What the heck is an option consideration?

Hey there — I got a terrific question into my Podcast Hotline and I want to share the info with you here.

As you know, I love me some lease option deals. I get asked about them a lot, which is cool because I love talking about them a lot. 🙂

So, 

 Also known as the option consideration.

The question: How does the non-refundable option deposit work and how do you get the money that the tenant-buyer paid upfront to be applied toward the down payment?

Maybe you know by now that a lease option is when you have a contract to lease a house for a period of time, and then have the option to buy it at the end of that time period. That’s good understanding to start with!

So typically, the deposit gets credited back to the optionor—the tenant-buyer living in the house.

But here’s the thing… as the investor, I usually flip these types of deal—I’m not staying in the middle. I’m going to step out of the equation by assigning my lease option away.

I sell the option—and my fee is the option deposit the tenant-buyer put down.

So how does that tenant-buyer get their deposit credited back to them when they decide to buy the house in 1–2 years?

Well:

  1. You never promise that the deposit will be applied toward their down payment. Alls I say is that the money will be applied toward the purchase price of the home—which could be a credit to reduce the price of the home, for example. 
  2. You use an investor-friendly mortgage company that has experience with this type of deal.
  3. Use a 3rd party escrow service to transfer the funds.

Here’s how it works: The tenant-buyer makes the check out to the escrow company… not me, the investor.

This is important because the tenant-buyer will then be able to show a check from a year or two earlier that was sent to an escrow company. 

With the right mortgage company that works with and knows how to present this scenario to the right bank… there should be no problem getting that deposit sourced back to the tenant-buyer as part of their future down payment.

For 2 reasons:

  1. The option deposit check is made out to the escrow company.
  2. The broker presents it correctly to the right bank.

BTW: I know that many of you have been told this strategy isn’t even legal. Don’t listen to those lies. I’ve been doing lease options—with option deposits—legally for years and have never had an issue.

Consider this strategy and you just might end up loving them as much as I do.

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