This is exactly why I give you the lowdown on the standard lease-option strategy that is being taught today. And once I have finished telling you all of the details on the potential risks and problems that lease-options pose, I show you how to properly structure a lease and option transaction so that you can use the low-risk, low-cost lease and option strategy to profit from single family houses. First off, the risk versus reward ratio for sublease-options is way out of whack! In other words, the risk potential that is associated with using sublease-options far outweighs the profit potential! There are just too many things that can go wrong with a sublease-option deal, which a lessee has absolutely no control over. For example, during the sublease-option period, any of the following can and usually do occur:
1. The tenant-buyer fails to make lease payments and must be evicted.
2. The tenant-buyer cannot be evicted from the property because a court rules that he or she has an equitable interest in the property and must be foreclosed on instead of evicted.
3. The tenant-buyer commits a wanton act of malicious vandalism and destroys the leased property.
4. The owner refuses to sell the property after the tenant-buyer has exercised his or her option.
5. The owner refuses to sell the property at the agreed-upon purchase price after the tenant-buyer has exercised his or her option.
6. The property under lease-option is damaged or destroyed by fire, storm, or earthquake, and the tenant-buyer must be relocated.
The standard sublease-option strategy being pushed today involves leasing a property and then subleasing it to a tenant-buyer. This requires the lessee (tenant) to become a lessor (landlord) responsible for managing the tenant-buyer. A sublease is also known as a sandwich lease, which is generally defined as: "A lease agreement in which the lessee (tenant) becomes a lessor (landlord) by subleasing the property under lease to a sublessee (tenant) who takes possession of the property." Under a typical sublease-option arrangement, an investor signs a lease-option agreement with a property owner and then subleases the property to a third party, known as a tenant-buyer, by using a sublease-option agreement. It is sort of the real estate equivalent of a threesome, in which the following three parties are involved in two separate lease-option transactions:
1. Lessor-optionor: The owner of the property being lease-optioned.
2. Lessee-optionee: The party leasing the property from the owner with an option to buy.
3. Tenant-buyer: The party subleasing the property from the lessee-optionee with an option to buy.
The problem with this scenario is that 99 percent of all investors who get involved in a sublease-option transaction do not know diddly squat about being a residential landlord. As a result, whenever they have any type of problem with a tenant-buyer, they are clueless about the correct way to solve it. For example, I recently received an e-mail from a lessee-optionee in Atlanta, Georgia, who wanted to know how to go about evicting a tenant-buyer in Georgia. I told her to log on to the state of Georgia web site and look up the residential tenant and landlord act online.
The point that I am making here is that this person had never even bothered to take the time to acquire the most basic knowledge about being a residential landlord in Georgia, even though residential rental housing is one of the most highly regulated businesses in America. In most cases, this ignorance of basic property management fundamentals turns out to be a recipe for financial disaster.
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