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Lease Options vs. Subject Tos
When to consider each technique

By Wendy Patton
www.WendyPatton.com
© 2007 by Wendy Patton

Acquiring investment real estate can be handled with many approaches. Two very popular zero down approaches are lease options and “Subject To” also referred to as ‘Getting the Deed”.

A lease option is a technique which involves gaining ‘control’ of a property, but not ownership—just the right to possess a property now and purchase that property at some future date with terms you define today.

A “Subject To” is getting the deed to a property without getting a new mortgage. Instead, the seller signs over the deed to his or her home ‘subject to’ the existing mortgage staying in place. The buyer in this case makes the mortgage payments on the old loan, but does not get a mortgage themselves to acquire this home.

Both of these techniques usually require little or no money down. In both of these techniques it is possible for the buyer to get money from the seller or the purchaser (or both!) in the beginning of the transaction. These techniques, when used properly, can provide for huge profits. They are both awesome strategies, and when used hand-in-hand by investors are almost an unbeatable pair!

This short article is not meant to give details of each technique, but rather to show when you should consider each. If you don’t understand how to document and protect yourself in each kind of technique, then purchase a course or book on the technique, or do additional research. It is important to understand how to use the technique and which one to use before you tie up a piece of real estate.

Why Knowing Both Techniques Means More Great Deals For You!
Unfortunately there are many people that are teaching that you should only do the subject to – only ‘get the deed’ deals. They recommend never buying on an option. I can’t tell you how many times I have heard, “If I don’t get the deed, I don’t do the deal”. With 22 year’s of experience (since 1985) doing both types of deals, I have to disagree with that statement. The more tools and techniques and ways you have to purchase property or to structure a deal, the more likely you will be able to work with a motivated seller to come to a potential win/win solution. If you only buy “Subject To”, you’ll walk away from a LOT of great deals in your real estate career—but you must know when each technique is appropriate to use.

Finding a motivated seller is the first step to any good real estate deal. There are many types of motivated sellers, but we tend to think of motivated sellers as the ones that are financially distressed. I like to look at motivation from a much wider range. Let me explain. I like to divide motivated sellers into two groups:

Sellers that have ‘Bad Debt’, are those in trouble. They might be behind on a mortgage, have lost their job, acquired an illness, going through a divorce, etc. In these situations, you need to get the deed either with a subject to or an outright purchase. Your main concern is that this type of seller will continue to have financial problems that could affect the title to “your” property if the deed is still in their name. For example, if this seller gets judgments from creditors, they can attach to any real estate the sellers own—and they will have to be paid off before you could exercise your option to buy. That’s why you want to get this type of seller off of the title.

Sellers that have ‘Good Debt’ are those NOT “in trouble” in the traditional sense, but they do have a reason motivating them to sell. Their problem is not financial desperation—it’s simply a change in their life. They might be transferring to a new location for a promotion, getting married (each owning their own home), building a new home, burned out landlords, etc.

Example #1: Here is an example when you MUST get the deed:

A seller calls you on the phone and says he is 2 months behind on payments. Do NOT option this home! This seller is in trouble financially and is not a good risk for an option. Anyone that is in a bad financial situation is not a good seller for an option. This is the type of seller that you must get off of the deed so that his financial situation will not affect the title to the property in the future.

Not every seller who is in financial trouble will tell you so, which is why you ALWAYS need to do research on the title before you get the deed or do an option. In this case, you will need to bring the seller’s mortgage current. Before you do, you will want to make sure that he/she is the owner of the property and there are no other liens on the property unknown to you.

Example #2: Here is an example when you COULD get the deed:

A seller calls you who owes $135,000 on his home—which is worth $135,000. Since he has no equity at all, this type of seller might very well be willing to give you the deed. And if there is high appreciation or a very low payment, you might be able to make a profit even though there’s no equity. Also, if there is equity in a home and the seller is willing to deed you the home, it is another opportunity for you with this technique.

On the other hand, if the seller’s payment is too high or the market is slow, you might need to have the seller pay you to take the deed. Yes, there are sellers who will pay you to take the deed to their home. Think about it: if this seller sells conventionally—that is, though a Realtor, he would have to pay up to $10,000 in commission to sell his home. Plus, he’ll have closing costs, transfer taxes, and will probably pay points or fees on behalf of his buyer. If he’s willing to pay all this money to an agent to sell the property—and wait 90-120 days to sell, too--why shouldn’t he just pay you to take over his payments NOW?

If the seller didn’t have the cash to give you, an option would be your best strategy. This way, the seller can pay you the $10,000 over time, or you could arrange for the seller to pay part of the monthly payment during the option period. This way, if he stops paying his portion of the payments, you have the choice of surrendering your option and simply giving the property back to him. When you have the deed, you can’t do this.

Example #3: Here is an example where you SHOULD lease option or lease purchase:

A doctor has a new home built for himself. His old home is worth $200,000 and he owes $100,000. He has $100,000 of equity. He is not behind on payments, and he did not need the $100,000 cash out to buy the new home. His old home is sitting vacant and the realtor has not sold it yet. He qualified for both house payments at the bank and he can technically afford both, but who wants to make an extra house payment?

Although he is motivated to sell because he’s coming out of pocket every month to own a vacant property, this type of seller is NOT going to simply give you the deed and let you take over the mortgage. No way is he going to give up all of his $100,000 in equity, and no way are you going to pay that much cash out of your pocket.

When you lease/option this house, he gets most of his equity back—although it won’t happen until YOU sell the property. The deal might work like this: you option the property for $190,000, and make payments to the seller that equals his total mortgage payments. You SELL the property on an 18 month lease/option for $228,000 with payments to match his payments. You get cash flow + $38,000 in profit when your tenant/buyer buys the property; the seller gets his payments taken care of for a few years, then gets the bulk of his equity out. And in the meantime, he doesn’t have to worry about management, vandals, frozen pipes, and all of the other things that owners of vacant houses have to deal with.

Example #4: Here is an example where you COULD lease option or lease purchase:

Seller just inherited a property worth $120,000 from their parents estate. It is owned free and clear and they don’t want to be paid off. They don’t need the cash, but they would love some cash flow on this asset. This seller is not going to give you the deed. Let’s say you can lease option this property for $700 per month with $300 per month going to the purchase – or the option credit. Your real payment in this case is only $400. You also could do seller financing on this property.

Let’s examine a seller financing deal:

A seller financed deal means that the seller will finance a mortgage for the buyer and the buyer pays their mortgage payment and interest to the seller versus a bank. This is primarily done when the seller owns a home free and clear and they do not have a mortgage on it themselves. Let’s say you negotiate a deal with the seller for a sales price of $110,000 – if you want your payment to be $700, as in the above lease option example, let’s see what that really means to a seller for a seller financed deal. First in a seller financing or mortgage your payment includes taxes and insurance (unless the buyer pays them themselves). This must be subtracted from the $700. Each part of the country fluctuates, so I will use an estimate of $250 per month for taxes and insurance. This leaves $450 for the seller. Now we must subtract our principal we negotiated above the $300 per month credit. This now leaves the seller with $150 per month. If this were to be all that is left this would essentially mean the seller is receiving 1.6-1.7% interest on their money. The interest rate has to be disclosed on the loan document or seller financed deal. A very low interest rate is much harder for a seller to accept then a lease option payment of $700 per month. It is the same thing to the seller, but it is spelled out differently. They don’t do the subtraction themselves to calculate the real rate of return. When you do a seller financing deal, you must calculate and show the interest rate in writing.

Let’s examine the pros and cons of Subject to vs. Lease Options – primarily as compared to one another.

Warning: There are many factors to consider when making an offer with either of these techniques. What is the current market condition for real estate in your area? Are homes appreciating, depreciating, or staying flat? What is the financial condition of the seller? Are they moving up or down financially in their new home? All of these items make a huge difference on how you will structure a deal. I always say – “Strong market – make a stronger offer. Weak market – make a weaker offer”.

Do your research, but if you keep your mind open to new ways of acquiring real estate, you will indeed make more money!!!!!

To find out more about Subject Tos or Lease Options read Wendy Patton’s book titled:
Investing in Real Estate with Lease Options or Subject Tos or visit her website at www.WendyPatton.com

Real Estate Lease Options

Wendy's strategies are for new and veteran investors alike. More importantly, Wendy's lease option strategies and tactics provide some cash now, cash flow now and later, and a big cash payload down the road.

Lease options are a way to purchase real estate, usually with little or no money down, sometimes even with money back in the investor's pocket.

Money is made in real estate by controlling property. Owning property is the most obvious way to control it, but it's possible to control it without ownership.

A lease option involves gaining control of a property, without the added burdens of ownership. It gives an investor the right to lease a home, condo, land, strip center or apartment building, and also the right to purchase it before the end of the lease period.

An option is a contract. In the case of real estate investing, it gives the optionee (investor) the right to purchase property during a contracted period of time. The most successful real estate developers today use options, in one form or another.

There are some risks involved, but there are ways to minimize your exposure. Options can be taken on a property without leasing it, this is called an "option to buy," or if you lease the property and have an option to buy, it this is called a "lease option to buy." This article is only discussing the latter.

Lease options are all about the terms

Lease options can allow you to negotiate terms that can increase your profits and provide a great investment opportunity. Whenever you can negotiate the terms on real estate, the value of the property goes up. Deals that were out of your reach before now might be possible, such as large apartment complexes, strip malls or other commercial investments.

With lease options you may be able to pay a higher price on a deal, if you can get reasonable terms.

Some of Wendy Pattons Testimonials:

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Wendy Pattons Videos:

"You've got to know ALL the answers before you make a decision"

Wendy tells why she often chooses to work with realtors.

Wendy reveals why goalsetting is so important to success in any situation.


Some scenes from a recent DVD from Wendy.

Wendy Focuses on 4 Areas:

BUYERS

SELLERS

REALTORS

	Wendy's New Book on Investing in Lease Options & Subject To's
	"Finally, a book that explains lease option and subject-to deals in depth and detail. This book is essential for anyone who wants to make money in real estate without using a lot of cash or taking on a lot of risk. A gold mine of great information." Robert Shemin, New York Times bestselling author of "Secrets of Buying and Selling Real Estate Without Using Your Own Money!"

	Wendy's Book, "Remarkable Women"
	With lease options and subject-to deals, investors can control properties worth much more than what they could normally afford to purchase. The potential for profit is great and the costs of getting started are low.