The Lease Option

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There have been numerous programs over the last thirty years that have had Lease Options as the backbone for the course. Most notably is the Carleton Sheets program. So, are lease options the key to achieving wealth? Possibly - but probably not in the way the "gurus" teach. There are more effective and profitable methods, developed by nationally renowned investor Bill Vaughn.

A lease option is simply a lease on a property, except that it also includes an option to buy that property during a predetermined period, at a predetermined price. Normally, a portion of the lease payment each month is applied toward the purchase price, which helps the buyer - that amount, applied to the purchase price, can act as his down payment.

If the tenant exercises his option, he requires less money at closing, since a portion of his payments have reduced the amount he needs for making the purchase.

If the tenant does not exercise his lease option before it expires, everything he has paid to date would be as rent, and he does not get anything back. He is simply a rent-paying tenant.

Let's say that you obtain a 3 year lease option on a home, and $200/month of your lease payment will be applied if you buy. In three years, that's $7,200 to be applied. Now let's say that immediately upon getting the lease option, you put a tenant in the home. His rent payments to you would cover your payments to the owner. Now, in three years, you "flip" the property - you exercise your option, and immediately sell to another buyer (perhaps your tenant). What has happened?

First, you would sell for its new value - it has appreciated over three years. For example, if the property is $200,000, and it appreciates even a modest 5% per year, in three years the place is worth over $230,000. But since $7200 of your lease option payments are applied to your $200,000 purchase price, you only owe the seller $192,800. So, you are paying $192,800 and selling for $230,000. That's a nifty profit of over $37,000.

OK, so that only comes to a profit of roughly $12,000/year. Or does it? Don't forget that you now are entitled to certain "home office" and other tax deductions, saving you money. More important, why not do one of these transactions every 3 months - 4 per year. That means your $12,000/year is now $48,000/year. Not a fortune, to be sure, but consider this - none of it ever cost you a penny! And, there's no reason you cannot do 8, 10, or even 20 such transactions each year.

SPECIAL NOTE: In 2005, the great state of Texas passed legislation that makes it difficult to execute a lease option. There are restrictions and special requirements. But, as with most laws, there are legitimate ways to get around this problem. Programs such as "The Simple Man's Guide to Real Estate" will teach you how to legally circumvent the restrictions on lease options in Texas - or any other state that may follow suit.