Not everybody has enough cash stashed away to buy an apartment building.

At first, it sounds like a catch-22. To have a huge chunk of cash on hand you most likely need to sell a property. But to have a property to sell, you needed cash to buy it the first place.

Fortunately are ways of getting a property under contract without writing a big check. Even in the wake of today’s foreclosure tsunami and the backlash against risky loans that required little to no money down, you can still buy property when you’re short on funds.

One viable alternative is the lease option.

A lease option deal has three principle components: the purchase price, the option consideration, and the terms. You need to protect yourself at each stage.

PRICE

The best way to protect yourself is not to overpay. Don’t fall in love with the property and get caught up in the emotion of the deal.

I’ve never seen a purchase price carved in stone. Price is always negotiable. We all start at the same point: the property owner wants more money than the property is worth, and you, the investor, want instant equity. Which means you want the property for less than it’s worth.

It’s a buyer’s market today, so getting it your way is likely. Particularly if the owner has held the property long enough to come out with a profit even if they sell below market value. So it’s good to know what the owner’s equity is… because that’s their profit and the figure that they’re really focused on.

You can negotiate a discount if there is deferred maintenance that needs to be taken care of. If the roof needs to be replaced or the building painted, get quotes from premium high-end contractors. Don’t lowball the repairs when you’re negotiating. This protects you from unwelcome surprises when it comes time to get things fixed.

OPTION CONSIDERATION

The option consideration is the amount you pay the property owner upfront. Think of it as a non-refundable deposit. Like everything related to the bottom line, it’s negotiable. Your success on getting the price down hinges on the motivation of the seller, so it can be worth your time to investigate the seller’s financial situation. If you’re not sure how much to offer, ask your broker or mentor for guidance. Seeking the advice of experts is one of the best ways to protect yourself.

TERMS

The terms of the lease option will specify how long you have the right (but not the obligation) to purchase the property. The owner has to sell it to you during this period for the specified price. Doesn’t matter if they strike oil next door and the property soars in value. You get the property for the agreed price in your lease option.

If it’s a single family home, ensure you retain the right to sublease to a tenant. Keep in mind that to squeak out a positive cash flow, your tenant’s rent needs to be more than your rent as specified in the lease option. You’re not going to make a financial killing on the cash flow income. Be sure there is marketplace demand for this rental property.