History can be a great teacher of techniques that can be a game changer in today's real estate market. Real Estate evolved in the early 2000's to a 100% financing contract that was negotiated solely on price. The creative real estate offers and strategies innovation in turn died. We started discussing the different category of strategies in the past article titled How to Execute a Sale-Leaseback Strategy. Today we chat about a speculation oriented investment strategy that first arose in the 1970's.
Lease option sales were popular financing instruments in the late 1970s and early 1980s. They were primarily used as a way to creatively buy real estate in an environment where 100% financing did not exist and hard moneylenders were tougher to locate. Here is a dirty little secret that has not been publicized as much. Banks consider lease-options a violation of the due on sale clause so if a lender discovers that a property owner has entered into a lease option agreement, the lender could call the mortgage or deed of trust loan due and foreclose if the loan was not paid off in full (Review Title 12 of the Code of Federal Regulations which refers specifically to lease-option contracts).
Options are misunderstood but when they are fully understood, properly prepared, and used correctly, real estate options are an excellent way to conserve capital, create leverage, reduce risks, and gain control of properties with immediate resale profit potential.