As I deal with a lot of investors, I often run into deals with Options, Lease Options, and Lease Purchase agreements. The problem is that these terms are often used interchangeably because many investors have received bad information on what they actually are. “Lease Options” are often pitched to investors in a “sexy” manner but nine times out of ten, they person pitching them is using the terms incorrectly. This brings us to a question that was recently asked (and recently misunderstood by another):

What is the difference between an Option, Lease Option, and Lease Purchase?

An Option is easiest defined in the manner in which it is stated. The buyer has the “option” to buy it. He also has the option not to. An option by itself has no lease attached and typically no other tie-in agreements. There may be an option fee associated with purchasing an option (or there may not be). Options are used primarily by investors, but also may be used by buyers who are nervous about certain external aspects of a property. For example, an option may be used to give a buyer the ability to buy a property at a pre-negotiated contract value/terms at some point in the future. A personal experience where this was used was when one of my buyers put an option on a piece of land where he wanted to build a gas station. There was a new road getting ready to come through and he did not want to buy the property if the road was going to dissect the property. He put the option on the property until the department of transportation finalized the plans for the road. Options typically:

• Have a predetermined/pre-negotiated contract in place and the buyer has the “option” to purchase at some point in the future
• Have a fee associated with obtaining the fee. This can range from $1 to several thousand dollars and is usually determined by the motive of the option (someone just wanting an option to pre-negotiate  deal while waiting on an external source such as department of transportation is called an “innocent option” and is usually not costly where an investor trying to tie up a property to resell or assign the option may have a higher fee associated with it). Option costs are also determined by the length of the option. An option for a few months may be next to nothing where an option for a few years would be substantially more
• Owner of the property cannot sell to anyone else while the option is in place
• Are typically easily assigned or transferred by buyer without consent by seller unless specifically noted otherwise in option
• Have an expiration. If a buyer does not exercise his option within the time period – it expires and he loses option and typically any fees associated with obtaining the option (the option fee which could have been as little as $1 or quite substantial).
• Come without obligation. The buyer has an “option” to buy property but he is not obligated to.

Now, this brings us to a Lease Option. The only real difference between an Option and a Lease Option is that a Lease Option also has a lease attached. Think of this like renting a place (the lease) and having the ability to buy it at any time during the lease period. In a lease option, the option may be easily assigned but often times, the lease is not. A perfect example of a lease option is the a buyer really likes a home but he has to sell his first before he will qualify for a loan or there may be other issues associated with obtaining financing. He may negotiate the terms of the purchase agreement up front using the option, and then you attach a lease so he can move in now and the seller can cover the note. Lease options are very popular among investors and vacant properties because it gives the seller the ability to have money coming in on the property during the interim while buyer is getting their financing together.  A lease option is nothing more than a lease [with an] option to purchase.

Now, this brings us to a Lease Purchase. This is probably the most under-used term for what it is. Often, investors and real estate professionals alike, substitute the term lease option for lease purchase. In fact, there are entire books written by real estate agents who improperly use this – no wonder the investors are confused! A Lease Purchase is pretty easily understood once you have full understanding of options and lease options.

• A Lease Purchase agreement still includes the lease and an option, HOWEVER, the buyer (or tenant) is responsible for things such as insurance, taxes, HOA dues, and other basic maintenance items as well as mechanical issues, and any other expenses
• The “option” in Not Really an option – it is more of a convenience fee
• Buyer is typically obligated to purchase under a lease purchase
• A Lease Purchase is also typically classified as “Rent to Own” and some portion of the money from the lease may (or may not) be applied toward a future downpayment for the purposes of a bank loan
• May be called a “Land Contract”, “Land Trust”, “Deed Contract”, “Contract for Deed” or other terms which are more in the legal realm than the investor/real estate realm.

Options and Lease Options are typically used when a buyer is not 100% sure if they want to buy a property or if they just need a small amount of time to determine their ability. Lease purchase agreements became really popular in the 80’s when bank rates were very high and sellers were willing to finance to buyers under long term loans (seller financing). They have since become an instrument for investors to sell to people who may not otherwise qualify for a loan or need a long-term solution to get prepared. A lease purchase agreement could last from 1 year to 10 years. An average is 3-5 years with the ability to renew if necessary.

If you are considering any of this as a viable solution for your properties or as a buyer, I urge you to contact me, quite frankly because there simply are not that many people in our area that fully understand this and you run the risk of serious issues if you do not know what you are doing – or have someone that does!

Knowing how to invest properly in real estate includes one important step that many investors forget – picking the right agent. Many investors choose properties to purchase based on what everyone else is doing or based on a sales flier they received from a listing agent telling them what a great deal it is, when both of these actions are the furthest away from what you want to do – unless you just like losing money.

The truth of the matter is, that many agents do not know how to properly valuate investment property or know how to analyze an investors individual needs. While I focus primarily on properties that will generate cash flow and the best potential for appreciation, I also realize that some investors are fine with an after tax cash flow if they can see a greater short term return on investment.

My investment strategy in my late 20’s was to look for things I could make a quick return on and get out of but as I got older I realized that longer term passive income was better for my overall strategy and I was fine with less appreciation potential as long as it could comfortably generate a revenue stream for me. In 10 years, I may have a different outlook. The point is, everyone’s goals are different and it is important to know what those goals are in the beginning and this is why I am a great choice as an investment REALTOR® on the Mississippi Coast. I work from Bay St Louis to Ocean Springs and can help you formulate a plan to maximize your goals.

Contact me and lets get started evaluating your needs so that I can assist you in meeting your real estate investing goals.

Go Zone accelerated depreciation is in its final year without any anticipation of being extended again. This means that if you are serious about doing anything with Go Zone property – you need to start acting now.

There are a lot of agents out there that are selling properties, saying they qualify for Go Zone under a “developer’s option”, but from the tax professionals I have spoken with, this is very murky water. I have had one broker tell me that they have been able to make this work, but two tax attorneys said no way. My philosophy is that if you go by the book, you won’t be heartbroken later when some IRS auditor tells you that you tried to game the system and lost.

The inventory for truly qualifying Go Zone property is declining. There is almost no multi-family properties that qualify and there are few single family properties that really make sense from an investment analysis. When I look at any real estate investment, I feel that it is important to make sense before tax incentives – otherwise it is not really an incentive, it just becomes a tool to sell.

There are a handful of single family homes being built that will qualify and make good sense from an investment standpoint.  If multi-family (duplex, triplex, fourplex or more units) is what you are most interested in, I have builders ready to get you a top-quality product that will make sense financially AND you can get the Go Zone depreciation.

Contact me today for more information or if you are ready to get started.

The MS Coast won another victory when the Go Zone bill was extended last month, providing for accelerated depreciation on real estate property put into use during 2011. The prior extension [2010] was a bit “thrown together” and extended the “put into use” part, but did not extend the expenditure date. What this means is that if you bought real estate in the Go Zone for the tax credits, you had to purchase something that was built on or prior to December 31, 2009 – this has changed.

The new extension will allow for any new property that has not been put into use. So, any property built since the Go Zone was enacted and not put into use will qualify.

What does this mean to you? Anyone looking for Go Zone property during 2010 had to find property that was built before the end of 2009 and never occupied (put into use). As you can imagine, the later in the year it got – the harder it was to find good, viable property as all the good ones were already sold. This left mostly bad investments or really high-dollar investments that only a handful of people could qualify for.

After a few hours tracking down information on the extension, I was able to get in contact with two attorneys that are well-versed in Go Zone. One of which I have referred before, and the other was very prompt in response to my inquiries and based on some papers he has authored/co-authored, seems extremely knowledgeable.

John Harral with ButlerSnow stated to me in a phone conversation that ultimately, any property built after Katrina and put into use during 2011 would qualify, although he also said that any specific questions should be directed to him or another Go Zone familiar attorney and your tax adviser.

Michael Haun with Paul, Hastings, Janofsky & Walker LLP, stated:

The recent extension pushed back both the placed-in-service date and the construction date to January 1, 2011.  Consequently, with respect to nonresidential real property or residential rental property that is placed-in-service by December 31, 2011, the adjusted basis of such property attributable to construction before January 1, 2012 is now eligible for the additional first-year depreciation.

What does that mean? In as simple terms as possible – anything that has been built and not put into use will qualify. There are an abundance of opportunities in existing properties as well as building new ones that would qualify for this. Use this CONTACT ME link to email or call me to help you find viable investments for your needs.

Attorney John Harral can be reached at (228) 575-3038
Attorney Michael Haun can be reached at (404) 815-2279
I (Damion Flynn, Broker) can be reached directly at (228) 365-1883

The Small Rental Assistance Program, SRAP, was designed by the Mississippi Development Authority, MDA, to assist coastal MS in disaster recovery. The SRAP program provided property owners forgivable loans up to $40,000 per unit for properties utilized in a rental capacity for 5 consecutive years from the SRAP “loan” date.

The SRAP program is over and the remaining portion of this post has been removed as it is deprecated.