I am sure you have seen advertisements on social media telling you that you can purchase properties with little or no money down. In my earlier article, I have shown you that this is entirely possible. All you need to do is to find the money that is locked up in your assets and liquidate them.
$1 Is All You Need. You Do Not Need OPM! (Other People’s Money)
However, what if you do not have any assets to liquidate and you are starting new? Is it still possible to purchase a property with little or no money down? What if I can tell you there is a way to do it. You do not need to borrow any money from your friends and relatives. You do not even need to take a bank loan. All you need to do is just to come up with $1. Are you interested in finding out more? Well, you just need to go to Amazon, spend some money on books and read them.
What is described in this book is the usage of the instrument called the lease option. The lease option works in very much the same way as a share option. The lease option is essentially a contract to purchase the financial instrument at a fixed price in the future at a specific date. Let me give you an example.
Opportunities Are Out There Everyday
Every day, there will always be someone who will encounter financial difficulties. There are so many reasons why things like that can happen. Be it bad business decisions, gambling problems or even this latest unexpected pandemic. Things can change drastically; people can lose their jobs and end up having to sell their properties. As we all know, finding a buyer for some real estate may not be that simple. The process can take weeks or even months. As a result of this predicament, the seller might be open to what we call a lease option. So, what is a lease option?
Definition Of A Lease Option
Let us say that the property the seller is holding on to has a market value of $1mil. The seller has a problem paying the mortgage and have trouble finding buyers. So you propose to help him with his monthly mortgage payments of $2772 for the next three years. Additionally, you are also allowed to lease out the property on his behalf. Lastly, in the agreement, there will be an option for you to purchase the property at an agreed price of say $900k three years later. Effectively, this is also known as a rent before you buy. All you need in this transaction is just $1 to carry out the deal.
Why Would the Seller Agree to This Terms And Conditions?
So why doesn’t the seller rent out the unit themselves? Well, firstly, not many people would want to agree to rent for such a long period. Secondly, you come in a stress reliever that can immediately remove the pressures the seller is facing today. Thirdly, you are contributing to the seller’s principal amount at the end of the day. The total mortgage amount you are paying over the next three years is about $99,962. For simplicity sakes, I will just round this up to $100k. Interest costs are around $25k for these three years, and you are effectively contributing $75k into the seller’s principal.
What Do You Do After Purchasing This $1 Option?
After purchasing the option, you would want to find what the author of the book refers to as a tenant-buyer. These tenant-buyers do not have much savings currently and would want to secure their future home at current prices. These buyers want security and peace of mind to be able to obtain a property at current prices. They do not want to save up in the next three years to find out that prices have gone up again, Therefore, making it impossible to become a homeowner.
Matchmaking the Seller and The Buyer
With just $1, you were able to take ownership of the piece of real estate effectively. This ownership is later transferred to the tenant-buyer for $100k. The tenant-buyer is then able to secure their future home at a fixed price. Everyone wins, and you take home $100k. Do these ten more times, and you are now on your way to become a millionaire.
Lease Option in Singapore
The lease option described above is no different than the deferred payment scheme offered by some developers in Singapore. Instead of coming up with just $1, developers tend to ask something in the range of 20% before you can “take ownership” of the property. Ownership can be in the form of self-stay or even a master tenancy to lease out the units. The remaining amount of 80% plus stamp duties are usually paid 24 months later. Why? Because if you think about it, a lease option with just $1 effectively transfers most of the risk to the seller. What if prices fell two years later? You can just forfeit the OTP(Option To Purchase) and lose $1. And in the event prices go up, you can do ahead and exercise the option to purchase.
Are Lease Options Feasible?
While some people have succeeded with the usage of lease options, you must understand that this instrument is more applicable to properties that have a more elastic demand. The fluidity of interest is the reason why the seller is unable to find a buyer or even a tenant to cover the mortgage payments during certain times. Elastic demand properties are almost always higher in risk compared to those that have more inelastic demand. I always prefer real estate with inelastic demand. Owners of such properties will almost always net a profit in the years to come.
Instead of spending a few thousand dollars to satisfy your curiosity, you now know the secret on how to buy properties with little or no money down. If you want to find out more on what is written in these books, do click on my Amazon affiliate link to get started. At the same time, your purchase will allow me to buy coffee and cookies—two of the most important raw materials for me to write articles like these!
Article contributed by Jerry Wong
Jerry Wong is a realtor with Propnex Realty. He loves coffee, cookies and condos and has been in real estate for ten years. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home. Or making well-informed decisions that see their assets grow. Book a video call appointment and Jerry will share with you the following.
- How certain factors affect real estate prices. Why some condos can make a million dollars while others can lose that same million.
- Why timing is not the most important thing. Because some people can buy the same condo at the same time, but one end up making $100k to $200k while the other suffers losses of the same amount!
- Understanding your requirements and craft a solution for your real estate needs. Be it in the form of asset progression, tax planning, financial calculations, rentals, sales, etc.
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