Today's track: Orange Sky — Alexi Murdoch
Two people want the same house.
The seller can't drop the price. The buyer can't get the loan. Not this year.
Every other tool this week needed somebody to give. An assignment needs a cash buyer. A novation needs equity. A seller carry needs a paid-off house. An assumption needs a loan worth taking over.
A lease option doesn't need anybody to give. It needs time, and time is the one thing both of those people have.
Here's how it works, how to write one this week, and exactly who to call.
What it is
A lease option is two pieces of paper.
Paper one is a lease: a normal landlord-and-tenant lease.
Paper two is an option: the tenant gets the right (not the obligation) to buy the house at a price you agree on today, any time before a date you agree on today.
Keep them as two separate documents. That's the whole design. The tenant moves in, pays rent, spends two or three years getting their credit and savings in shape, then buys at today's price. The seller gets the payment covered now and the sale later.
And you, the investor, can sit in the middle and get paid on both ends. More on that in a minute.
The five things you negotiate
The option fee. Money the tenant-buyer pays up front for the right to buy, usually 1% to 5% of the price. It's non-refundable, and it counts toward the price when they buy. On a $265,000 house, 3% is about $8,000.
The term. How long they have to buy. Usually 24 to 36 months: long enough for a credit plan to work, short enough that the seller isn't stuck.
The strike price. The price they'll pay when they buy, locked today. (Strike price just means "the agreed purchase price.")
The rent. This is where the money is, and where most people get it wrong. Next section.
Who fixes what. The landlord keeps the big stuff: taxes, insurance, roof, furnace. The tenant-buyer handles the small stuff.
Rent credits, done right
Every course teaches it the same way: "$300 a month of your rent goes toward your down payment."
Then the tenant-buyer walks into a lender two years later with what they think is $7,200, and the lender tells them they have zero.
Here's the rule. Fannie Mae (the agency that buys most home loans from lenders) says a rent credit only counts if it's rent paid above market rent. The Federal Housing Administration (FHA) says the same thing. If the house rents for $1,800 and they paid $1,800, there's no credit, no matter what the lease called it.
So build it the way the lender reads it:
Market rent is $1,800. Charge $1,950. The $150 above market is the credit. Write it in the lease, collect it every month, keep the proof. After 24 months, that's $3,600 of real down-payment money a lender will count.
Want to give them more than that? Great. Call it a discount off the purchase price, not down-payment money, and tell them plainly at signing.
That one choice is the difference between a tenant-buyer who closes and one who finds out at the lender's desk.
Three ways to play it
1. You own the house. You've got a rental you're tired of, or a house that won't sell. Put a tenant-buyer in it. You get a higher rent, an option fee up front, a tenant who treats it like their own (because it's about to be), and a sale at today's price.
2. The sandwich. You don't own anything. You lease the house from the owner with an option to buy, then lease it to a tenant-buyer with an option to buy from you, at a higher rent and a higher price.
Real numbers. A vacant house listed at $250,000 has sat 150 days. You lease it from the owner at $1,700 a month with an option to buy at $245,000 within 36 months, and you pay the owner a $2,500 option fee.
You lease it to a tenant-buyer at $1,950 a month with an option to buy from you at $265,000 within 24 months. They pay you an $8,000 option fee, and they earn that $150-a-month credit.
Up front: $8,000 in, $2,500 out. $5,500 in your pocket.
Every month: $1,950 in, $1,700 out. $250 × 24 months = $6,000.
At closing: they pay $265,000, minus their $8,000 fee and $3,600 in credits, so $253,400 comes in. You pay the owner $245,000, minus the $2,500 you already paid. $10,900.
About $22,000 over two years on a house you never bought. The owner stops paying for an empty house next month and gets a sale this winter's market wasn't going to give them.
One rule you never break: your option with the owner has to last longer than your tenant-buyer's option with you. 36 months above, 24 months below. Always. And keep a few months of rent in reserve, because if your tenant-buyer stops paying, you still owe the owner.
3. The master lease option. Same idea, whole building. You lease the entire property, run it, pay the expenses, keep the cash flow, and hold an option to buy it at a fixed price in three to five years. It's how you control an apartment building without qualifying for a loan on it.
This is the one I'd be looking at hardest right now. A year ago, Louisville's 2-to-4-unit market had about five and a half months of supply (how long it would take to sell everything listed at the current pace). As of August it's almost nine. Owners who can't sell are owners who'll listen.
Who says yes: sellers
Vacant and sitting. They're paying a mortgage, utilities and insurance on an empty house every single month.
Tired landlords. Especially the ones who've had a house listed for rent for six-plus weeks and can't find a tenant.
Deals that fell apart. Sat for months, finally got a buyer, lost the buyer. That seller is exhausted.
Relocations. They have to go, and the house has to wait.
Low equity. They can't drop the price, because there's nothing left after the loan and closing costs.
Every one of those is on a list in the PS. Click them.
Who says yes: buyers
Self-employed people whose two years of tax returns don't show what they really make.
People with fixable credit and a plan. The median credit score on a new mortgage is around 775 right now. There's a whole tier of good, capable people sitting in the 600s who aren't bad risks. They're just not bankable this year.
Where to find them: loan officers are the best source nobody uses. Ask them to give your name to the buyers they couldn't approve, and let the buyer call you. (Don't ask a loan officer for a list of people they turned down. That's their customer's private information, not theirs to hand out.) Also: credit counselors, self-employed and 1099 contract workers, and the seller's current tenant, who's already living there.
How to make the call
If it's listed, call the listing agent, not the seller. Then give them two offers.
"Here's my cash number. And here's option B: my buyer leases it starting next month and buys it at close to your asking price within 24 months. Your seller gets the payment covered right away, an option fee up front, and a sale. Can you show them both?"
Lead with cash, give a second choice, let the seller pick. Everybody gets to feel like a Winner, and you're the only offer on the table that solved their actual problem.
Build it clean
Five rules, and you're ahead of most of the people who teach this:
Two separate documents, the lease and the option.
Record a memorandum of option with the Jefferson County Clerk. It's a one-page public notice that the tenant-buyer has the right to buy, so the owner can't sell or refinance out from under them.
Keep the option fee and the security deposit separate. In Jefferson County, Kentucky landlord-tenant law requires the security deposit to sit in its own account. Different money, different rules.
Landlord keeps taxes, insurance and major repairs. That's what keeps it a lease. Push all of that onto the tenant and a Kentucky court can treat it like the land contract from Friday's issue, which means a foreclosure instead of an eviction.
Written screening criteria, same for everyone, before the first applicant. Louisville Metro protects more groups than federal law does, including source of income. If it's not written down first, it's not a standard.
We've got the contracts and the language ready: the lease, the option agreement, the memorandum. Have your attorney look it over before you sign anything, and then go write one.
Go deeper with Andrew
If you want to go further than an email can take you, talk to my good friend Andrew Schlag.
Andrew started out as a farm boy in Evansville and worked his way up. He's a total expert at this: seller financing, land contracts, lease options, all of it. We've been doing deals together for over a decade, and he's always up for trying one of my weird ideas just to see what happens.
I definitely recommend reaching out to him. Reply "ANDREW" and I'll connect you.
Why it's in the toolbox
A lease option is the answer when the seller can't discount and the buyer can't qualify. No other tool this week closes that deal. Not an assignment, not a novation, not a seller carry, not an assumption.
It's two people who want the same thing and can't get there today. You're the one who gives them the time.
Tomorrow's the big one: assumable mortgages. How they work, who can and can't take one over, what you're allowed to say in an ad, and how "subject-to" is different in every way that matters.
📊 Friday's poll: If you were selling a paid-off rental, what would actually make you carry the note?
Nothing, I'd take the cash and run: 50%
Monthly income I don't have to manage: 30%
Spreading the tax hit: 20%
A higher price than cash would bring: 0%
I didn't know this was an option: 0%
Half of you would take the cash, which is exactly why the buyer who shows up with a cash offer and a carry offer wins. And look at that zero: the higher price is usually the best part of carrying the note, and nobody voted for it. Nobody said they didn't know it was an option, either. Friday did its job.
Today's poll
What's stopping you from sending your first lease-option offer?
Results in tomorrow's issue.
🏆 The Top Five is ready as always: the five best deals on the Louisville MLS this morning, five lowball setups, and my math on every one. Rules say I can't mass-send other agents' listings, so it goes one-to-one. Reply "FIVE".
Thank you for reading this every morning. I don’t say it enough. And I want more of you actually working with me on it — send me the deal, the question, the thing you’re stuck on. Hit reply. This only gets better with more of you in it.
Last week, Monday the 21st through Friday the 25th: 324,510 emails went out. 141,032 of you opened one. That’s a 44% open rate, five days straight.
A bank — checking your own money, your own account — gets opened 25 to 33% of the time. You open a real estate newsletter about assignments and land contracts more than that. Every single day.
Every issue this week ran a different length — 1,200 words one day, 2,600 the next, because I was working to empower, not just talking. Multiply real reading time by real opens and you get almost 24,000 hours of reading in five days. Nearly 1,000 days. The better part of three years of somebody, somewhere, reading this thing back to back, no stopping. Or call it a job: 598 forty-hour work weeks. Eleven and a half years of full-time employment, packed into one week. My hometown in Ohio (Springboro) was only 10,000 people. Last week, we had a newsletter read by 42,500 people. Four times my home town reads The Morning Bergeron, WILD!
That’s not a newsletter number. That’s a stadium showing up every single morning for something I get to hand them for free.
So here’s what that means for you. Every one of your listings, every off-market deal, every assignment, every personal property — it goes in front of every one of those people. For free. Every day.
If you’re about to sell something and you’re thinking about doing it with anybody else — think about what that many eyes is worth first. It’d be foolish to list with somebody else instead of a Winner Realty agent, or sit on your deal instead of putting it on OffMarket.deals, where this audience already lives.
We just do things differently here, and this is why.
With Enthusiasm,
Rob Bergeron
Owner–Realtor at Award-Winning Winner Realty
Winner Realty: (502) 305-8915
Winner Realty | OffMarket.deals | Property Partner Data Company
Schedule time to discuss your goals, bottlenecks, or whatever’s on your mind — book me here.
PS: Go shopping. Six lists, live on the Louisville MLS (Multiple Listing Service) this morning, all in Jefferson County, all people who could use a second option. Louisville price cuts hit a three-week high — same day new listings surge too — 144 cuts and 125 new listings in 24 hours is a market repricing itself in real time, not just stalling. Cuts jumped 96→144 day-over-day (+50%), which looks like capitulation, but new listings jumped even faster (74→125, +69%), so the ratio actually eased from 1.30 to 1.15. More than one in four active Louisville listings has been sitting for three months or longer. Let’s get them LOI’s!
Read literally, sellers are repricing existing inventory and new sellers are still willing to list at today's prices.
Vacant, price already cut, 90+ days on market (43): paying a mortgage on an empty house.
Houses sitting at least 180 days (84): half a year in, it's not a pricing problem anymore, it's a conversation.
Houses listed for rent 45+ days, still looking for a tenant (31): a landlord who'd take a tenant-buyer tomorrow.
2-to-4-unit buildings sitting 90+ days (57): your master lease option targets.
PSS: 8 booked phone meetings today! Excited to take on the day!
Book you call here!
PSSS: New tab on the site: Tools. Every free Winner Realty calculator and guide in one place. Kentucky closing costs for buyers and sellers, the transfer tax, mortgage and DSCR (debt service coverage ratio, the number rental lenders check) calculators, the new wholesale offer calculator, and sooooo much more. No signup, no catch: https://www.themorningbergeron.com/tools
PSSSS: Soon