One of America’s billionaires was recently asked the questions, “How do you do it? What is your number one wealth building secret?” Without even one second of hesitation he replied, “find what it is that people need the most, and give it to them.”
Remember that statement. — Give it to them.
There are literally hundreds of different ways to acquire real estate. In future articles, I will be sharing some of the many different innovative techniques used in creative real estate financing. In this article, were going to explore a very useful and profitable creative real estate financing technique commonly called Lease Purchase Options. For ease of explanation, we will refer to Lease Purchase Options as Lease Purchase.
What exactly is a Lease Purchase?
A Lease Purchase is a process where a rental agreement is combined with a purchase or an option contract. Price, length of contract, escrow instructions, rent credit and other pertinent terms are all negotiated in advance. This allows the tenant/buyer to have a defined percentage or dollar amount to be credited to a down payment or off of the total purchase price of the property when a payment is made.
First and foremost, you must know what needs, wants, and desires the “right” property will fulfill. It is obvious that those needs, wants, and desires will be the requirements of someone. That someone is the investor. It is the investor who establishes the value of any piece of property in the marketplace by his or her requirements.
A real estate investor always has only two considerations. Those two things are:
1. A return on investment or Profit. (also known as ROI)
2. A return of investment or Security.
Remember that no matter what the circumstances are surrounding an investment, these two considerations are always the same: some form of profit (i.e. dollars, property exchange or other goods and services, tax savings, personal use) and security, or an assurance that the original investment will remain intact and can be recovered.
The Lease Purchase, (also known as a lease option), has everything an investor needs to make a profitable investment in real estate. Utilizing small down payments of 1% to 2%, an investor can control properties that would usually require 10% to 30% down, without ever having to see a lender or go through the loan application process.
There are three different ways a good deal can generate profits.
1. Cash upfront with option consideration
2. Cash monthly in the form of rent
3. Cash at closing or a note
Other options involve “flipping” of the optioned property to a third party or just acting as a consultant for the buyer and seller, retaining a portion of the option agreement. Controlling properties by creating a lease purchase option is, by far, the best way to be involved in controlling homes and obtaining great cash flow, high profits and minimum risk. Lease Purchase may be the best way to create a quick cash flow for the first time homeowner or even the seasoned investor.
The key ingredients in putting together a profitable Lease Option are:
1. Finding a motivated seller
2. Determining what his Needs and Wants are and creating a win/win situation.
3. Finding a tenant/buyer
Question: Where do I find a Motivated Seller? Good question.
Remember a motivated sellers’ number one objective is to get rid of their property – as soon as possible. A sellers’ motivation can come from many different situations:
o Relocation – job transfers
o Financial difficulties
o Death/divorce
o Tennant problems
o Change in family size
o Building a new home
You need to determine what the sellers’ motivation is once you contact them. Often a seller is facing financial difficulties and at other times it’s just that he no longer wants to be bothered with the property because he now has other interests. Our first priority then in talking with the individual initially is to determine Wants versus Needs. Most motivated sellers fall in the Need category. Their situation may not be negative. In the above list there are some items that are very positive for the seller. But still it remains, that this property is no longer needed for whatever reason(s).
You can find these deals:
o Looking in classified ads – “Homes for rent or lease” or “For sale by Owner” ads. You can ask if they would be interested in giving an option to buy their property if you lease it from them.
o Distributing flyers and/or mailers stating, ” I can buy or lease your home” or “I can buy or lease your home in 24 hours! Any size, any condition, any location. Call (your name) (000) 123-4567
o Running an ad in your local paper stating you are looking to lease a home. You can ask if they would consider an option after the owner contacts you.)
Question: Where do I find tenant buyers?
Your tenant/buyer is someone who desperately wants his or her own home, but for one reason or another, getting bank financing will not work for them at the present time. They either have credit problems, don’t have the large down payment necessary to qualify or they don’t have a high enough income. – You have the ability to give this person an opportunity to realize their dreams.
o Run an ad such as this: “Rent to Own. If you can rent you can own! Stop paying off your landlords’ mortgage! You can rent to own your own home even with poor credit! Call (your name) (000) 123-4567
o Send mailers to occupants in neighboring apartment complexes asking if they’re tired of renting and if they would like to own their own homes.
Some benefits of a lease option for the Investor are:
1. You now control another persons’ asset. You’re in a position to make money on a property you don’t even own.
2. Provides a positive cash flow opportunity.
3. You have no closing costs.
4. A Lease/Option agreement is a unilateral contract – the seller must perform. You are not bound in any way. If the property should depreciate in value or some other catastrophic event occur, you can simply walk away.
5. You don’t have tax or insurance costs.
6. You are buying the property tomorrow at today’s prices.
7. Little or no money needed up front.
8. Very little management needed. Tenant/buyers take much pride in the property and therefore tend to keep it up and even improve upon it. That’s because they have an interest in owning it – not just renting it.