How does an assignable lease option work? (real estate investors can make fast money with ‘dem)

by | Indy Anna, Real Estate Investing, Uncategorized

What is an assignable lease for real estate investors?

When I was asked, “What exactly is an assignable lease option?” I thought we should be clear that when we talk about a lease option, a lease with option, a rent to buy, etc. it is all the same thing.  This is relating to residential real estate where you, as an investor, work with a seller to lease or lease option their property and then you hand off that lease option to another buyer.  This new buyer will live in the property and fulfill the terms of the lease option.

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Let’s get started…

There are two main parts of an assignable lease option, the lease with option itself and then the assignment.  An assignable lease is pretty straight forward in its making and understanding. We are going to cover the key parts of it here and what it means to ‘assign’ this lease option to someone else.

So what is a lease option assignment?

The assignable lease is most often a lease with option to purchase that is going to be assigned from the investor to the buyer.  Unlike a sandwich lease option the investor is NOT going to be involved later in between the original seller/owner and the tenant buyer.

So to do this, first you will want a ‘Letter of Intent’ with the seller.

The Letter of Intent

This is a basic letter, sometimes we also call it a “Lease Option Memo” and this is a basic agreement letter that you and the seller will sign.  This explains your involvement in the deal and it allows the seller to continue marketing their home.  You need to make sure that the seller knows that you as the investor will assign the lease with option to another party.

This is crucial for investors that aren’t licensed realtors as you are making it clear you have permission to assign a contract on a property you do not personally own,  you are a PRINCIPAL in the transaction.  In some cases you may only market the contract itself and not the actual property or home, check with your legal team.  You can also go through our training on how to build a good legal team for more on dealing with issues like this.

Remember: You are a PRINCIPAL and you are NOT representing anybody.

You need to become a PRINCIPAL in the transaction and make it clear that you are NOT representing anybody.  You need a real estate license to do that, so the KEY is that you never represent anybody and that you are always a principal in the transaction.

So what gets assigned?

What actually gets ‘assigned’ to the end buyer is the lease with option to purchase.  This may be two separate documents, one is the lease and the other the option.  Or you can do them and assign together as well.  We’ve covered a lease with option to purchase basics in a recent lesson so be sure you go to that lesson if you haven’t already because it will help you understand this process better.

Example of an assignable lease in action:

Becky is selling her home.  Investor Erin talks with Becky and Becky wants to do a lease with option to purchase.  Basically this is the same thing as a rent to buy, and Becky wants Erin to help her do one.

Erin has Becky sign off on the Letter of Intent, the LOI.   Next Erin draws up the lease with option to purchase contract.  

Erin also explains to Becky that the lease option will be ASSIGNED to another tenant buyer that Erin already has found or will find.

Then Erin finds Mark, the tenant buyer that wants to buy the house on a lease option.  So then Erin (with Becky’s knowledge of Mark and Mark having been screened as a buyer to meet Becky’s approval) assigns the contract to Mark.

Mark will pay a “down payment” or assignment payment.  (don’t call it a fee)

In most cases Erin will profit the full ‘down payment’ for the deal as her portion of the proceeds for her work. In some cases the seller will need to split this ‘down payment’ with the investor, but usually the goal is for you as investor getting the full amount of the down payment.

How much money will Erin make assigning a lease option?

Normally the minimum you want to make on these deals is $3,000 – $5,000.

This is also sometimes referred to as the ‘option consideration payment’.   Once Erin is paid she steps away from the deal, and Mark completes the terms of the contract with Becky.

Mark will continue to pay Becky monthly payments for the terms of the contract, and at the end of the terms, he will have the option to purchase the house by means of money he’s saved up or by refinancing and using a lender to buy it.

Questions about lease options:

What gets people into trouble is almost never the paperwork or contracts, it is what you SAY to the people you work with that’s why it is so important that you are totally transparent with everything and always be HONEST.

What if Mark disappears and does not refinance the house?

At that point Becky, the owner, will basically be in the same position she is in now.  She can put the house on the market and seek a cash offer or if you agree you can help her do a lease option again.

What if Mark destroys the property?

The best way to deal with this is to whatever you can to reduce the likelihood that Mark will harm the property and increase the chances of him taking care of it.  The relationship with tenants and tenant buyers is important.  Also the more money down that Mark pays, the more likely he is to complete the purchase and behave.

To answer the question, Becky will be responsible for any repairs if Mark destroys and leaves the property.  However Erin can put in the agreement that she will help Becky find another tenant buyer if something happens with Mark.

Who handles repairs and is Becky a landlord?

In the contract with Mark it is 110% clear that Mark is BUYING and NOT RENTING the home, so Mark is responsible for everything with the property regarding upkeep, maintenance, etc.  Keeping records of this will be helpful when he goes to finance the property with a loan as well.

We do lease options to find BUYERS not tenants, so Mark is to treat Becky the way he would a bank.  You don’t call your bank and say your toilet is leaking.  Mark takes care of the property.

Legal Contracts and Paperwork

Here is a lease agreement assignment form.

Here is also a shorter version of a lease assignment contract.

Sometimes you can do these as a back up offers, here’s a contract for writing and adding an addendum to an offer that makes it clear it is back up offer.

The Back Up offer contract is here.

Contracts from the Sandwich Lease Option post:

This is from the post on sandwich lease options here.

Here is an example of lease with an option to purchase contract.

You want to use a rental application for just about any type of tenant, even if it is a tenant buyer.  The more information you have about a potential client, the better decisions  you can make.  Do this even if you are renting or doing a rent to buy or lease option, you need to know your tenant buyers’ background info.

Here is a basic rental application.

In some states like California or Texas people think lease options are illegal, that is not true and has never been true but sometimes it does make sense to do a standard rental or lease and do the option part separate.  In these cases you can do the rental part separate from the option.

Here’s an example of standard rental contract for the state of California.

Here’s a standard rental agreement contract for the state of Texas.

Also in places where they are weird about lease options and maybe it makes sense to do shorter term rental and lease agreements, you can use a contract like a month to month or a standard rental agreement.  If you use the month-to-month contract below you can just change the dates and expand it as much as you can to six or nine months for example.  Of maybe you can just use the standard rental contract for one year or more.

Here is a month-to-month rental contract.

Here is a  standard rental or lease agreement with no option to purchase.

Here’s a standard lease with option to purchase contract, I think this is one we use in Ohio or it may say that but we just change the name of the location and use them all over too.

Also keep in mind that in order to do a sandwich lease option you will need permission to sublet the property and since most standard lease agreements do NOT allow for that you may need something like this:

Sublease agreement

Or this Landlord Sublet Consent Agreement.

Remember these are in Word format

By putting them in Microsoft Word format you can download AND edit them as you like.

 Also sometimes it is fun to look up legal documents, here’s an SEC filing of a lease assignment with ‘Doc Holliday Casino’ company.  Fun stuff.  I’m a nerd, I know.

Also make sure check out our EPIC post on 100 FREE ways to find motivated sellers.

Hope that helps.

Thank yall!  = )

~ Indy Anna

 

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