Explained: non-refundable option deposit

As most of you know, I love to teach about lease options. And, it’s my favorite kind of strategy.

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?

Well…

  1. 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.
  2. 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.

Previous

Next