When to Use Lease Option vs. Getting the Deed

Acquiring investment real estate can be handled with many approaches. Two very popular “no money down” approaches are lease options and “subject to,” or “getting the deed.”

A lease option is a technique that involves gaining “control” of a property, but not ownership–just the right to possess a property now and purchase that property at some future date with terms you define today.

A “subject to” is getting the deed to a property without getting a new mortgage. Instead, the seller signs over the deed to his or her home “subject to the existing financing” staying in place. The buyer in this case makes the mortgage payments on the old loan, but does not get a mortgage themselves to acquire this home.

Both of these techniques usually require little or no money down. In both of these techniques it is possible for the buyer to get money from the seller or the purchaser (or both) in the beginning of the transaction. These techniques, when used properly, can provide for huge profits. They are awesome strategies and when used hand-in-hand, are almost an unbeatable pair!

This is not meant to give details of each technique, but rather to show when you should consider each. If you don’t understand how to document and protect yourself in each kind of technique, then purchase a course on the technique, or do additional research.

Knowing Both Techniques Means More Great Deals

Unfortunately, there are many people who are teaching that you should only do the “subject to” (only get the deed) deals. They recommend never buying on an option. I can’t tell you how many times I have heard, “If I don’t get the deed, I don’t do the deal.” With 20 years of experience doing both types of deals, I have to disagree.

The more tools and techniques and ways you have to purchase property or to structure a deal, the more likely you will be able to work with a motivated seller to arrive at a potential solution. If you only buy “subject to,” you’ll walk away from a LOT of great deals–but you must know when each technique is appropriate.

Finding a motivated seller is the first step to any good real estate deal. There are many types of motivated sellers, but we tend to think of motivated sellers as the ones that are financially distressed. I like to look at motivation from a much wider range. Let me explain. I like to divide motivated sellers into two groups:




Sellers have bad debt



Get the deed; NO lease option





Sellers have good debt


lease option or deed!


Sellers who have “bad debt” are those in trouble. They may be behind on a mortgage, lost their job, acquired an illness, going through a divorce, etc. In these situations, you need to get the deed either with a subject to or an outright purchase. Your main concern is that this seller will continue to have financial problems that could affect the title to “your” property if the deed is still in their names.

For example, if this seller gets judgments from creditors, they can attach to any real estate the sellers own–and they will have to be paid off before you could exercise your option to buy. That’s why you want to get this type of seller off of the title.

Sellers that have “good debt” are NOT in trouble in the traditional sense, but they do have a reason motivating them to sell. Their problem is not financial desperation–it’s simply a change in their life. They might be transferring to a new location for a promotion, getting married (each owning their own home), building a new home, burned-out landlords, etc.

An example of when you MUST get the deed

A seller calls you on the phone and says he is two months behind on payments. Do NOT lease option this home! This seller is in trouble financially and is not a good risk for an option. Anyone in a bad financial situation is not a good seller for an option. This is the type of seller that you must get off of the deed so that his financial situation will not affect the title to the property in the future.

Not every seller who is in financial trouble tells you so. You ALWAYS need to do research on the title before you get the deed or do an option. In this case, you will need to bring the seller’s mortgage current. Before you do, you will want to make sure that he is the owner of the property and there are no other liens on the property unknown to you.

An example when you COULD get the deed

A seller calls you who owes $135,000 on his home–which is worth $135,000. Since he has no equity at all, this type of seller might very well be willing to give you the deed. And if there is high appreciation or a very low payment, you might be able to make a profit even though there’s no equity.

On the other hand, if the seller’s payment is too high or the market is slow, you might need to have the seller pay you to take the deed. Yes, there are sellers who will pay you to take the deed to their home. Think about it: if this seller sells conventionally–that is, though a Realtor, he would have to pay up to $10,000 in commission to sell his home.

Plus, he’ll have closing costs, transfer taxes, and will probably pay points or fees on behalf of his buyer. If he’s willing to pay all this money to an agent to sell the property–and wait 90 to 120 days to sell–why shouldn’t he just pay you to take over his payments NOW?

If the seller doesn’t have the cash to give you, an option would be your best strategy. This way, the seller can pay you the $10,000 over time, or you could arrange for the seller to pay part of the monthly payment during the option period.

This way, if he stops paying his portion of the payments, you have the choice of surrendering your option and simply giving the property back to him. When you have the deed, you can’t do this.

An example of when you SHOULD lease option

A doctor has a new home built for himself. His old home is worth $200,000, and he owes $125,000. He has $75,000 of equity. He is not behind on payments, and he did not need the $75,000 cash out to buy the new home.

His old home is sitting vacant, and the Realtor has not sold it yet. He qualified for both house payments at the bank, and he can technically afford both, but who wants to make an extra house payment?

Although he is motivated to sell because he’s coming out of pocket every month to own a vacant property, this type of seller is NOT going to simply give you the deed and let you take over the mortgage. No way is he going to give up all of his $75,000 in equity, and no way are you going to pay that much cash out of pocket.

When you lease option this house, he gets most of his equity back–although it won’t happen until YOU sell the property. The deal might work like this: You option the property for $195,000 and make payments to the seller that equals his total mortgage payments. You SELL the property on an 18-month lease option for $228,000 with payments to match his payments.

You get cash flow plus $33,000 in profit when your tenant/buyer buys the property; the seller gets his payments taken care of for a few years; then he gets the bulk of his equity out. And in the meantime, he 22-month have to worry about management, vandals, frozen pipes, and all of the other things that owners of vacant houses have to deal with.

An example of when you COULD lease option

A seller just inherited a property worth $120,000 from his parents estate. It is owned free and clear, and they don’t want to be paid off. They don’t need the cash, but they would love some cash flow on this asset. This seller is not going to give you the deed.

Let’s say you can lease option this property for $700 per month with $300 per month going to the purchase–or the option credit. Your real payment in this case is only $400. You also could do seller financing on this property.

Let’s examine a seller financing deal

A seller financed deal means that the seller will finance a mortgage for the buyer,and the buyer pays their mortgage payment and interest to the seller versus a bank. This is primarily done when the seller owns a home free and clear,and they do not have a mortgage on it themselves.

Let’s say you negotiate a deal with the seller for a sales price of $110,000 if you want your payment to be $700, as in the above lease option example. Let’s see what that really means to a seller for a seller financed deal.

First, with seller financing or a mortgage your payment includes taxes and insurance (unless the buyer pays them themselves). This must be subtracted from the $700. Each part of the country fluctuates, so I will use an estimate of $250 per month for taxes and insurance. This leaves $450 for the seller.

Now we must subtract our principal we negotiated above the $300 per month credit. This now leaves the seller with $150 per month. If this were to be all that is left this would essentially mean the seller is receiving 1.5 to 1.7% interest on their money. The interest rate has to be disclosed on the loan document or seller financed deal.

A very low interest rate is much harder for a seller to accept than a lease option payment of $700 per month. It is the same thing to the seller, but it is spelled out differently. They don’t do the subtraction themselves to calculate the real rate of return. When you do a seller financing deal, you must calculate and show the interest rate in writing.

Pros and cons of subject to vs. lease options


Subject to Pros


Subject to Cons


Title is in your name; full ownership.

You own it and have ethical responsibility to the seller even if the market changes or you 1.5 sell the home. You own it! No changing your mind on this one.


Some sellers will pay you to take the deed.

You will need to keep two insurance policies in place. One that goes to the lender with the old owner on it, so it 1.5 trigger the “due on sale” clause and one policy for you as the real owner. You must insure it based on the title, or you will have no coverage. This increases your real monthly. You can also place it in a Land Trust to avoid most of the “due on sale” issues (usually recommended).


Easier to prove “seasoning of title” when you are the title holder. Easier to refinance.


In some states mortgage brokers and Realtors could be fined and/or subject to revocation of their license. It could be considered against their code of ethics to assist a person in violating a clause in a contract.


If you are on the title, you will have long-term gains vs. short-term if you hold the home for longer than 12 months.


Sellers with lots of equity will be hesitant or completely against giving the deed.


Lease Option Pros


Lease Option Cons


You don’t have to buy later if the market drops or there is something wrong with the home. You can get out!


Title is NOT in your name; the seller could screw it up. You must be careful to screen the seller. Only do lease option from strong sellers, not those in trouble or headed for trouble (unless you put the deed in a Land Trust).


More sellers will do an option vs. giving up a deed, especially on “pretty” homes.


You will have short-term capital gains vs. long-term if you are not on the title. You can avoid this by financing it with the 12 months of payments (see the pros), get on the title and hold it for 12 months before closing with your tenant buyer. This is a minimum of a 24-month solution.


After 12 months of payments, many lenders will treat a lease option as a refinance as if you were on the deed. It would be treated like a land contract or contract for deed refinance.


Some sellers might feel like an “option” is not closure on their home. Some sellers feel better with a deed being transferred or a lease purchase (which is a guarantee vs. and option).


A way to get nicer homes. It is more likely the seller that is not behind has taken better care of their home. This type of seller is more likely to consider a lease option vs. signing over the deed.




Seasoning of title will start when you file a memorandum of option or lien of interest. Most lenders will consider this adequate and similar to recording a deed (with the exception of FHA).



Sellers with lots of equity are more likely to give you the right to buy the home than they are to give you the deed to their home.


Sellers with lots of equity usually want to close and get their equity out.


Warning: There are many factors to consider when making an offer with either of these techniques. What is the current market condition for real estate in your area? Are homes appreciating, depreciating, or staying flat? What is the financial condition of the seller? Are they moving up or down financially in their new home?

All of these items make a huge difference on how you will structure a deal. I always say, “Strong market; make a stronger offer. Weak market; make a weaker offer.” Do your research. But if you keep your mind open to new ways of acquiring real estate, you will indeed make more money!

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By CREOnline Contributor

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