An Investing Technique

The Lease Purchase Advantage

By Michael Carbonare
a/k/a The Naked Investor

I'll start by admitting my personal bias in this article: I believe that lease purchasing, done correctly, is the best way for every newbie and real estate investor wannabe to break into this business. A bold statement, perhaps. But, can you blame me?

I work from my home office, (hey, you can't beat the coffee or the commute), and have no dress code, (I'm called the Naked Investor for a reason).

With some specialized knowledge I can generate a steady volume of deals each and every month. Some are short term for small, quick profits. Others are held onto longer and can generate much larger profits. But all generate upfront cash flow. And as a new investor isn't this what you're looking for? And I can do this without needing to go hat in hand to lenders, without needing large deposits of cash, and without my personal credit ever being a factor. Newbie Nirvana.

Lease Purchasing is smart real estate. Learn the concepts, apply them correctly, and you'll understand why I say that controlling real estate is oftentimes better than owning it. As the investor in the deal you can create a win/win situation for all parties involved and earn substantial profits in the process. And because you don't need large cash deposits to do so, and because the deal is infinitely quicker than, say, buying, fixing, and then selling, you are able to do a volume of deals quickly. Deals that can generate income upfront, each month from the cash flow, and on the back end if and when the property sells. With many properties these profits can occur again and again if the option to purchase is not exercised.

I learned many years ago that I could make more money by controlling other people's properties than by buying them. Sure, you can go out and purchase that house down the street. But, for the privilege of doing so you'll need ten percent down. You'll need to qualify for the loan, prepay taxes and insurance, and possibly be required to pay homeowners fees, also. You're responsible for the maintenance and repairs. Leaking roof? It's your headache. Welcome to homeownership!

I hear the voices out there: "But, Michael, how do I get this control?" Well, it starts with a seller who is motivated to some degree. I know every guru who has ever preached real estate has given you this same advice. Find that elusive motivated seller and begin making large cash deposits at the bank. Let me give you a wake up call: in the real world not every seller is motivated. The beauty of lease purchasing is that we can offer even that ho-hum seller with the bad attitude a technique that will give them everything they want and still profit ourselves. Pay full price and profit? Exactly!

Show me another real estate strategy that can truthfully make this claim.

But let's look at that motivated seller and what he means to you. There are two strategies within this control category. One is called a Sandwich Lease, and the other is an Assignment. The Sandwich Lease is essentially a property where we negotiate a long-term lease agreement with the right to sublet and/or assign that agreement. Sandwich leasing provides three profit centers to the investor: option money, monthly cash flow, and back end profit. And I'm talking about pretty homes in good neighborhoods. No fixers, (unless you want to), and no war zones. Our goal is to control that property for as long a period as possible, and sublet it to the tenant/buyer in one year increments. This strategy maximizes our profits.

Now, if you are brand new to this business you may have already overheard a variety of Tenants from Hell stories. So you're understandably reluctant to lease to my in-laws. I don't blame you. But, before you decide lease purchasing isn't for you, let me tell you about assignments. How hard do you think it would be to find someone to assign, or sell, that contract you have already negotiated? It isn't. You're holding in your hand an agreement that allows you to assign your interest in the deal to a third party. This agreement gives you control of the property for three years, and all the terms are fixed for that time. Any appreciation that occurs is yours. You have no maintenance or repair responsibilities. You pay no closing costs and don't need to arrange any financing. What do you think this may be worth to another individual? Two thousand, three thousand, five thousand dollars? Assign your interest, collect your payday, and you're out of the deal and onto the next one. You didn't lift a hammer or jump through financial hoops. It was quick, non adversarial, and allows you to do it all over again.

Suffice it to say that Lease Purchasing is both creative and flexible. In addition to the two techniques I touched on above, we can also utilize another very powerful but underutilized technique called the Cooperative Assignment. This favorite of mine allows us to give the seller everything they want and still earn substantial profits in the process. That's correct: pay full price and still profit. Lease Purchasing is smart real estate!

However, by controlling that same property with a long-term lease option we can receive most of the benefits of ownership without the aggravations. Think about it: we finance the property as a tenant, but control it and benefit from it as an owner. It doesn't get any better.