In looking at the property in the San Francisco Bay Area real estate market, I would have to say as we move forward into 2007 and over the next few years, there will be some great deal to be had, that is for sure. Your success will depend on where you are as a property investor, as well as your acquisition strategy, how long you will carry the property before you exit out of it.
Once you have a number of people providing you with listings of homes that are in distress, that are either facing foreclosure or is a (REO) banked owned property. There are opportunities to purchase property subject-to, or possibly short-sale opportunities with certain lenders. Regardless. you will be able to find deals in the coming markets.
My problem is, in the Bay Area where appreciation and prices have gone so high. Rental prices and incomes have not kept up with property appreciation. So even when I can purchase property below market value in the East Bay, I really have to be sure I can handle the negative cash flow after I rent it out. What makes sense is to do a lease option with a non refund able deposit. That way I can get some money back as well as a little higher monthly.
As I said earlier, it is all about the exit strategy, so since the vast majority of lease options never exercise the option, I figure I'll get higher rent, a deposit and a great tenant who will take care of the property. I'll still control the property and take the taxes, if the tenant exercises the option then it is a win-win. Because I'll be cashing out on my profit, unfortunately not worthy of a 1031 exchange. If they don't then I'm in good shape and can do the exact same thing.
What I think is important here is the strategy. By giving the lease option, I can recoup some of my initial investment amount, and have funds to cover any negatives in the cash flow.