The Fair Lease Purchase Option

Co-Author of Buy Low, Rent Smart, Sell High

Part Two

A properly implemented "buy and lease/purchase" model takes the best of the "buy and flip" and "buy and hold" models. It also minimizes each model's most glaring flaws.

First, most investors who use the lease/purchase model are able to "flip" some of their properties and sell others to their lease/purchase tenants. This allows the investor to generate the "cash windfalls" necessary for portfolio expansion, without the pressure of having to sell that is specific to the "buy and flip" model. Additionally, the investor should be able to make purchases work with as little as 10% investor discount (much less than the typical "buy and flip" model), because the pressure and risk associated with having to sell fast is no longer present.

Second, on the landlording side, most lease/purchase agreements transfer the repairs and maintenance responsibility to the tenant, as the tenant is not a typical renter but rather a "future homeowner". The typical lease/purchase agreement can also be signed for significantly longer terms. Both these factors save the landlord much of the time, headache, and cost associated with upkeep and turnover common with most rentals. A final bonus is even when the tenant does not exercise the purchase and vacates either voluntarily or involuntarily, the properties generally are in much better condition than had the tenant been a typical renter.

What do we mean by "fair" lease/purchase as noted in the title?

Sadly, many investors have given lease/purchase a bad reputation by offering restrictive terms designed to minimize the lease/purchasers probability of exercising the purchase option, while "supposedly" maximizing the investor's return. We have found a correlation between offering attractive and reasonable option terms, and the profits available to the investor, our "win/win" philosophy. People are not stupid, and if the terms are not attractive demand for the investor's lease/purchases will be minimized. By making the terms especially attractive, there should be higher demand for the lease/purchase, and the investor can be more selective among the available candidates. Carrying this supposition further, higher quality tenants placed in the property mean less money and time spent landlording. That time and money can then be better spent expanding the investor's portfolio to truly significant levels.

Does this "buy and flip" and "buy and hold" hybrid model work in practice?

Indeed one must allow for variation as no model is implemented exactly the same by any two investors, and markets across North America can be incredibly different. However, implemented correctly and in the right market, we can attest that an investor can manage a large portfolio of properties with minimal management time with the Fair Lease/Purchase Hybrid. We have, and we've been able to do this while maintaining full-time day jobs.

If Hybrids are the automotive future of our country, perhaps the Fair Lease/Purchase Hybrid will be the perfect model for investors concerned with the flaws of either the "buy and flip" or "buy and hold" investment models.

Part One

Andy Heller is co-author of the Fortune Magazine recommended book "Buy Low, Rent Smart, Sell High" and together with his partner, Scott Frank, have approximately 40 years of combined real estate investing experience and have purchased, rented and sold approximately 100 residential properties. For more on the Fair Lease/Purchase and other real estate investing tips go to www.buylowrentsmart.com