Whenever I talk to a group about these, I’ve noticed the most misunderstood facet of the process is the “non-refundable option deposit.” (Also known as the “option consideration.”)
And it just so happens that a question came into my Podcast Hotline about this…
The caller asked:
How do you get that deposit money if you decide to step out of the equation? And how does the tenant-buyer then use it for a purchase credit to put toward the down payment?
First thing’s first…
A lease option is a contract someone has on the house to lease it for a period of time with the option to buy it at the end of that time period.
And to do that, the tenant-buyer would need to put down a non-refundable option deposit/option consideration.
They get that money back as a credit if or when they decide to buy the house.
So that’s all pretty cut and dry.
But add in—you—the investor to the mix: let’s say the numbers aren’t working for me anymore and I want out of the deal and I want to cut myself out of the middle and sell to the tenant-buyer.
When I sell the deal, my fee is the option consideration money that the tenant-buyer put down.
So, how does the tenant-buyer then get that money back if or when they decide to buy the home and use that credit toward the down payment?
- Use a 3rd-party escrow service. The tenant-buyer writes the deposit check to the escrow company, so when they buy the house in a couple of years, they have proof that a check was sent to an escrow company.
- Never promise the deposit will be applied to their down payment—I say it’ll be applied to the purchase price of the home, which could be in the form of a credit to reduce the price of the home. (So, instead of the sale price being $200,000, it’ll be $195,000.)
And, make sure you are working with a mortgage broker who understands this strategy and knows the right banks to work with.
One last thing…
I know that many of you have been told this whole thing isn’t even legal. Not true. I’ve been doing lease options—with the option deposits—for years and have never had a bit of legal problem.
Just another reason why I love the lease option strategy so much.
Maybe you will too.