I need to understand how the investor makes money from the lease option. Is my following concept of how the process works correct?
1) Its best to find a motivated seller or if not especially motivated look for a property that has been on the market for a long time or has been on and off the market several times.
2) Get the seller to agree to doing a lease option with me (the investor)for 1 year with an option for a second year.
3) Pay the monthly rent for the first year at an agreed upon amount with the seller. If I go for the second year I should offer a higher rent amount for the second year, which is also an amount agreed upon with the seller.
4) The lease with option should also include an agreed upon price to purchase the property should I decide to exercise my option to purchase.
5) The agreement should include a rent credit. If I exercise the option to purchase a certain portion of what I paid in rent would go toward the purchase price. The percentage would depend on how motivated the seller is.
6) I should also include an assignment clause to allow myself to assign my interest and obligation in the lease option. I should try to do this without the seller requiring pre-approval of the assignment.
7) I should pay the seller option money.
Now, if I understand the lease option, the above 6 steps are what would be required to effectuate the lease option. I understand that with the clause in the agreement, I would be able to assign the lease option, but here is where I get lost.
a) If I assign the option, is it best to assign to an end buyer or an individual (is that what they call retail?)?
b) How much option money should I pay?
c) Since I really don't want to hold any property right now, how should this deal be done so that I don't actually have to take hold of the property as I have no money?
Am I right to think that in my case I will (at this point in time) always be assigning this type of deal. So, I should have an individual (retail buyer) already to take the property and whatever deal I can arrange with the seller the individual should be ready, willing and able to take that deal? Therefore, I should find an option buyer first, then look for a property that fits the option buyers house desires. That way I know who I'm getting the lease option property for in the first place?
d) I'm not sure just how I would make money on this deal. The option money is really coming from the my willing option buyer? The option money isn't refundable, but that wouldn't be money I keep right; because that is the money that has to go to the seller? It is also the option buyer that is really paying the monthly rent?
So, is my thinking right to say that even in the lease option I am still only locking up the property to assign the lease option over to my retail buyer (individual) or my end buyer (investor).
If all the money that is required to be paid to the seller (option money, monthly rent, rent credit) is being paid by the assignment option buyer and that money has to go to the seller, where, oh where is my money coming from?
Didn't mean to be long winded, but I wanted everyone to understand just what I understand and don't understand about lease option and whether this would be something that a newbie could try along with a regular assignment purchase.
Always striving to move forward toward better times!