Oregon Association of Professional Real Estate Investors
The current real estate climate is an exciting one. It is because, arguably, more wealth can be created now using less cash than in the past year or two. Many sellers and landlords who wouldn't even listen to a creative way to do a real estate transaction six months ago are now eager to hear how creative you can be.
Those who have followed my writing and coaching know that I'm a big proponent of a lease/option method of controlling real estate. "Controlling real estate" is the operative word here. Why not control it rather than own it? "But," you protest, "I thought I had to own real estate to benefit from it." Not so!
The real estate market in Central Oregon is full of empty homes in which the owner is making payments. We have a window of opportunity that can result in huge financial gains for the investor who'll work and think outside the box. Consider the following questions:
Q - Why should I buy property via a lease/option?
A - You can create wealth and positive cash flow. Owners of empty homes are eager to fill their homes. They are tired of making payments on something that may be, in their eyes loosing money and value. You are their savior.
For as little as $100 for option consideration on a two year option period (the least amount of time you prefer to negotiate) you can control a house. I have protégées who have secured a one year option for the grand total of $1. One person in my real estate investment club will give $1,000 option consideration for a five year option.
If you are wondering if that is a good deal for you, consider how much that property may increase in five years. As you will read below in a following answer, the $1,000 option consideration (or however much you spend) should be returned to you soon after you have given it.
Q - Why would a seller give you a lease with option to buy?
A - You offer to take care of his property, maintain it properly, pay your payment on time and have a buyer ready to finance the property at the end of the option period. If you have two to five year option (negotiate the longest term possible) he retains all the tax benefits of owning the property and he doesn't have to pay a real estate broker fee. In real estate broker fee savings alone he will realize many thousands of dollars.
Q - How and when do you make money?
A - Money is created for the investor at three different points in the process. You, the investor, will sublet the house with an option to purchase to a Tenant/Buyer and create cash income. Your two year option consideration was $100. You will receive $5,000 on a one year option you negotiate with your Tenant/Buyer. You have created $4,900. That amount will be deducted from the sale price if the Tenant/Buyer exercises his option and purchases the home. Here's some great news: You will not have to claim the $4,900 on your income tax until the option of your buyer is exercised or expires.
If you negotiate a rental fee of $1,200 per month from your seller (part of which will be credited to you later) and you find a Tenant/Buyer who will pay you $1,400 you have created positive cash flow of $200. If you control ten properties in this manner you'll enjoy a monthly passive income of $2,000. It is also possible to offer your Tenant/Buyer an incentive for giving you additional money income. For example, you can offer him a $200 credit for each $100 he pays extra each month. He makes money and you increase your monthly cash flow.
The third way you can make money is by negotiating an option price of, for example, $250,000 and selling to your Tenant/Buyer for $270.000. If you do this you will have created $20,000 plus at least $2,400 per house for the year. And you did it with
Q - How do you find motivated sellers?
A - Marketing is the key to any business. There is no exception. You must have contacts in order to stay in business. You can make a lot of money if you will spend a minimum of one hour each day to work your marketing plan.
Lease/option sellers can be found by going to the library and looking back two or three months in the real estate classifieds for houses for rent. If a property owner has been making payments on an empty house for that long, you may have a motivated seller.
Call the number of the owner (I skip the property management companies but they might be open to a call as well) and ask if the house is still available for rent. If it is, have him tell you about it. Then, tell him that you are interested in a long term lease of at least two years. Ask if that is that something that may be of interest to him.
If he is not interested in leasing for two years, thank him for his time and wish him well. If he is interested, tell him you are an investor and ask if you pay your rent on time and take care of his property, would he be willing to sell it to you when the lease is up?
If he answers in the affirmative you may have a lease option. You then meet him and look at the house. If the house will serve your purpose negotiate a lease option arrangement that benefits you.
Here are some other ways to find motivated seller:
If you see an empty house, note the address and contact your title company or county clerk for ownership information. Write a letter to the owner offering to lease option his house. Do some research in writing sales letters and make a compelling argument. Be sure to explain how he will benefit. He must clearly understand what's in it for him.
If you have real a estate broker team member (your success team), have him send you the daily list of expired listings. Write each one a letter using the formula in the above paragraph. Be sure your broker is compensated in some manner. Most real estate brokers will jump through hoops for you if they know they will get paid at some point.
Real estate brokers are also a great source for finding motivated sellers. Educate your broker(s) on the subject of lease options and how they could benefit. A payday several months away is much better than no payday at all.
Q - What kind of documents should I use?
A - If you are buying on a lease option, you need a simple one page lease option form. Keep it simple and to the point. You can buy on online, at my office or have your attorney draw one up for you. Just make sure the document is buyer friendly.
When you're selling use a much more comprehensive lease and option agreement. The one I use (you can purchase and download it at www.RealCashFlow.net and go to "Products") has many protections for the seller. These two documents (the lease and option) have taken away all my landlord headaches. I don't have any calls for repairs or complaints.
Q - How do I safeguard myself?
If you're going to buy with a lease option here is a list of things you may need:
1. A signed Authorization to Release Information form for the lender. You want to know that your seller is making his payments each month. You don't want to discover the house is in foreclosure.
2. You may want to set up an escrow account. The escrow company will collect the payment and disperse the funds. If you set up an escrow account be sure to have the seller sign a Warranty Deed and place it in escrow to be released when you are ready to exercise your option and purchase the property. If the seller is vacationing in China when you get ready to close your loan you won't have to go look for him.
3. Your option agreement should include provisions describing what happens if your seller fails to make a payment or pay the property taxes. The document I use states that I have the option of making his payment. If I do make the payment my option agreement states I will be credited $3 (it could just as easily be $4 for every dollar) I spend on his behalf. In other words, if he doesn't make his $1,500 per month payment and I do, $4,500 will be credited to me when I exercise my option to purchase. Not a bad return on my $1,500 and he is motivated to keep his payment current. If my landlord is late on ten payments I may be able to deduct up to $45,000 off the price of the house.
There is money to be made using lease options. If you haven't already explored this option for controlling property you should. Think outside the box and let the deals happen. You will be pleasantly surprised at what you can do.
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© 2007 by Don Loyd
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