday.  And if the couple was unable to exercise their option, they were only out a $200 down payment. 

Well, after two years, the couple was ready to buy.  They had the condo appraised and were surprised to discover the real estate market was booming.  The condo was valued at $103,000. They owed $82,400!  The equity in the condo allowed them to buy it with no extra money down and no financial qualifying.