Credit and Background Checks

[Peter114]

Hi,

How do you handle the fact that homesellers and landlords want to do a credit and background check before they do a L/O deal?

I presented myself as an individual and also as a company that was interested in doing a L/O on their property. Either way they want to do a credit and background check.

If I do a L/O assignment then I could use the T/B's credit info, but if I do a sandwich lease how can I get around all these strangers checking my credit and backround?

I hear everyone saying that L/O's can be done with no credit and no money down.

Thanks in advance!
Peter

[javipa]

Please excuse this huge post...  I didn't know where to stop...

That's such a great question...!  I think that's the question that scares off a lot of wanna-be 'investors'.

There's one answer:  Sift out sellers who want to check your credit and/or want cash.

If you can't sift for this niche, then you'll have to offer either, 1) Credibility, 2) Cash, or 3) Both.  Offering 1) doesn't mean pulling our credit.

In other words,
1.  Demonstrate reliability (in lieu of a credit/background check)
2.  Give the seller money...
3.  Find end/users with cash/credit/reliability

The most common reason to use lease/options in the first place is that they are geared to help buyers with credit issues; whether it's not having a down payment, or time is needed to improve/repair their credit to qualify for permanent financing.  There are other reasons to do lease/options, but I'm assuming it's not to lock in a price, or take advantage of appreciation.  Of course it could represent living in a nice neighborhood, establishing roots, all while looking for permanent financing.

Of course some sellers offer lease options because they can't get their price; need a mortgage payment covered with a higher-than-rent lease/option payment; or simply need a quick solution to their own credit situation. 

Meantime, if a seller still wants our credit report, we say, "Next!"  There is a 'fix' for this problem, which I'll get to in a second... Meantime...it's not smart to do a lease/option on its face if the option expires before our credit situation is solved... Just saying.

There is another alternative, which you alluded to, and that is 'assigning contracts."   Frankly, we could focus only on those until we solve whatever credit issue we have.  There's more than one way to skin a cat here.

Notwithstanding, the 'fix' we recommend is assembling a credential book, regardless of which option we exercise.  This book simply presents us in the "most positive light" and can elegantly, if not effectively, create, build, and maintain trust in the seller/Optionor about us. 

Moreover a credential book simply shows the seller what responsible and reliable buyers we are.  It contains testimonials from those we've helped and includes reference letters from those who we do business with (title, escrow, property management companies, etc.). 

Also it will have all the contracts needed to close; business cards; calculator; pen; Sharpie; notepad; and carbon paper.  Most professional negotiators/sales representatives (which is your business exactly) will include a copy of a Better Business Bureau certificate ...and to really drill down on stability, include a photo of the youth athletic team(s) they support.

If assembled and presented correctly, the only thing a motivated Optionor will be doing is trying to sell us on their house in the hopes we don't change our mind about helping them; not asking, "How's your credit?"  [My blog has a longer illustration of how to apply this.]

All that said, short of a credential book, we suggest continuing to drill down to the most motivated, anxious Optionors whose idea of checking our credit doesn't occur to them.  The one thing that seems to universally overcome most obstacles is a wad of cash. 

It's amazing how cash creates instant trust and credibility.

-----------------------------------------
As far as 'no down' is concerned, it all depends again on how we both qualify the prospects and sell the deals.  For example, not every seller needs, or wants, money up front.  We want to work exclusively with these sellers.

We didn't say 'most' don't need, or want, money.  However we can qualify these prospects up front by asking, "If we come to terms today, are you needing immediate cash out of this transaction?"  Then wait for an answer.  There's several other ways to approach this, too, as you'll read in any Ron LeGrand lease/option course, but I'll just offer this one for now.

We might get an answer like, "Yes, I need money to bring the loan current."  Or, "Yes, I need money to move."  Or, "No, I don't have to have money up front."  Or, "Yes, I want you to have 'skin' in the game."  The last answer just means that the seller just read a 'Lease/Option" book and now knows how to include the phrase "skin in the game" in his negotiations.  Of course nothing 'reeks' of amateur status than inelegantly throwing out that phrase.   

All translated: "I've got options and I'm an anal-retentive, know-it-all, worry-wort, that can't really read people very well, and so I command the most narrow, unsophisticated, clunky qualifications so that I can brag to my friends that I never take a risk and negotiate like Donald Trump."  To this option-toting prospect we say, "NEXT...!"

Of course we're going to walk from the sellers that insist on money up front and/or background/credit checks (or we're going to assign this deal to a tenant/buyer with money to put down and willing to have his butt probed for credit problems). 

Meantime, the insistence of cash up front, WILL eliminate most prospects.  Our answer is to sift out the losers up front, or quickly sift raw prospects, so we won't frustrate ourselves pitching losers.  In the end we need to find the sellers who appreciate our solution so much that they won't do anything to disqualify US.

Hope that helps.  I need to write up an article on this topic.

NOTE:  Deals go bad.  Everyone has a lease/option deal-gone-bad story, and all the amateurs 'know' their deal is gonna go 'bad.'  The question is, "Why do deals go bad?"  In my humble opinion, the deals that go bad, do so, because they are lopsided in favor of one party (the seller), or the other (rarely the buyer) at the get-go.  Why? 

Because the deals are NOT simply disguised sales of property.  They depend on 'fairy dust promises' that somehow the option price is not ridiculous; that the Optionee's credit will miraculously raise from the dead in time to exercise the option itself; or that either/both the Optionor or the Optionee have little if any competence at knowing how ot open escrow, much less finding, qualifying for , or actually closing on a loan. 

Furthermore, a lot depends on the seller knowing how to provide a verifiable repayment history to support the buyer's down payment 'credits.'  Or how to demonstrate that the down payment/option credits being verified are bonafide and not just a figment of everyone's imagination, or a gimmick? 

If that's not enough for a deal to go bad, it's because the buyer (or seller) feels like they were cheated, lied to, or misrepresented by the other party (part of the lopsided deal dilemma).  And the more money an Optionee puts up, the more reason for a fight later; especially if the Optionor has uber restrictions on the option; or doesn't allow extra time for financing/qualifying hiccups' to be solved. 

I'm just outlining that deals don't always go bad because the buyer has credit problems.  They can go bad because the deals were just plain 'bad.'  

[Real Estate Seller]

A fair question you don't want the seller to do a credit/background check. Are you going to ask to do a credit/background check when you do a L/O?

[javipa]

Yes, but this is a routine rental application situation.  Renters expect this.

[Peter114]

Hi javipa

Great post...thanks for the info!!

Hey I was wondering with the Sandwich Lease Option, as the investor we would be the one on the lease with the homeowner.

Is there a way or approach that we could use the end tenant-buyer's credit report to give the homeowner, since they will be the one actually living in the property and planning to buy the property?

How could we explain or tell the homeowner that we are basically finding the T/B and managing the property and helping the T/B to complete the buying process?

I was wondering how this could be done since we, the investor, actually will be the one with the lease contract between the homeowner and me.

Thanks,
Peter

[javipa]

Peter,

I think the easiest and least complicated approach is simply to bring a tenant/buyer to the transaction.

You simply need an option on the property to give you the right to market and assign your position.  There are several ways to do this. 

One way is to use a performance lease/option, coupled with the understanding that you're putting a tenant buyer in the property.  The seller may want to approve of whomever you put in the property.   That's fine.  With this type of agreement, you only pay the seller, on paper, what the tenant/Buyer actually pays.  So, if the tenant/Buyer fails to pay, you're not going to be making up rent/option payments.

Frankly, there's so many variations of a theme available; lease/option assignments; sandwich lease/option, lease/option "accomodators," etc.

To answer your question, have the seller check the end/user Buyer's credit.  After all, the tenant/Buyers are the ones living in the house and making rent payments, not you (of course).

----------------------------------

As an alternative, there's a lot more money and control with Sub2 deals.  Frankly, flipping houses with lease/options rather than with a Land Contract has less profit potential.  Why?  Because a lease/option doesn't really solidify a closed deal, unless it's really disguised as a full-on sale.  And if it is disguised as a full-on sale, why not simply seller finance with a full-on mortgage in the first place, I ask. 

Meantime, a 'normal' lease/option leaves the seller responsible for repairs the whole time.  If the air conditioner blows up, gets stolen, or the plumbing starts leaking like a sieve, guess who's gonna pay?  

And even though the tenant/buyer may feel like he owns the house, he really does NOT own it.  He has a right to own it ...if he can pay the seller off, but it's only a right to own, not actual ownership.  To make matters even less attractive to a potential tenant/buyer, he can't deduct either his mortgage interest or depreciation from his income taxes.

On the other hand, with Sub2 seller financing, we can offer effective ownership and all the tax advantages to a buyer.  We also capture bigger down payments.  Why?  Because people will generally pay more to 'own' than to 'option. 

Also Sub2 closings are ridiculously FAST.  Why?  Because we are not waiting on banks, appraisals, title checks, or slow agents.  Meanwhile, we can find our own buyers really fast ..and qualify them in about 30 seconds.  How's that happen, you ask. 

First we attract a huge pool of buyers by offering "No Credit Check" seller financing.  Second, if the buyer gives us the cash we want, and can fog a mirror, he qualifies!  Try that with a lease/option, or ...a bank!

It's the ultimate 'cash for keys' transaction!!!

Let me give you a real example of how this worked for me in a new farm I started cultivating back in 2009 with the goal of hitting the ground running.  I found a home, Sub2, with a VA loan on it.  I advertised it with seller financing with "no credit check" and a "low down payment" ($10,000).  My phone rang off the hook. 

I left the same ad up and within six weeks, I had captured over 40 buyers with down payments ranging from $10k to $60,000.  You can imagine how hard and fast I worked at finding a house for my $60,000 buyer...!!

So, I had something nice for sale; my unique selling proposition was "No Credit Check Seller Financing," and there's nobody else offering this in my farm.  It's so unique that people can hardly believe it's true.  It's so unbelievable that I can't even keep my "No Credit Check" craigslist headlines from being flagged.  I've had to be creative to keep my usp from being pulled off CL. 

Anyway, there's more than one way to skin a cat.

[pilot76180]

For a sandwich LO you are using your LLC, so as Javipa stated, if an owner does want to "do some homework" on your company, then have references, and, if possible, like our company, join the BBB.
It's not that common for an owner to want to check your credit, so, as javipa states, sift thru the sellers.
On a co-op, or assignment, I always pull a tri-merge mortgage report and if the seller wants to see it that's fine, because the applicant has signed off on me discussing it with the seller.
I'm picky about our applicants, so I always pull credit, and I turn down about 70% or so of the applications.
BUT, our success rate is unmatched and the sellers love us.

I even turn down sellers that I don't feel cozy with.  I made a joke remark to one on the phone and he didn't like it, so I told him I didn't think we could help him...he stammered around...uh..what?  "Yeah, I'm just not feeling us connecting.  Good luck!"
Hey, if a seller has no sense of humor...why do I want to deal with that?

[Real Estate Seller]

You should pull credit when you get ready to do assignment because you want to know who you are dealing with and flip the coin over the seller want to pull credit to see who they are doing a LO with. It is a good practice if you have nothing to hide.

[javipa]

Pilot,

I had to laugh at your 'cozy' qualification... That is the same with me. 

[pilot76180]

I turned down a seller last week because he didn't have an e-mail address....?????  Really?  2012, no e-mail?  How am I supposed to communicate with him?
He also seemed to be a little um...off....
I asked how much he had his house listed at...his response.."twenty seven hundred"....I asked for clarification.."twenty seven hundred?"  "Yeah..twenty seven hundred..or 77 or something.."  Yeah..no e-mail and he's a genius....no thanks...BTW-it was listed for $177k....

[Real Estate Seller]

We all got a big laugh around the water cooler that you don't do business with a seller that don't have a e-mail. You must be new to the real estate business? Have you ever heard of a telephone?

[javipa]

I turned down a seller last week because he didn't have an e-mail address....?????  Really?  2012, no e-mail?  How am I supposed to communicate with him?
He also seemed to be a little um...off....
I asked how much he had his house listed at...his response.."twenty seven hundred"....I asked for clarification.."twenty seven hundred?"  "Yeah..twenty seven hundred..or 77 or something.."  Yeah..no e-mail and he's a genius....no thanks...BTW-it was listed for $177k....

Yes, that makes me nervous, too.  I've had problems with clients that had no phone, much less email.  No phone.  No email.  No deal.  My agreement requires the client have at least a (working) phones (cell or land line).

I walk from 'iffy,' 'off' people, too, regardless of their communication ability.  That's a just a recipe for chronic babysitting, miscommunication, drama and trauma, if not a setup for a professional punch in the mouth.

However, hope springs eternal once in a while.  Last year I got myself snagged up with a retard that I KNEW BETTER to engage with.  After signing him up, of course, he immediately came on THIS forum to ask questions about 'our' deal.  Can we say things went all "FUBAR" on me?  I sort of wish he didn't have internet...!   

Actually that turned out to be a blessing.  I walked and the client continued to spin himself into an emotional haze and psychological tizzy ...and eventually lose his house.  Some people are too screwed up to help.

[Mdhaas]

Last year I got myself snagged up with a retard that I KNEW BETTER to engage with

nice professional terminology   

[kdhastedt]

Last year I got myself snagged up with a retard that I KNEW BETTER to engage with

nice professional terminology   

I believe it's technical jargon from the medical world....

Keith

[Mdhaas]

allllllrighty then