In the book-Rich Dad Poor Dad, Kiyosaki states, “Rich dad forbade the words ‘I can’t afford it.’… Instead, rich dad required his children to say, ‘How can I afford it?’ His reasoning, the words ‘I can’t afford it’ shut down your brain. It didn’t have to think anymore. ‘How can I afford it?’ opened up the brain. Forced it to think and search for answers.”
Lease Option strategies are one such creative tool that allows you to invest in properties with little or no money down.
Lease Option strategies opens your mind to a variety of methods that real estate investors across the world are using to find the best deals. Then, focus on the strategies that fit your time availability and work in your market.
Quite simply, an option gives you an opportunity to buy a specific property.
The legal definition is that an option gives you the right, but not the obligation to buy an asset at a set price within a specific period of time. In other words: you can buy it if you want to, but you don’t have to if you don’t want to.
There are two types of option deeds – Put and Call Option Deed and a Call Option Deed.
When you sign a Put and Call Option Deed you must settle the property; we will not be dealing or discussing this type of option deed, because under this deed you have obligation to settle the property.
We work and will discuss only the Call Option Deed, where you have only an option to buy but not the obligation to settle the property.
The benefits of using Lease Option strategies include letting you:
- You can accumulate million ringgit worth of properties with little or no cash upfront
- You will have control over multimillion ringgit properties without requiring large sums of money or bank loans to finance the deals
- You will learn how to get below market properties
- You will learn how to on-sell property without settling the property
- You will learn many more strategies that you can use to have control over the properties
- And many more
Below is a simple Lease Option strategy.
For years, investors have used lease options to sell property to tenants who could not quite qualify for a loan. This process allows the tenants’ time to save up the required down payment, build their credit, establish a longer job history, or rectify whatever is prohibiting them from obtaining a loan. A lease option could allow a family to move into their dream house and give them time to save enough for a down payment to buy the home, without worrying that the owner will sell to someone else in the meantime. For clarity, let me give you an example of how investors have traditionally used this simple lease option strategy:
Wong and Mei have been working hard to buy a home, but they don’t yet have enough money for the full down payment. Wong who has just started working in a new company is not able to get a loan unless he has worked for a year.
So Wong and Mei decide to do a lease option on a nice house in Rawang. Tan, a real estate investor, offers the couple a lease for RM1,500 per month with the option to purchase the home
anytime in the next three years for RM400,000. During this time, Tan cannot sell to anyone else, and as soon as Wong & Mei are ready and able, they will obtain a mortgage and purchase the home for RM400,000, using a loan from the bank. Tan will get his cash and rents; Wong & Mei will get their dream home.
The lease agreement is similar to any other standard lease sign between a landlord and a tenant. The lease agreement would contain information such as the names of both parties, the property address, the monthly rental, deposits, rules and regulations, lease period, due date, and others.
The option involves a separate legal document in which the owner (Tan) agrees to give the lessee (Wong & Mei) the exclusive right to buy the house within a specific time period (3 years) and for a predetermined price (RM400,000). In this option contract (Wong & Mei),the lessee is given the option to buy but it does not legally require them to. However, the option does legally obligate the seller (Tan) to sell the house under the agreed terms in the option if the lessee (Wong & Mei) decide to buy the property. In short, the option is only “binding” for the owner (Tan).
There are two sides of a Lease Option.
As you can see from the example of Wong and Mei, a successful lease option arrangement can be a win-win for all parties involved. This is done through 2 different agreements:-
- A lease
- An option
In addition to the option paperwork, there is an option fee to be paid. By paying this fee, the lessee is essentially paying for the right of exclusivity on the home, so only they can buy the home, and the seller cannot sell to anyone else during the duration agreed upon.
We will discuss why Lease Option is beneficial to all the above parties in the example above in our next blog post.