If you are a real estate investor looking to do a lease option deal, one of the biggest challenges you will face is finding owners who are willing to enter into lease option contracts with you.
Lease option arrangements can offer owners some great benefits, but most owners who are in the market to sell their property want to find a buyer who will pay them the entire purchase price now. They don't want to rent out their property and they don't want to wait years to sell.
So, you need to find that subset of owners where a lease option makes sense. But how do you find these lease option deals?
There are six strategies you can use to find lease options deals:
- Real estate agents
- Aged property listings
- Aged rental listings
- Expired property listings
- Direct marketing campaigns
We will go into each of these strategies in detail below, including easy-to-follow tips on how to implement each of them. There are some incredible online resources that you can leverage (many of them free), so it's definitely worth checking out.
But first, let’s cover some introductory questions that you may have about lease options in general (if you want to skip straight to the six strategies, click here).
This background is important because the lease options can be a bit complicated and a lot of the information we present later on won’t make sense if you aren't at least familiar with how they work.
With that, let’s get into it!
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The information contained in this post is for informational purposes only. It is not a recommendation to buy or invest, and it is not financial, investment, legal, or tax advice. You should seek the advice of a qualified professional before making any investment or other decisions relating to the topics covered by this article.
Table of Contents
What Is a Lease Option?
A lease option is an agreement where the owner of a property enters into a lease with the tenant but also gives the tenant an option to buy the property. The option grants the tenant the right to buy the property within an agreed-upon time (usually a few years) and at an agreed-upon price.
This “tenant-buyer” pays a non-refundable fee for this option. The landlord cannot sell the property to anyone else during the term of the option.
Investors can use lease options for real estate investing in a number of different ways. We’ll cover them briefly below.
How Do You Structure a Lease Option Deal?
There are generally three ways in which real estate investors structure lease options. They are as follows:
Sell a Lease Option to Tenant-Buyer
In this scenario, you own the property and enter into a lease option with a tenant-buyer. You get the option fee and a long-term renter. The tenant-buyer gets the lease and the right to buy the property.
This is the lease option strategy from the perspective of a landlord. You may want to look at this option if you want to sell your property but are having a hard time doing so with traditional methods.
By using lease options, you can secure a long-term tenant (usually multiple years) that will treat your place like their own and you get to receive some option money to boot.
If you are a landlord and want to learn more about this strategy, check out my article here.
Buy a Lease Option from a Property Owner
This is the other side of the lease option arrangement. Here, you are the tenant-buyer. So you pay the owner an option fee and secure a long-term lease. Finding leads for these type of property owners is the topic of this article.
Under this structure, you want to get a lease that allows you to sublease the property to another tenant. You also want a lease that has below-market rent. You should convince the owner that this is reasonable because you are giving them a very long-term lease.
How Do Lease Options Make Money?
After you secure a long-term lease at below-market rents, you find a renter who is willing to pay market rent and rent the property to them. You pocket the difference between the rent you pay and the rent that your tenant pays you.
You can then rinse and repeat with other properties and build a cash flow empire.
This is the classic lease option strategy used by investors who may not be able to buy a property outright, but still want to get into the rental property game.
You don’t need a lot of money to start and don’t need great credit or strong income because you don’t need bank financing. All you need is a modest option fee and a willing seller.
Related Reading: If you want to learn more about this type of lease option strategy, check out my article on the topic. If you are on the fence on whether you should use this strategy or go the traditional rental property investing route, take a look at my comparison article where we examine key factors that you should consider in choosing between the two strategies.
How Much Is the Option Fee in a Lease Option?
1% of the purchase price is the rule of thumb for a lease option fee, but this is usually negotiable. While the option fee is not refundable, you can often apply it to the purchase of the property if the option is later exercised.
Of course, you are also going to negotiate the duration of the option (usually 1-3 years, although longer is better). The length of the lease typically equals the duration of the option.
Structure a Sandwich Lease Option
A sandwich lease option strategy is where you obtain a lease option from an owner like I just discussed, but turn around and offer a “rent to own” program for your tenants.
Here’s an example:
Under your lease option with an owner, you pay a $3,000 option fee to buy the property for $100,000 within three years. Your rent is $1,000.
You then structure a lease option with your tenant where they pay you $4,000 as an option fee. Under your lease option with them, they can buy the property for $120,000 and they pay you $1,200 per month in rent.
How do sandwich lease options make money?
Pretty simple, you pocket the difference between your option fee and the tenant’s option fee. You also pocket the difference between the rents.
If you land the trifecta, your tenant will buy the property from you by using their option, and you will then get to pocket the difference there too.
Related reading: Interested in learning more about sandwich lease options? It sounds intriguing, I know, but there are some key risks that you need to be aware of (and address) if you want to do this successfully. Check out my in-depth article on the topic to find out more.
Six Strategies to Find Lease Option Deals
Ok, now that we've covered the introductory stuff, let's explore six great strategies for finding lease-option deals!
Real Estate Agents
Many investors think that real estate agents cannot find them creative real estate deals, like lease options. I understand why they think so. Most real estate agents do not deal in creative real estate strategies and want to just sell homes the “normal” way.
If you want to use real estate agents as a source of lease option deals, you will need to educate them on how your program works. You may hear “no” a lot before you hear a “yes.”
After all, they need to earn a living too. They do this by getting commission checks on properties they sell. So if you want to enlist the aid of a real estate agent to bring you lease-option deals, you need to make it worth their while.
The problem with lease options is that the sale (if it happens at all) will happen years down the road. Agents are not going to want to put the work in now and hope to get paid years later.
So you need to make sure they know that if they send you lease-option deals, that they will get paid for their efforts. A simple way to do this is to offer them money upfront if you close on a lease option agreement.
You normally pay an option fee to buy a lease option from an owner so you can use some or all of those funds to pay the agent. And the agent will still get the remainder of their commission if/when you exercise your option to buy.
Now, it’s worth noting that not every listing is going to work for lease options. The seller needs to be someone who does not need all of their equity out of the property now. For people who need their existing equity to fund the down payment on a new home, this strategy may not work.
Any experienced realtor has probably heard the line “if I don’t sell my home soon, I may have to rent it out.” That is the perfect situation for a lease option (and you should include it in your pitch to real estate agents).
As I mentioned, you may encounter resistance at first, but if you keep at it and find the right agent, they can be a great source of lease option deals.
For Sale By Owner (FSBO)
Using FSBO listings can also be a terrific way to find lease-option deals. Many people who list their properties FSBO realize pretty quickly that it is not working out as expected, especially in a buyer’s market. They are often approached by real estate agents who want to try to get them to list with them. In many cases, they don't hear from real buyers, which is what they want.
So you should start by telling them that you are not a real estate agent and actually want to give them money in exchange for an option to buy their property. Let them know how your lease option program works, including telling them that you will not be living in the property, but will be sub-leasing it instead.
I don't want to sugar coat anything: as I mentioned at the very beginning of this article, the subset of people who will find a lease option acceptable is not going to be huge because most people want to be able to cash out their equity.
But, by using this strategy, you don't have to worry about paying a real estate agent and you will likely find owners who are frustrated with the FSBO experience and want an easy solution to their problems.
Bottom line: if you knock on enough doors (figuratively), some owners will find your option appealing.
You can find FSBO listings on Zillow. Click on the “Other listings” button rather than the default “Agent listing” setting and that should pull up FSBO properties. If you are using craigslist, you can simply type in “FSBO” once you are on the page for your target area and that should narrow down the results to just FSBO properties.
Of course, there are a host of other places you can find FSBO properties:
If you want still more options, just google “how to find FSBO properties” and you should see plenty of resources.
Aged Property Listings
You can go on Zillow and sort property listings by age. Find the oldest ones and reach out to the agents to see if they would be willing to present a lease option to their seller.
The longer that a property has been sitting on the market, the more motivated the seller is probably going to be. Some sellers who would not have considered a lease option when they first listed may find that option acceptable after their property has been on the market for 5 months.
When talking with agents, use the same approach we covered earlier when we discussed using real estate agents as lead generators. Make sure they understand that you are willing to give them some money upfront,
On Zillow, you can see the price and tax history of the property, so you can check what the current owner paid for the property. If they paid close to the asking price (or even above it) when they bought it, that may be a sign that there is not a ton of equity in the property, which is good for you. If you see listings where they rented the property, that’s also a good sign, since you know it is probably not their primary home.
Other popular real estate sites offer similar features. For example, both Redfin and Realtor.com allow you to sort by age of the listing on their respective websites. You can use a similar approach for these listings too.
If you can get access to MLS listings, that’s even better because you will have a lot more information at your disposal and can really target the right property owners. But you will need to know a real estate agent that is willing to pull these listings for you.
Aged Rental Listings
Along a similar vein, you can search for rental listings that are old. There are some great advantages to this approach. Unlike property listings for sale, you know that the owner of the property is a landlord and wants to rent the property out.
If the listing is old, that means they are not having much success. They are sitting on a vacant property that is costing them money each month (in the form of mortgage payments) so they are going to be highly motivated to rent it out (or even sell it).
That’s where you come in.
Not only can you offer to pay them a nice option fee, but you also solve their vacancy problem by entering into a long-term lease with them.
Again, Zillow and other property listing websites allow you to sort rental listings by age, so the process for finding these motivated landlords would be similar to the process you used above to find motivated sellers.
Expired Property Listings
Expired listings can also be a great way to find lease-option deals. An expired listing is one where the listing contract between the property owner and the listing real estate agent has expired. The length of these agreements is negotiable, but they typically last 30 days, 90 days, 6 months, or even up to a year.
Once they expire, though, no agent is representing the seller and you can reach out directly to them. Just like the motivated sellers who have had their property sitting on the market for a while, the owner of an expired listing will be motivated to sell (maybe even more so).
But the good thing is, in this case, you won't have to deal with the complication of paying an agent.
Direct Marketing Campaigns
Another option to generate leads for lease options is direct marketing. What is direct marketing?
Direct marketing is any marketing that uses direct communication to individuals, rather than through a third party such as mass media. Mail and social media are some of the ways to use direct marketing to target your audience.
Many lease option investors find success using good old-fashioned direct mail campaigns that are targeted to two audiences: (i) distressed owners and (ii) tired landlords.
How to Target Distressed Owners
You can target distressed owners, such as folks who are behind on their mortgage payments (pre-foreclosures). These owners can't make their mortgage payments and may just want a way out. Finding a lease option arrangement that takes care of their mortgage payments and gives them an infusion of cash might be really appealing.
How do you find distressed owners? There are a lot of options, but you can begin online. Here are some options:
- Zillow (they have a “pre-foreclosures” section which identifies properties that are in pre-foreclosure). I love this option because it's free!
Of course, you can also use lead generation companies that will give you a list of owners (with contact info) who are behind in their payments. That can be quite effective, but will cost you some money. More on that a bit later.
How to Target Tired Landlords
Out of state landlords are another great target audience. It’s not easy to manage rental properties. I know – I have been self-managing nine of them for many years now.
It can be even harder if you have to do it remotely. Now, most out-of-state landlords use property managers, but unless you find a good one, you can really be taking a beating.
A bad property manager can neglect repairs and maintenance, do shoddy work, let properties sit vacant (or not do a very good job finding great tenants). All while taking your money each month.
If you are out of state, you may be feeling tired and trapped if you are stuck with a bad property manager because it is not easy to switch when you are hundreds (or even thousands) of miles away from your properties.
So how do you find these “tired” out of state landlords?
Listsource is a great option. Real estate investors rave about it. I like it because you can really customize your direct marketing campaign. It’s not just out-of-state landlords you can target. You can also target pre-foreclosures and a host of other attributes when developing your mail campaign.
These guys are owned by Corelogic, which is a premier property data company, so the information they have is pretty extensive.
The biggest drawback though is the cost. Depending on the scope of your campaign, getting those leads can be really expensive. And that's just for the leads. You still have to pay for the postcards, printing, mailing, etc.
But you can build your search parameters on listsource and get a quote before you are obligated to purchase, so there won't be any surprises.
Anson Young’s book, ”Finding and Funding Great Deals” goes into detail on how to effectively use listsource to find great deals. May be worth a read if you want to learn more about direct marketing and other methods to find great real estate deals.
Social Media Marketing
If you prefer more modern marketing techniques, you can go online and market through social media. One strategy that I see being used quite a bit to generate leads is Facebook ads.
Simply stated, you can use paid Facebook ads to target property owners who might be receptive to your lease option arrangements. Targeting Facebook users in your area who are interested in FSBO, for example, may be one example.
Facebook ads cost money, though, so you will need to weigh that against their effectiveness. You also will need to create a landing page on your website, etc. to capture the leads that your Facebook ads generate.
If you are interested in learning more about this strategy, there are a lot of online resources that you can use to get smarter about using Facebook ads for real estate lead generation. If you run a simple google search on the topic, you will see it is a popular area.
I think it can be an effective approach, but like with any marketing strategy, it will take time, effort, and some trial and error before you get it right.
Obviously, Facebook is just one social media channel. There are tons of online marketing channels available to you. Looking into all of them can lead you down a rabbit hole, but you may find some options that ultimately work for you.
So there you have it. Six strategies for finding lease option deals. Most of these strategies are time tested and have been used by real estate investors for many years (except for the social media strategy, of course).
As with all lead generation strategies, you will need to tweak them and optimize them over time so that you can get the best results, but hopefully this article gives you some ideas on how to get started. Best of luck on your investing journey!