Exit Strategy - Structuring of a tenant purchase, with a lease purchase
When you are framing your real estate exit strategy, there are many ways to structure a tenant purchase. When structuring a tenant, lease purchase, the most important aspect to consider is it needs to be a win win for both parties in order for it to get to the closing table and be successful.
Lease purchase. The laws and guidelines of lease purchases can change state by state so consult with your real estate agents and attorneys in your prospective real estate investing locations. What I have found is the safest way for the investor to structure it is to have two documents - a lease to rent the unit and a separate purchase contract to purchase the property.
The reason to have these working parallel to each other is to protect you against a tenant that may become a bad apple. If the tenant proves to be non reliable and you need to evict them for things like nonpayment, you want a separate lease that allows you to evict them. I have see court rulings where the landlords tried to evict tenants for non payment. The courts ruled in favor of the non paying tenant because the language within the contract portrayed the tenant as a buyer more than a tenant.
In essence, in order to evict the Buyer/Tenant, the landlord would have to foreclose on the property. This of course is a much slower process and much more costly to the landlord. So having separate but parallel contracts, a lease and a purchase contract working together, may cost a few more dollars to draft but can create a piece of mind that is well worth the investment. I always recommend these contracts be drafted by a local attorney with knowledge of the local real estate investing market and rules.
When the buyer does execute the purchase, per the contract you both win. They acquired a house and you cashed out and can re-position your assets to the next emerging market and make your money work harder.
Truth be told, approximately 70% of these lease purchases never execute. This may still benefit you as the investor/landlord. The buyer/tenant, at least in the beginning of the lease, give you a much larger non refundable deposit which represents their intentions to purchase from you. Most often the rent is also at a premium so you cash flow is greater.
As the Buyer/tenant plans to someday own the home, they are taking much better care of your property. Should they have a change of plans and decide not to purchase, you may have lost a buyer but you gained the deposit and the cash flow. Either way you still have a win. The buyer/tenant made a calculated assessment and decide the desire to move on is in their best interest so they did not lose, it was their choice. You can now re-lease the investment property or sell it with a larger profit.
If you are considering structuring a tenant purchase or lease purchase, it may be worth your time to give us a call and discuss the options that you have AND especially learning buying habits to be successful in real estate investing!