In order to understand how lease options work, there are a couple of basic definitions that should be addressed:

• LEASE: Gives a tenant (or renter) the exclusive use of property for a specific period of time.
• OPTION: Gives the right, not the obligation, to buy a specific property at a specific price on or before a specific date.

This is a way that you can help rescue a person from near financial ruin and make a profit. A lease option is often a good arrangement for a potential home buyer because it lets him move into a house he may potentially buy without having to come up with a down payment or financing at that time.

Here is a scenario to show how the process can work:

A homeowner puts her home up for sale because she is moving to another part of the country. She is asking $150,000 for the property. The home sits on the market for months until finally she is approached by a couple presenting a unique offer. The offer is $3,500 for the option to buy the home from her for the full price of $150,000 within the next 24 months. In the meantime the couple will rent the home from her, covering her mortgage plus a little cash flow until the property is finally purchased outright by the couple.

The seller needs to move and the home, which has sat on the market for months, is costing her money every month. The homeowner decides to accept this offer for a few very good reasons:

• The tenant/buyers are coming in with $3,500 plus first and last months' rent of $1,000 per month. Their $5,500 is significantly more than a traditional tenant has available, adding financial protection for the seller in this transaction.
• If the option is exercised, the seller would get top dollar for the home because she will receive the full $150,000 (which she expected to negotiate) plus the $3,500 option payment, AND does not have to pay a real estate commission on the sale. Upfront, this saves and ultimately makes her THOUSANDS more!
• The tenants’ ultimate goal is to buy the home. They have a vested interest in the property because of their option fee. This means that they are more likely to take excellent care of the property.
• If the tenant/buyers cannot exercise their option to purchase, the seller gets to keep the equity increase during the two years of the lease option term while the tenants occupy the home. This is due to appreciation. She also gets to keep the option payment and enjoy the tax benefits of ownership during that time period. She can then sell the property for a greater gain, OR she can offer to lease-option it to another prospective tenant/buyer.

For an IRA that is sizable enough to buy a home in its entirety, this is a tremendous way for the IRA to protect itself from the hazards of rental real estate. There are many benefits to holding lease options inside your IRA. Like tax liens, these options offer a wonderful alternative to the stock market for investors with smaller retirement accounts.