High Leverage without Financing: Lease-Option

Thinking about how to maximize leverage and reduce risk, I think Lease-Option would be a better strategy than buying in traditional way:

1) Find pre-foreclosure owners to negotiate a Option price that would make them happy when the option is exercised 2 years later. But this price is still about 20-30% below current market. In other word, high enough to get the owner out of default, low enough so that you may get a profit later.

2) Offer to lease(with option) from the owner for 1 year or 2 year for a good rent rate. You would turn around to lease the property to a real tenant at a market rent, hopefully getting positive cashflow. By the time the lease-option is over, you can exercize the option at a pre-set price. Hopefully, the market would also start to appreciate in price, you may be able to sell it at a much higher price then the option price.

Summary: You win by the spread between option price and then (1,2 years ago) market price. You may also win by appreciation between old market price and new market price.

The risk is low because when the lease is over, you don't have to exercise the option.

What it really comes down to is using very small upfront cash to control the total value of the property at a minimum risk. The beauty is NO FINANCING is involved, yet you reach close to 100% leverage. We can potentially control the price for multiple houses. If one of them doesn't work out, we simply walk way after the lease is over. The positive cash flow may be enough to compensate for the lost premium. The option premium can also be very small, down to $1 per option, or whichever amount to help the owner out of default.

Well, I think it may work better when the market is identified to be close to a new boom (this is in fact the hardest...). When the market is starting to move, it's also the time foreclosure rate rises to the peak. Thus, I think opportunities will abound.

Because foreclosed owners are desparate. They are over their head in payments, they may be divorcing, owning big credit card bill and etc. They will be so happy to get out of this house burden and avoid bankruptcy. When a person is on the verge of bankruptcy, he won't think about becoming a landlord. Also,you as investor always set your option price 20-30% below market, but 20-30% above his loan principle. So you will solve his problem, but also win big for yourself when the market recovers.

Often time it's like high doctor bill or divorce or completely unexpected accident causing foreclosure. Once legal binding lease-option contract is signed, the owner can't back out. Your right to exercise that option is legally granted.

Q: 等感覺房市到最低馬上要起來的時候,foreclsure deals估計也是最多的時候,用lease option確實是個很好的主意.現在rental market挺好的,應該不難租.我有些基本問題不太明白,簽了lease option,是不是我就是合法的owner呢?如果不是,過1-2年lease結束了,房價張起來了,原來的owner要cancel deal怎麽辦?

A: No, you are not owner, and owner can't cancel the option

The lease-option contract is not a sales contract, so you are not a owner of the house. But you now control the value of the house within the lease term. The owner will be bound by the contract to sell to you whenever you want to exercise the option. The only risk is when the market is not rising, you can choose not to exercise the option, then losing the premium. However, if you negotiate a low premium, like $1 dollar or $100 dollar, you have not much to lose.

Well, your intention is to time it right, hold the least option for 2 years or longer, then catch the rise cycle, you will win that way.


A lot of people questioned why a home owner would accept lease-option if it's in fact a leasing agreement with option to sell in the future. Please note that there is one essential difference: up-front money put down.

For home owner facing foreclosure, money is the only thing that can bail them out but the thing they don't have. To make lease option work, you as a smart investor would offer a down payment that's enough to bail trouble home owner out of foreclosure so they can keep the house. This downpayment can serve as the rent during the lease term, or will be applied as downpayment in the future when the purchase option is executed. Some investors offer higher than market rent and apply portion of the rent towards downpayment when purchase option gets executed.

Lease option is a very powerful tool when used properly.


No realtor !
Because realtor can't wait 1 or 2 years for the deal to close. Realtor often became road block in getting the deal put together. Realtor is only after commission. Lease-option is not a sale, so realtor is useless. You need a title agent and real estate attorney.

If you don't offer that deal, Bank will repurchase that property from the owner in a matter of months. Once a Notice of default is issued, the owner doesn't have a lot of time to sell the property. So, they most like face foreclosure by bank taking over the property. The owner may face bankruptcy and destroyment of his credit status. By offering him a lease-option, he can gracefully exit in a year or two, and potentially end up much better than Bank's takeover. Because the option price is usually higher than Bank's REPO price. Bank's repo price is often set at the outstanding loan balance, which will be destroyment of the owner's equity. At least in lease-option, owner will get some equity back and avoid foreclosure.

On top of that, savvy investor will sweeten the deal by offering owner a 10% profit share if the property can be sold higher than the option price at ON-SELL.

This is a very powerful tool to contain the risk while controlling other people's money. Lease-option can have many different endings. They can become long term holdings after exercising the option, or they can be flipped quickly to other buyers. Or, you can sign another Lease-option with your tenant with a higher option price, at the same expiration date, you can pocket the difference. I think the real difficulty is timing.

This is a very powerful tool to contain the risk while controlling other people's money. Lease-option can have many different endings. They can become long term holdings after exercising the option, or they can be flipped quickly to other buyers. Or, you can sign another Lease-option with your tenant with a higher option price, at the same expiration date, you can pocket the difference. I think the real difficulty is timing.

Q: Why focusing on pre-foreclosure not foreclosure
A: You can't do lease option on foreclosure properties. It's bank who owns foreclosure houses and what banks needs is quick disposal of properties for money back.

Pre-foreclosure is not yet foreclosed. They simply received Notice of Default from their bank. I think the Bank give them one month to pay up or quick.

After bank repurchased the house, the bank becomes the new owner. You can't do lease-option with banks. Certain owners may not owe a lot to the banks. But the owner will have no more money to continue to pay the banks, in this case, you can insist that the owner pay up the bank current, you take over the payment from that point on. In extreme case you can ask for 1 dollar. Lease option is so flexible that anything can be done between you and the seller, as long as the owner think you are fair to him and can help him out.

By sharing with owner 10% future profit is another way to reduce the premium. Everything can be negotiable.

Q: Buyer needs to bail out the house owner to avoid foreclosure which might be a big amount. The money may be used as a down payment if the buyer exercises the option. If the buyer does not buy the house at the option expiration date, the payment will be lost, right?

A: Right, but you can always find case where the owner owes only couple of months payment to banks. You can insist on the owner to terms that you like, like pay up and bring the bankaccount current before you take over the lease. Because in bad times, owners facing bankruptcy will possibly accept your terms because they are in deep trouble, without you, a "white knight", their house will be foreclosed, no other choice.

The biggest advantage of lease option over Preconstruction is your Freedom to control other people's money. You will not be slaved by the builder. In lease-option, you will be the master of the deal, you can have enough time to monitor the market and find your next buyer before the option expires.

In preconstruction flippign, you don't have such flexibility and freedom. That's what I don't like. 

那怎麽發現這種機會呢?
A: Subscribe to www.foreclosures.com, or going to your district court to see when will the auction take place, then find out who's the owner, go directly to the owner and nicely explain to him your plan to save him. As soon as the lease is signed, the missed payment is paid, the auction will be canceled.

In such desparation, the owner may accept crazy terms from you,