How To Invest In A Declining Real Estate Market

In South Florida like many other places in the U.S. the supply of houses and apartments exceeds demand and prices are starting to decline. However, even in these declining markets it is possible to invest in real estate and realize a good profit on your investment, or to sell your own home and get an above-market price for it. One of the “secrets” of making money in such situations is to utilize a “lease with option to buy” strategy. Let’s take a look at why this is such a good approach and how it works.

First of all it is useful to clarify the terms. “Lease with option to buy” is the same exact thing as “rent to purchase.” They both mean that the tenant is entering a “lease,” a rental agreement over a fixed amount of time, and that he or she has the “option” or right to buy the property within the time period that is laid out in the agreement.

The advantages of this arrangement for the property owner are as follows:

1. Lease-purchase properties are more attractive than ordinary rentals. Many people want to own their own house or apartment but are just not ready to do it immediately. If you offer your property as a “lease-purchase” or “rent to buy” then you will get more responses to your advertisements, and will be able to get a good tenant more quickly.

2. You will end up with more responsible tenants. People who have entered into a lease purchase arrangement will treat the house or apartment as their “own” because they have a good hope of owning it outright in the near future.

3. Maintenance costs are lower. This is the outcome of having more responsible tenants.

4. The cash-flow for the owner is greater when there is a lease-purchase arrangement in place. The reason for this is that in addition to collecting the rent a portion of the option fee will be payable each month. The option fee is the amount that the tenant pays in order to reserve the right to purchase the property at a future date.

5. The property can be sold at 15% above the prevailing market price. You can getter a higher amount for the property because the people who are renting from you would not be able to otherwise buy a house (due to credit restrictions or because they have not yet acquired enough time on their jobs) and are willing to pay a bit more in order to get a chance to buy a property that is attractive to them.

If you want to lease or sell your own home or an investment property following this method, here are a few tips:

1. Charge a normal rent. Even though the tenant is also paying part of the option fee on a monthly basis, and even though you know that he or she will eventually buy the property, you do not have to lower the rent.

2. Take some of the option fee in advance. Although option fees are generally paid in installments as part of the rent, if the tenant pays some of it up front, there is more chance that he or see will follow through and actually buy your property.

3. Make sure that you can cancel the option arrangement if the tenant does not live up to the terms of the rental or lease.

4. Work closely with your bank to determine when your tenant will be able to have a mortgage, and then time your lease-option accordingly

In the Miami area, where I have my real estate business, over the last 4 years an estimated 40 % of new homes were bought by investors/speculators. Inventory (homes on the market) has tripled in the last twelve months while sales have dropped to less than 8 % of homes on the market. On top of that, in the last three years 10 times more condos were being built/approved than in the entire previous ten years - 70,000 vs. 7,000.

Despite this seeming oversupply of housing or “declining market,” investors and careful homeowners have been able to get a good return on their investments by using the lease purchase strategy.