HOW TO MAKE MONEY WITH LEASE OPTIONS

[wallacehobbs]

In my Day to Day Real Estate Investing Career I have noticed I get a lot of questions about Lease Options.

Folks say, Wallace, give me the detailS Exactly how these Work and How I can make money doing them. Be careful for what you ask for. Here goes.

Leases and options are not widely understood.  They are just Control without ownership. Each of these are very powerful.  When you pair the two together, they will open up a lot of money making possibilities.

Leases control use and  possession.  Option on the other hand control the right to purchase. You buy with lease options and you can sell with lease options and you can assign you options positions.  You can even do any of this for a Fee for others.

The First place you should consider applying lease options is in your current rental program.  You must understand something: Straight rental will give the advantage to your tenants. Your position is weak. You should use a Lease Option to make it so you are now in a position of strength and not your tenants.

Don't just RENT your properties, use a RENT TO OWN. This is simply what a lease option really is.  Does that make sense? The only difference is your dealing with people who want to have the American Dream: Home Ownership, but need help. Lease Options will give them the chance to own and its a soft sale.

What you will ask your owner/tenants for is a 3% to 5% of your Sales price of the home up front, and it is non-refundable.  It is what is called an option Consideration.  You will apply this to their cash down payment at closing with they buy the house in either One year or Two years, depending on how long you make your lease option.

The Lease and the option can be for a One or Two Year period.  These are two separate documents. There usally is no mention of the option in the lease, but the option is conditioned upon all terms of the lease agreement being met.  The lease payments are the market rate.

The selling price on the property is at retail with the buyer paying the closing cost. You can be flexible here.

A rental credit can be added to help make the deal work.  I suggest to allow $200 a month to reduce the purchase price for every month the rent is paid on time.

The Demand for RENT TO OWN homes is Strong!  When you run an AD in your local paper you will be swamped with calls.  Have a voice mail box set up!  I will ask people how much they have saved up for a down payment and how much money can they afford to pay a month in rent before I give out any information.

What's nice about this is that Bad Credit is not a problem for them.  Cash Qualifies them.  As long as they have a few thousand dollars in a non-refundable money and can afford the monthly payments you can work with them.

Selling or renting on a lease options PAYS you in several ways:

UP FRONT CASH IN YOUR POCKET:  This is the money form the non-refundable option consideration.  Even if it is only $2000.00 is sure beats a refundable deposit with is the biggest cause for tenants fighting with a landlord.  This can be huge for you.  Lets say you have 25 houses and you collect $2000.00 on each one, that's $50,000.00.  Not too bad, right.

YOUR MONTHLY POSITIVE CASH FLOW:  Cash flow is KING. I alway try to get at least $200 a month on each house and hopefully more. Don't forget your RENT TO OWN tenants have an incentive to pay on time (to get that $200 a month rent credit towards the down payment).  Another thing is you  make them responsible for all minor repairs.  Hey, they are buying the house and that's part of ownership.

PROFIT WHEN YOU SALE THE PROPERTY:  Lets say at the end of a One or Two year lease Option that 1/2 of these make it to closing, for whatever reason. Don't worry if this does happen.  You will already have made money.  If they don't close then just do another lease option again and get up-front money and cash flow again!  Of course you goal is to get all of them to close for your tennant buyers.

Lets face it.  Most of these people can not buy a house.  They have bad credit, bankruptcy, Divorce, self employed etc.  You may be the only one willing to give them a chance to own a home.

The tenants will have to do their part.  They must get themselves ready to qualify for a loan.  The money you make here is from the difference you paid for the property and what you set your sales price at.  You will get a higher price and have lower cost, pay no Real Estate Agents a commission, their is no holding cost and you pay no closing cost.

This is absolutely the best way for a beginner to get started as a Real Estate Investor.

Until Next time, Happy Investing.

Wallace Hobbs
Real Estate Investor      

[RosewoodTX]

Wallace,

Great info.  This is exactly the info I needed because my initial interests in REI have been concerning developing a rental base.  I now feel that the lease with option is the way to go.

In fact, that is exactly how I bought my own property.  I made a lease/option contract for a year.  Part of the payment went to a down payment and in a year I picked up the non-qual VA assumption (w/less than a $150.00 app fee) and entered into a seller-finance contract with the owner for the balance of her interest in the property.  

Also, because she liked me, she sold it to me for 2k below assessed value per acre and shortly after the deal the appraised value increased by over 50%.  You'll may think I'm an idiot though, because she actually offered me 4k below the AV.  Of course, I wasn't investment minded at the time and because I liked her also, I just couldn't accept it.  I don't regret it one bit.  

To be honest with you, I didn't know what was going on except that I had the property of my dreams.  Now I know!   And what a great deal it was.

I'm curious to know why the option should not appear in the lease?  I understand there are two forms for this deal but what are the implications of the option appearing in the lease.  

Thanks again,    Elizabeth

 

     

[$Cash$]

wallacehobbs,

Glad to meet you.

UP FRONT CASH IN YOUR POCKET:  This is the money form the non-refundable option consideration.  Even if it is only $2000.00 is sure beats a refundable deposit with is the biggest cause for tenants fighting with a landlord.  This can be huge for you.  Lets say you have 25 houses and you collect $2000.00 on each one, that's $100,000.00.  Not too bad, right.

You might want to explain how you arrived at the figure of $100,000 off 25 houses at $2,000 each?

The way I see it that is $50,000 with 25 Lease Option deals and with Subject To deals on the average that is 2 houses.

John $Cash$ Locke

[wallacehobbs]

John,

LOL.  Yes, I just looked at my draft I wrote and I had written down 50 houses not 25.

50 x $2000 in $100,000.

My Bad.

 :

[$Cash$]

wallacehobbs,

Thank you for the clarification.

The Lease and the option can be for a One or Two Year period.  These are two separate documents. Make sure there is NO mention of the option in the lease, but the option is conditioned upon all terms of the lease agreement being met.  The lease payments are the market rate.

Now maybe you can explain why you would not mention the option in the lease since it is part of the agreement between you and your buyer?

John $Cash$ Locke

[$Cash$]

wallacehobbs,

Speaking strickly from a "legal standpoint", what are the legalities involved that you have to separate an Agreement albeit "A Lease" or "A Option" since they are both part of the terms of the Agreement with your tenant?

In doing Lease Option deals is the tenant normally confused as to what the transaction involves so that the terms of the deal have to be separated in two parts to make it a legal transaction?

John $Cash$ Locke

[$Cash$]

wallacehobbs,

I am fully aware of how Lease Option deals work and why some investors are told to separate  the Lease from the Option portion of the Agreement with their Tenant/Buyer.

It is called an "Equitable Title" issue and when you are trying to do a "Quit or Pay" to evict your Tenant Buyer and you leave out the part about the Option portion some are of the belief  that this will not put you in a Judicial Foreclosure position and I disagreee with this.

Once your Tenant Buyer shows the Court the Option on the property, the Judge "can and may" rule it is an Equitable Title issue and then you will have to go to the court that handles Judicial Foreclosure.  Since you received $2K down see how far that goes with a Judicial Foreclosure.

State law has nothing to do with it, either you are up front in your contractual agreements with your tenant/buyers - buyers or you are trying to hide something and the excuse that the tenant buyer may be confused is a pretty poor excuse.

Remember I deal with my students in all 50 states, Canada  and Europe, not that I am familiar with all the laws everywhere, I do know that we are up front in our dealings and the seller or buyer is not left in a state of confusion when the deal is done.

I won't get into what happens when the seller you are lease optioning from receives a federal tax lien, files bankruptcy or any other encumbrance that attaches to the property that you are responsible to your tenant buyer to give clear title to.

So here is my advice wallacehobbs, when coming on a discussion board to promote yourself or your network, remember there are some pro investors on this board that are pretty smart fellows and gals and they can spot the pro's from the wannabe's pretty darn quick by the way they post.

John $Cash$ Locke  

[ReggieSC]

$Cash$,

In your last post you stated the following, "I won't get into what happens when the seller you are lease optioning from receives a federal tax lien, files bankruptcy or any other encumbrance that attaches to the property that you are responsible to your tenant buyer to give clear title to."

What can an investor using lease options do to protect themselves if this does happen or to prevent this from happening? Could the investor record the option, that way they will be alerted if those events occur?

[RosewoodTX]

$Cash$,

Thanks for pressing the point and getting the matter clarified.  

I recently found your site on Subject to training method.  Very intriguing!  

Elizabeth

[$Cash$]

ReggieSC,

Glad to meet you.

Let me first say Lease Option is a viable method of investing and all real estate investing has a certain amount of "Risk vs Reward" connected to it.

An example would be a person purchased a home in a new sub-division using conventional methods.  The interest rates rise and the builder of the sub-division has problems qualifying buyers, so he lowers the price of the houses.  Recently I saw a case where a person paid $180K for their house and the builder dropped the price of the identical house to $150K.  Even the conventional aspects of purchasing have certain pit falls.

Recording the option will only show that you have an interest in the property, it will not stop any liens or incumbrances from attaching to the property that your seller has placed against him.

John $Cash$ Locke

[$Cash$]

Elizabeth,

Glad to meet you.

What I like to see when a person albeit a pro investor or a new person comes on a discussion board is an attitude of helping others who have questions or asking questions, this way a person with credentials displays to others that they have been there and done that, also they gain respect from the members of the board if they give good advice.

When I see someone come on a board thumping there chest, you can pretty much tell they are selling something and chances are they are not what they say they are.

Your welcome,

John $Cash$ Locke

[Roger J]

Cash,

Good catch, but since this discussion on lease options has been started, let's try to clarify a few points to help people out.

First and foremost, lease options are NOT a preferred method of acquiring investment properties.  The risk simply does not outweigh the reward.  If you agree with Mr. Hobbs, which I do, that in a L/O situation the seller has control, then why, as an investor, would you ever want to be in the position of the renter/buyer?  There are better methods of getting property.

I too like lease options as a method of "selling" my properties.  Rent to Own, Lease/purchase, lease option and owner terms are all the rage right now and you can rent/sell your properties faster with them.

I agree that you need to have separate lease and option agreements, but for different reasons.  Most gurus/course writers tell you to separate them to prevent "equitable title" situations, which Mr. Locke mentioned.  This may not work, people and the answer is simple.  Whenever you are forced to go to court, you are rolling the dice.  Even if you are completely in the right, you may lose.  It's simply up to the judge, and sometimes, it's the judges opinion of the law, and not the letter, that will apply.

I separate may lease and options agreements so that it is simple for the renter to understand.  Renters understand leases.  They're used to them.  If the lease and the option are separate, then all I really have to explain is the option fee.  Notice I said, FEE.  Not a downpayment and especially not a deposit.

If you're going to use lease options to move your properties, then you do need to take the standard landlord precautions.  You need to get an application from the potential tenant and call on their last two landlords (minimum).  You also need to pull their credit.  Yes, you can avertise the bad credit is okay, but you need to know their credit history.  Why?  First, you don't want someone who has never paid for anything in their life.  What you're looking for is preferrably someone who had good credit, it went bad (divorce, sickness, job loss, etc.) and now they are trying to get back on track.  Second, you want to gage their ability to buy the property.  If their credit is so bad that even in two years, they won't be able to buy, then it's best not to rent to them.  You're not doing anybody in favors if you do.

On to the points.

In the real world, you're only going to get 1-3% for an option fee.  Rent to own tenants are coming from a renting background.  They are used to only putting down one to two months rent as a deposit.  Frankly, most simply won't have much more than this unless they've spoken with a l/o investor before and have saved up the option fee.  Also, at 5%, alot of people would qualify for financing thru a lender.  Even those that wouldn't will probably want more conventional financing terms (like a contract for deed, simple owner financing, etc).  You can hold out for 5% and you'll probably eventually even get it.  However, how long you have to hold that empty property to get remains to be seen.  So, you will get cash in your pocket upfront.  I just don't agree on the $$$ amount.

Cashflow.  This is true even if you're "just renting."  You want to have cashflow.  Anything less is a waste of time.  Oh, and a rent credit won't get you your payments made on time.  What does that is strict enforcement of the terms of the lease (getting the late fee, for example).  That's what makes renters pay on time.

Profit when you sell.  Okay, here is the one that I really have issues with.  Mr. Hobbs says that if only half of your lease options make it to closing, who cares?  Well, you should.  If only have are making it to closing, then you're not doing your job as an investor.  If you're "selling" on lease options, then your goal should be to actually sell your properties to the tenant/buyer.  You do this by providing them the services they need to get into the property.  First, you check them out BEFORE they sign (see above).  If they won't be able to qualify, not rent to them.   Second, you coach them on how to improve their credit in order to be in a position to buy.  Third, you line up the mortgage broker/loan that enables them to buy when the time comes.  Now, if you do this and they still can't qualify, then you've done your job and can sleep at night.  However, if you just putting people in based on their option fee, knowing and hoping that they don't buy, you're not going to be in business long.  Word will get out that your a crook and your business will suffer.

hope it helps,

Roger

[RosewoodTX]

Hi Roger,

Your info did help!            
 

$Cash$

That is what I have come to appreciate about this forum.  
                       Thanks again,    Elizabeth
   

[daboss]

Mr. Locke.

You deftly manuevered around answering the question.
What can be done to protect yourself if the original seller files for bankruptcy, gets sued, has a tax lien, etc. and they encumber the property?

Obviously there is always some risk, but I have a sneaking suspicion that you have some pre-emtive solutions for the maximum protection available.  And I bet that information is available in your course.

I think you are correct that the original poster was posting for his own benefit (i.e.  to get people to buy something from him)  Albeit you are famous and rightly considered to be an expert--aren't you doing the same thing?

[$Cash$]

daboss,

Glad to meet you.

The answer to the question is He Who Has The Deed Controls The Property

In Subject To investing we receive the deed, so any liens or encumbrances past our recording of the deed against the seller does not attach to the property.

I do not mention Lease Option investing in my course and very seldom do those two words pass my lips, as I am aware that very quickly most Lease Option investors realize that it is just as easy to get the deed.  When they do, they find Subject To investing is more $profitable$.

I think you are correct that the original poster was posting for his own benefit (i.e.  to get people to buy something from him)  Albeit you are famous and rightly considered to be an expert--aren't you doing the same thing?

When I first authored the Subject To "That's What I Do." training manual in a very short period of time it became the Number 1 seller on the 4 sites that is was carried on and continued to be Number 1.  One day I woke up and said I have to many students so I discontinued the training manual.  My reasoning was I take a special interest in seeing my students become successful and I was getting to many students to effectively do this  A few of the reasons are is because they have my cell number, one on one lifetime email and a password protected website that I frequent to answer questions and network with the students there.

If it were only about selling product then the training manual would still be available today, now I have my Bird Dog E-Book and Subject To Training Course which keeps me busy enough.  I talk with people who do not have my materials, answer e-mails from people who also do not have my materials. So I feel I give back as much as I am able to, because I have been successful as a course writer and a creative real estate investor.

I regularly turn down speaking invitations to seminars, workshops, creiclubs, etc. throughout the United States, so to say aren't I doing the same thing I don't think so.

Personally if I were just starting out wanting to be a GURU I would post to answer peoples questions and prove my knowledge by the way I posted, not start out with 5 deals under my belt an proclaim to be the chosen one.  I hope Mr. Hobbs learned a valuable lesson. The following has been my slogan for a long time and works wonders with all sorts of people and especially sellers when you are trying to do a deal.

"If people like you they'll listen to you, but if they trust you they will do business with you."

I have predicted for along time that this site will become the Number 1 creative real estate site anywhere (just shy of that now), so for now I think I will just hang out here and help when I can.

John $Cash$ Locke