© 2010 by Wendy Patton
There are basically three types of sellers you will encounter as you try to find your Lease Option deals, no matter whether it is a homeowner or an investor selling, no matter how motivated they are, and no matter where in the country they are located. These three types of sellers are:
- Sellers who are upside down
- Sellers who are break even
- Sellers who have equity in their home
Let’s take a look at each and see how you might be able to put together a Lease Option deal and how to Protect Yourself in each of these situations.
- Sellers Who are Upside Down
Unfortunately, it seems that there are many sellers in today’s market that are upside down. If a seller owes more on their home than it’s worth, they are upside down. Their home is not worth what they owe on it.
As a Lease Option (or Subject To) real estate investor there is very little you can do for someone who is upside down, or there is little you “should” do for this type of seller. No matter how moving their story, no matter how desperate their situation and no matter how motivated they are as a seller, this is not a position you will want to be in. The absolute best way to protect yourself is to not do the deal with a lease option or subject to. This situation is ONLY good if you want to do a short-sale with their lender or have the seller pay down their mortgage balance (assuming they can). There may be the very rare occasion when you find a seller that can cover enough equity difference and subsidize monthly payments to actually make the numbers work, but these instances are so rare that I’m not going to waste time here chasing pipe dreams.
This is a great time to say “NEXT” if you are looking for little or no money down deals.
- Sellers Who are Break Even or Have Little Equity
Sellers who are break-even have been sellers I have in the past said to walk away from for a Lease Option. Not anymore! Can you do Lease Option deals with these sellers? YES! There is a new strategy I am using and it is growing like wild fire. It is called a Cooperative Lease Option.
The average break-even seller is going to be someone you can’t help for a Sandwich Lease Option, BUT they might be a perfect candidate for a Cooperative Lease Option. Let’s define both of these types of Lease Options.
A Sandwich Lease Option - is when you purchase a property from an owner on a lease with an option to buy. You then find a buyer who will buy from you on a lease with an option to buy. You are in the middle, hence why it is called a Sandwich Lease Option.
When are these good? When the seller has equity and will allow you to get part or all of it over time with your lease option terms. This is what I call my “Big” Money Strategy.
A Cooperative Lease Option – is when you purchase the property from the owner on a lease with and option to buy. You then find a buyer who will pay you to step in your shoes. This is a wholesale deal. You sell your contract to a buyer. It is called a Cooperative Lease Option (aka Wholesale Lease Option) because both the buyer and the seller are “cooperating” with you and know exactly what is going on. They know you are selling the contract (deal) to a buyer – it is usually for the option fee. How much? Usually around 3% of the purchase price can be negotiated. Example: The price of the home is $100,000 – you would get approximately $3,000.
When are these good? When your seller doesn’t have much equity for you as an investor to get. This is what I call my “Small” Money Strategy.
How many more deals can you do now with a Cooperative Lease Option that you might have walked away from before? Would earning $3,000 - $10,000 per deal excite you? What if you could do most of this from the Internet? One of my students lives in India. He does Cooperative Lease Options in the Chicago area. It is all done on the Internet and he does 5+ deals each month. What would that mean to you and your family?
- Sellers Who Have Equity
Sellers who have equity in their homes are in the best category for putting together your Lease Option deals, however, when you find someone who has equity in their home and is willing to do a Lease Option deal you mustn’t throw caution to the wind. You still want to evaluate the deal. When they have more equity though, you are more likely to receive option credits each month. Option credits give you equity each month from the rental payment you are making. If you purchase the home for $200,000 and each month you are paying $1,000 in rental payments to the seller, ask the seller for $1,000 a month credit towards the purchase price. For example: after one month you owe $199,000, after two months you owe $198,000, etc. You are getting the entire monthly rental payment credited towards the purchase price. This works well with sellers who have equity. Make sure you don’t get them upside down (with their equity) by doing this. For instance, if they owe $185,000 and you do this deal for 20 months, you would owe $180,000 ($200,000 - $20,000 = $180,000). Be careful, if you get them upside down they might not want to, or might not be able to, close on the property when you are ready. Will all sellers give you 100% credit for your payments? No, of course not, but will some? Yes, some will. If not, negotiate something less than 100% credit. No matter what you negotiate it is part of your profit for later. There are many other things you can negotiate also with a seller when doing a Sandwich Lease Option.
How many people own their home free and clear? In the U.S., more than 30% own their homes free and clear. How about the sellers with equity, but not free and clear, plus the ones that are at a break-even point? Add these all together and you will find a very good percentage of home owners are candidates for one of these lease options strategies.
Is it all “doom and gloom” in the market? Heck NO! I live in Detroit and the deals are everywhere. You just have to know how to find them. Learning when to apply each type of option strategy is the key. Learning when to walk away is another key.
Check out my schedule to find out when I will be teaching a lease option class near you.