Allocation is by far the easiest of the lease purchase strategies and requires the least amount of investment and risk to make the deal and make a profit up front. Instead of taking the property and subletting with an option or sandwich lease, you can actually sell the lease to someone else. You have created a valuable marketable product! You can also sell and even create a note financing the sale of the lease.
An assignment is when we negotiate the deal with the owner of a property and contains all the terms of the transaction within the specialized written contract. Then we can assign (which means to sell) the contract to a third party. It can be the Tenant / Buyer or another investor. Usually it is a lease and sale contract that contains a specific assignment clause with the right to sublet, transfer or transfer any rights within the original contract with the owner to another principal party.
Example: I found a property in a good neighborhood / school district. The owner had tried to sell it, had put up a rental sign as he was moving to a new state, and did not want to keep two mortgage payments. The property was worth $ 100,000 and the seller had a mortgage of $ 95,000. His payments were $ 1000 per month PITI (principal, interest, taxes, insurance). Real estate agents did not list the house because there were not enough earnings to pay a 6% commission. I offered to lease the house with the right to assign and buy for the balance of the mortgage. You would also pay $ 1000 per month with a five year contract and would be responsible for any monthly maintenance / repairs under $ 100. You would pay $ 1000 as option money and the first month’s rent with a 20 day advance notice before payments will begin.
The landlord agreed and I started calling all of my previous listing tenants / buyers. A tenant / buyer (with children) had just filed for bankruptcy, but was looking for a home in a good school district and a safe neighborhood. You knew it would take at least 2 years before you could get a new mortgage and save your down payment. It was perfect for this house. I told him that he could move into the house, buy it for the balance of the mortgage, and that I would sell him the contract (assignment) for $ 6,500. He only had $ 3,500, but he really wanted the house. I told him that I would take the balance of the assignment fee as a personal note (no guarantee) at 0% if I paid on the first of the month. He could pay me $ 250 a month and pay off the promissory note in 12 months. He accepted. I got my $ 1000 back, made a profit of $ 5500 ($ 3500 in cash and a $ 3000 bill) and was out of the deal. Assignments are great for trading houses without buying them. As usual, everyone wins on a lease purchase.