The Art of the Flip…
Those who know me know I LOVE lease options…and I especially love the lease option flip.
What is that, you ask? Is this some new, secret strategy? No, not at all. It is, in simplest terms, a lease option assignment.
The assignment is by far the easiest of the lease option strategies and requires the least amount of investment and risk in order to do the 
deal and profit. An assignment is when we negotiate the deal with a seller and contain all the terms of the transaction within the contract. We then assign (which means to sell) the contract to a third party. This can be the tenant/buyer, another investor, or even the original seller.
Here’s one way to flip a lease…step by step…
Step One: Find A Seller
Find a motivated seller who is willing to sell their house with a lease option. I have my best success marketing to “tired landlords,” expired listings, and “for sale by owners.” Use newspaper ads, bandit signs, websites, and craigslist ads. And don’t forget your local REIA.
Step Two: Sign the Paperwork
Sign a Lease with Option to Purchase with the seller. I use a simple, one page document which allows me to purchase and/or transfer my interest to a third party. Make sure you have your documents reviewed by your real estate attorney.
Step Three: Find a Tenant/Buyer
Find a qualified tenant/buyer who has the money for the option fee and has a good chance to get a mortgage in 6 to 12 months. I have used bandit signs, classified ads and flyers – all with great success. Now I use leasing agents to find my tenant/buyers. This is working quite well.
Step Four: Close with Tenant/Buyer
I use a standard, realtor approved Residential Lease and a SEPARATE Option to Purchase. The agreements are with YOU as the seller/landlord. Collect the full option consideration, first month’s rent, and security deposit (if any).
Step Five: Assign the Documents to the Seller
Close the deal with your seller by assigning him or her your tenant/buyer lease and option to purchase agreements. The seller gets the first month’s rent and you keep the option consideration. If you used a leasing agent to find your tenant/buyer you pay the commission from your option consideration and keep the difference.
Now…rinse and repeat!
So, there you have it, you’ve found a property, got it under contract, and assigned your interest. And THAT is how you flip a lease (and option)!
What experience have you had with lease options? Do you use this as an investing strategy? I’d love to hear your thoughts and opinion below 
Hi Bill,
How do you screen your tenant buyers? What steps do you take to make sure your tenant buyer is able to get a mortgage in a 6 to 12 months time frame?
Thanks,
Hugh
Good question Hugh 🙂 I use services at mrlandlord.com for screening my tenant buyers. There are LOTS of similar services out there. You can also check with your local REIA for recommendations on tenant screening. Some folks do their own screening by calling employers and previous landlords. Don’t call the current landlord…If your applicant is a bad tenant the CURRENT landlord may give him a good reference just to get rid of him 😉 You have to determine the level of screening that makes you feel comfortable with your tenant buyer. I have all tenant buyers commit to working with a mortgage broker in order to get qualified for a loan.
Great article!
How much is the consideration? I heard it’s between 4-6% of the sale price? And what’s the normal rate you pay the leasing agent?
I also heard almost half of the tenants don’t exercise the option, is that your experience?
Also, what’s buyer’s motivation for purchasing under lease option when they can rent freely without paying option fee upfront?
Thanks Eve. I’m glad you liked the article. That’s about right for the option consideration. The rule of thumb that we’ve always used is 3-5%. If I use a leasing agent they would get one-half to one month rent for finding a tenant buyer. And no, that has not been my experience. But that’s because we screen our tenant buyers carefully and make sure that they work with a mortgage broker and credit repair specialist in order to qualify for a loan prior to the expiration of the option.
If they want to “rent freely” without purchasing then there is no motivation. The motivation for a BUYER is that they can get into a home with no bank qualifying and have the time get their credit in shape to qualify for a mortgage. A added bonus is that some lenders will treat the loan as a refinance.
Regarding renting, some tenant buyers can not rent a quality home in a safe neighborhood, sometimes the quality of rentals are poor. If you sign up a LO House in a good school district, 3-4 B, 2 B, safe neighborhood, 2 car garage, well that product people want! So they will gladly pay 3 – 5 %.
Conversely, poor neighborhoods, high crime, who wants to pay 3 – 5% for that?