Wholesaling vs. Lease Options (aka Ugly vs. Pretty) – Part 2Posted on April 3, 2015 by
Welcome back! In our last article, we talked about how trends come & go in all things, but we specifically discussed the fact that there are two tried & true strategies that have seemed to stand the test of time in Real Estate Investing. Those strategies are: Wholesaling and Lease Options.
Wholesaling was discussed last time – it’s mainly done in the “Ugly” house business (houses that need a lot of work). And Lease Options are typically understood to be done in the “Pretty” house business (houses that don’t need much work).
Thanks for hanging in with me so far, veteran investors. Keep reading. It gets better.
Lease Options have been around for a good, long time. Certainly as long as any of the well-known, current ‘Gurus’ have been teaching. The way they work is basically like this:
A homeowner/seller wants to sell their house, but a typical wholesale-style deal (usually with a lowball price offer) doesn’t work, or they just don’t like the offer… or the offer doesn’t make sense. I mean, why would any sane seller sell their house that doesn’t need much work that they have a ton of equity in for a deeply-discounted price?
Sure, there are times when this will happen, but those deals are usually few & far between. However, the seller is still flexible, they do have a need & desire to sell their house, and they like & trust you. So what else can you do?
A great, effective solution is to get them to agree to Lease Option the house to you. In other words, you both agree to have them sell you the house at a reasonable price within a certain time frame AND during that time, you’ll have the right to Lease (fancy word for rent) their property at an agreed-upon amount every month, beginning at a certain time you agree to.
For example, let’s say you find a seller with a house with an ARV of $200,000. The house is in great shape – maybe only needs a little paint or cosmetic work, but it’s totally liveable & in a great location. Their monthly house payment is $1,100, P.I.T.I. (all in, including Taxes & Insurance), and their payments are current. Further, they owe $150,000 on their existing mortgage.
After negotiating, you discover that they’ll be happy to sell you the house for $180,000, and they don’t need to close until some time in the future. But they feel very strong about not just selling the house for what they owe on it AND they’re uncomfortable with leaving the loan in their name (eliminating a typical ‘subject to’ deal).
If all you know is Wholesaling (or even “Subject To”), and you don’t have the powerful Lease Option tool in your arsenal, you’d probably just walk away from that deal… and miss out on the tens of thousands of dollars in profits that you’d make… if you keep reading to learn how to do this.
So what do you do? The answer (obvious setup here): A Lease Option!
In a situation like that, you could go back to the seller and make your offer:
Offer to buy the house from them for the $180,000 that they want (making sure that this is their absolute bottom-dollar price, of course), closing on it as far in the future as possible (try to get at least 3-5 years if possible, so that you can give as much time as needed to your tenant buyers).
AND paying them monthly RENT in the amount of their mortgage payments, in this case $1,100.
(NOTE: Make sure that the local rents will support at least this amount).
Also, try to get in as “light” as possible, meaning little to no money down.
So your option agreement to buy is for $180,000, sometime within 3 years, during which time, you’ll be making the mortgage payment of $1,100 every month until you buy. Let’s also say that they want $1,000 to move forward on the agreement. So far so good?
Now, you turn around & offer this house for SALE for $209,900 on a ‘Rent-To-Own,’ ‘Lease Purchase,’ or even ‘Owner Financing’ basis to an owner occupant or tenant buyer. Basically, you’re looking for someone who has some CASH to put down, but may have trouble qualifying for a normal mortgage, due to some credit issues that they just need a little time to clean up.
And let’s say that you find someone who loves the house, has $10,000 to put down (at least), and can pay rent in the amount of $1,500/month. By prescreening them with your mortgage broker, you discover that they’ll probably need a year or two to get their credit in line to be able to buy.
So what does that NOW look like for you? Let’s summarize… You BUY for $180,000 and you SELL for $209,900. Your up-front profit will be the $10,000 your buyers put down to you minus the $1,000 you give the sellers for the agreement. So that’s $9,000. Every month, you receive $1,500 rent and put out $1,100 mortgage payment. That’s $400/month! And you don’t even own the property! Over only one year, that’s $4,800 in income to you.
For this example, let’s say that they buy the house one year later. Your profit would be the $9,000 (downpayment) plus the $4,800 (monthly rents) PLUS the $20,000 spread between the loan balance to payoff and their remaining amount to buy! Your Total Profit = $33,800!!
And You Almost Walked Away From This Deal!?!
Now, I know that some people reading this may be thinking something like “Yeah, but I don’t want to hold any properties! I just want to turn & burn.” Or “Yeah, but what if the property is too far from me? I don’t want to drive too far or whatever.”
NO problem… ‘cuz guess what? I’ve got a GREAT solution for you, too!
So make sure you read this column NEXT MONTH, when I’m going to help you understand a cool concept on how we can combine these two “Die Hard” strategies of…
Wholesaling AND Lease Options!
This will be very sweet… So don’t miss out!
See you right here next month.