How to Secure a Property Without Putting Down Any of Your Money…..
Hello, future property investor. Samuel Leeds here. One of the things I taught during the virtual property investors crash course was how to buy houses without making a down payment with your own money. And the key is lease option agreements.
What Is a Lease Option Agreement?
I employed a lease option strategy many times when starting out my journey in property investing. But what is a lease option agreement? To understand this genius property investing method, you must first understand that when you buy a house, you're not just going to earn a regular income in the form of rent. You will also gain from the property's capital appreciation.
Capital appreciation refers to an increase in the value of an asset, in this case, a property. Rent is fast money. As soon as you rent out a property, you're going to start making money immediately. That's the money you will spend on bills. But capital appreciation is what will make you wealthy.
And this is where lease options come in. I've amassed so much wealth from lease options because they earn you rent and capital appreciation, unlike rent-to-rents, which only make you rent. I'll illustrate this strategy with the story of how I got my first lease option deal.
The year was 2009 …
A man called Steve contacted me asking if I wanted to buy a house he was selling for £85,000. Of course, I had some questions. Where's the property located? How much rent will I stand to make? What's the situation? He told me he bought the house in 2007 for £95,000, but it had since dropped in value.
Steve revealed he bought the house in Bloxwich, Walsall, so his son could have affordable accommodation. The son was paying £450 a month, which was below the estimated market value rate,i.e., £550. So Steve wasn't making much of a profit and had an outstanding mortgage of £81,000. In fact, if he sold the house for £85,000 and paid off his mortgage and settled other costs, including legal fees and estate agent fees, he wouldn't be left with much, if anything.
My man Steve was in what we call negative equity. The only kind of negativity I love in my life. Negative equity is when the outstanding mortgage on the property is equal to or less than the property value. And with all the expenses associated with selling a house, Steve pretty much had no equity in the home. So why was he selling the house knowing very well he wasn't going to make much money.
As it turned out, Steve's son had moved out, and the house was vacant. Moreover, Steve was a tired landlord. He wanted out, so he could retire without all the hassle of managing a property. I offered to buy the house for £72,000, which he declined, saying he couldn't accept anything short of £81,000, which was his outstanding mortgage.
I then tried to convince him to keep the house and instead rent it out to a new tenant at the market value rate, which was £550. Why? After paying a monthly mortgage payment of £145, he'd still make £400 a month. I told him this would give the property time to go back up in value, at which time he could see it for a decent profit. But Steve would have none of it.
So I made Steve a final proposal. Given that we were in the middle of a financial crisis and housing prices had dropped significantly, it was a terrible time to sell a property. No one, including me, would willingly part with £81,000 to acquire a property at the then state of the property market. I proposed buying the property for £81,000 in seven years, and meanwhile, I'd take full responsibility for the property as the landlord, including paying the monthly mortgage payments.
Such an agreement, as I explained to Steve, would give the market a chance to recover. It would also relieve him of all responsibilities and see him earn a decent amount of money from the sale. And despite it being a logical option, Steve expressed his misgivings and had tons of questions. How does it work? What happens if you don't pay me the mortgage? Can I see a copy of the contract? What happens if this/that …?
I encouraged Steve to sleep on it and speak to a solicitor about all his questions. I then told him I had done many such deals, where I hired the services of the same lawyer. I gave him the lawyer's card, asking him to contact him. And I, of course, asked him to call me back if, after his research, he was interested in going ahead with the deal.
When I got home, I thought about whether Steve would say yes or no. Steve took my advice and contacted my solicitor, and thoroughly picked his brain. And by the time he called me a week later, he knew more about lease option agreements than I did. To my delight, he informed me that he would like to go ahead with the heads of terms for a lease option agreement.
Steve liked the idea of having the property taken off his hands and getting someone else to pay off his mortgage. It was a much better deal than selling the home right away and not making a single penny and having to pay for some costs out-of-pocket. For me, acquiring the property through a lease option agreement would be beneficial for various reasons, including:
- Rent: I advertised the property at £550 per month before I even got the keys. So with a tenant in the house, I stood to make at least £325 in profit after paying a £145 monthly mortgage payment and other expenses. That's £27,300 at the end of the 7-year lease period.
- Down payment: Part of the lease option agreement was the option to buy the property for £81,000 after seven years. So if I chose to buy the house, which I did, I'd use the £27,300 I had amassed in the seven years to pay the deposit, making it a no-money-down deal. The only money I spent buying the house was a £1 non-refundable option fee to make the agreement legally binding and £750 in solicitor fees.
- Home equity. If the home value increased above the agreed-upon purchasing price, i.e., £81,000, I'll also have built equity in the house. In this case, the property's value increased to £125,000 after seven years.
That was my first lease option agreement. After which, I thought, why not do one more and another? So before long, I began to build my property portfolio as a teenager with lease-option agreements. I was picking up free houses everywhere.
Lessons From the Story of How I Got My First Lease Option
- Why buy a house and put down a hefty deposit when you can acquire it on a lease option agreement? You'll have the option to buy, not the obligation. So if the property goes up in value, you hit the jackpot; if it doesn't, you walk away.
- Be the one that asks the questions because that's the person who's in control. If you find yourself answering questions trying to prove yourself to the seller or agent, you're at a disadvantage.
- How you present a lease-option offer will determine whether the property owner accepts it or not.
- Make decisions based on logic, not emotions. You could miss out on great property deals if you base your decisions on feelings, such as fear or anger.
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