The Top 3 Ways to find Lease Option Tenants and Buyers in Soft Markets

As you know, I’ve been doing Lease Options for many years now. I’ve seen down markets, up markets and everything in between. Having survived all kinds of markets I can tell you I LOVE doing Lease Options in down markets.  Why is that?  Because there are SO MANY deals just waiting for me. In a down market the motivated sellers are plentiful.  The common misconception when the media is screaming about how bad the market is, is that there are no buyers out there. That is true. There are fewer buyers in a soft market. Does that mean it’s impossible to find them? Not at all.

Let’s take a look at some ways to find Lease Option tenants and buyers in soft markets:

1)         First, is the asking price.  If your asking price, either the sale asking price or monthly rent asking price, is too high for your Lease Option, you’ll scare away most buyers.  Yes, it’s common that on a Lease Option the rent and purchase price are marked up due to the flexibility you are offering the buyer.  However, if the market is soft you’ll find these marked up margins shrink.  This especially applies to the monthly rent.  If you are asking too much for rent you will have a VERY hard time finding tenants.  If you want to place a quality tenant quickly make sure the rent is competitive, maybe even slightly less than the competition

2)         Second, think long term.  If you have structured a longer term Lease Option deal with the seller, like 3 to 5 years, consider just renting the house initially.  Rent the house out for the first couple of years before you try to place a Lease Option buyer.  This will give you time to weather the soft market and start moving towards rebound.  If you get stuck with the mindset of only looking for Lease Option buyers you’ll be following the herd, trying to sell in a down market.  Just rent the house in the down market and try to sell it when the market picks back up.

3)         Third, cover your cash flow.  If you put together a great Lease Option deal and have it start right away, who covers the monthly rent until you find a tenant?  News flash:

You Do!

What just happened?  You became a motivated seller!  You are much more likely to make a bad decision in Lease Optioning that house than if you didn’t have to pay the monthly payment.  You are also reducing your profit margin for every month the house sits vacant.  Instead, structure the deal to give yourself some time (a few months at least) to find the buyer or tenant.  You could even have the Lease Option begin only once you have found a tenant.  Be fair to the owner and let them continue to try to sell their home on their own during this time.

Taking all of this into account I think you’ll see why I LOVE to find Lease Options tenants and buyers in soft markets. If you put together the Lease Option deals when the market is soft you’ll find it easy to get the kinds of deals you really want.  Then if you structure the deal with strong terms and use the selling techniques I talk about, you’ll be selling when the market has improved and find it a whole lot easier to move your properties and make handsome profits.

If you have any questions or comments please feel free to leave them in the comment section.  I would love to hear your thoughts in the comments.  Also, Share this with others by clicking the retweet button above. Thanks!

If you are in the difficult situation of falling behind on your mortgage payments and trying to sell your home, offering it on a rent-to-own basis may help you stay out of foreclosure. I wish I could say for certain, because I hate to see people lose their homes to the bank, but obviously it’s no guarantee. The last thing lenders want right now is to foreclose on your home. They have gotten pretty flexible in working with homeowners to find solutions. Be sure to include them in the process when trying to find a resolution. As you read on you can evaluate whether you think selling your home as a rent-to-own will help you. Critical factors to consider are:

• Monthly Payment Adjusting Up? If your monthly payment has adjusted upwards, will you be able to rent your home to a tenant-buyer for enough to cover the new payment? If not, you will have to cover the difference yourself or get the lender to agree to a reduced payment. There are lenders that will work with you on your interest rate. This is called a loan modification. They usually won’t change your balance but they might change the interest rate and length of loan. Talk to your lender to discuss your options.

• Home Prices Dropping? Do you live in one of the areas where home prices have dropped dramatically? If so, is your home worth much less than your current loan amount? If this is the case you won’t be able to sell it to a tenant-buyer for enough to pay off your mortgage. Do you have the extra money to pay off the difference? Do you need to consider foreclosure? Maybe a short sale is your solution versus a rent-to-own. A short sale is when you get your mortgage company to accept a lesser amount on the payoff of your mortgage than you owe, when you sell your home. This is called “shorting” the mortgage. Many people and lenders have had to consider this alternative with the housing market decline.

• Behind on Your Payments? How much are you currently behind in payments? You will need to bring them current one way or another to stop the foreclosure. The option fee from your tenant-buyer may be enough to cover this. If it isn’t, you might be able to use the option fee to cover part of it and then establish a catch-up plan with your lender.

Yes, you do have choices other than the traditional way of selling your home! Obviously this is the part where I sing the praises of rent-to-own.

Want to learn more about selling your home as a rent to own?  See Wendy Patton’s book, Rent to Sell, Your Hands on Guide to Sell Your Home When Buyers Are Scarce.

If you are like many others who have come to my site to learn how to make more money by investing with little or no money down in lease options, I have an exciting opportunity for you. I am now offering a FREE online DVD to help you Learn How to put $5,000- $10,000 into your  pocket within 29 days using lease options .  I am sure you may have concerns and may be wondering if it is even possible in today’s Real Estate market when you do not have:

• Enough credit to purchase a property with a mortgage
• If you do not have enough cash to buy or put down
• You do not want to get stuck with a property you can not

Take a few moments from what you are currently doing and watch.

Here is what you will learn:

• Why Real Estate?
• What a Lease Option is.
• Why you need a Lease Options.
• 6 keys to success.

Check out the Box located on the right side of this blog and get it now!!

1. Price

Typically buyers won’t try to negotiate price.  They often accept your asking price (which includes a rent-to-own premium) because of the flexibility they receive by doing rent-to-own.  However, should a buyer try to negotiate on price (and they will if they read my book, Rent-to-Buy) there are a couple of ways to counter them.

1.         You want to emphasize the flexibility they are receiving by being able to rent the home before they buy it.  This type of flexibility justifiably commands a greater price than a comparable home being sold conventionally.

2.         You want to emphasize the rarity of what you are offering.  Simply put, a buyer who is buying a rent-to-own home has very few choices in homes.  There aren’t that many out there.  This rarity also makes the home more valuable.

2.         Option Fee

More than any other term buyers will likely try to negotiate a smaller option fee.  In some cases they’ll do this because they don’t have enough money saved, in other cases they’ll do it simply because they don’t want to part with the money.

Obviously the more option fee you receive the better because it means the buyer is less likely to walk away from their money.  When a tenant-buyer tries to negotiate a lower option fee you can counter it by:

1.         Pointing out that the option fee counts as a down payment when they are trying to qualify for a mortgage and the larger the option fee the better it will look to the lender.

2.         (If the tenant-buyer has poor credit) Explain that you are taking a risk by letting someone who can’t currently qualify for a mortgage move into your home and that the option fee is your security against that risk.  Tell them that the option fee conveys their seriousness about the home.

3.         Closing cost contributions

Typically at the beginning of the option period tenant-buyers won’t ask for or won’t know they need to ask for help with closing costs.  This usually comes up at the point when they are applying for a mortgage and discover that they need to pay them.

This is when either their real estate agent or their mortgage broker will tell them that they can ask the seller (you) to help pay closing costs.  The way this is usually handled is that the purchase price is increased to offset all of or part of the closing costs.  Assuming that the home will appraise for enough to cover this.

You may have done this when you bought the home yourself, it’s a very common practice.  By increasing the purchase price to cover closing costs, it’s mostly a wash for you as the seller.  It does end up costing you a little bit with increased taxes, commissions, title fees and so forth based on the slightly higher selling price (maybe a couple hundred dollars depending on the cost of your home).

I recommend granting this concession if you can because it gets your buyers to buy your home.  The cost to you is pretty small so it’s worth it to get your home sold.  If you suspect that your home won’t appraise for enough to cover the closing costs because property values are going down in your market, you may want to encourage the tenant-buyer early during the rental period to start saving some money to cover their closing costs when they get a mortgage, this way you are less likely to have to add them into the purchase price.

I’ve talked a fair amount about why you NEED to offer your home on a rent-to-own basis to get it sold in this market. But I haven’t talked at all about the benefits to you in doing so. After all, most of us hate doing things just because we HAVE to, we would much rather do things we WANT to do.

Here are some of the reasons rent-to-own can be beneficial for you:

1. Higher Purchase Price - Rent-to-own sales typically command a price premium over traditional sales. The buyer is paying extra for the flexibility he receives by not having to do an outright purchase immediately.

1. Higher Rent - You may be able to charge more for monthly rent in a rent-to-own than you would for just a straight rental. I will cover this in more detail later.

1. Cash Flow - If your monthly payments are less than the monthly rent, the difference goes into your pocket.

1. Option Fee - This upfront fee paid to you by your buyer is what secures the purchase price down the road. If the buyer closes on the home, it would be applied towards the purchase price. If the buyer elects to not purchase the home, the option fee is forfeited and still remains yours. Either way you win. If you were to just rent the home, the tenant would put down a security deposit. The option fee is different than a security deposit. A security deposit is owned by the tenant and can’t be used by the owner, except for repairing damages, unpaid rent and other provisions as mandated under state laws.
2. Eliminates the Burden of the Mortgage Payment – If you have already moved on to your next home and your old house is sitting empty while you try to sell it, then you are saddled with TWO mortgage payments. Hopefully you aren’t in this position, but if you are I feel your pain. Ouch! If the house has been taking a while to sell, you know how fast the money coming out of your pocket adds up. It gobbles up any equity you have at a frightening rate. Placing a rent-to-own buyer that pays that extra mortgage can take away your pain.

As you can see, selling your home as a rent-to-own offers a lot of benefits to you: Higher purchase price, cash flow, higher rent, option fee, selling faster and more! To learn more ways a rent-to-own can be beneficial for you check out my book Rent-to-Sell.

When I first started doing lease options it was about two years before I realized that I needed to work with Realtors because of their control over the sellers. Realtors pre-screen everything for you and in general their sellers aren’t in financial trouble. The Realtors control the relationship with the sellers and the sellers tell the Realtors everything, including personal information. That’s one of the key reasons I like to work with Realtors – they control the knowledge base about the seller.
I look for Realtors who can understand lease options and can help their sellers also understand the benefits of lease option, but this understanding can take time. My job is to assist them and help them understand when to call me. Here is how I generate leads for lease options through realtors.
1. Making cold calls to generate leads
If you look in any real estate section of any newspaper, you can find the top listing agents you need regarding potential properties. Many times the agent is unavailable, but that’s not a problem. Just leave a descriptive message about the property that interests you and let the agent know how to contact you. You might want to make yourself a short script with the highlights of the things you need to discuss so that you don’t fumble for words when on the phone. Also don’t be afraid to ask for information from the assistants. They often know as much or more about the status of the home and the seller.

2. Structuring the Deals through Realtors
Tell the agent how you found out about them – butters them up a bit – and let them know that you are willing to give a presentation. Suggest that the Realtor fax you a potential listing. If you have already developed a relationship with the Realtor, you can always “dig” a little during the phone conversation to see if they have a property that is a good candidate for a lease option that they might have overlooked.
A. Proposal – used to put together a mock-up offer to a Realtor that they can then present to the home owner or seller. It will put down the overall terms in writing without the specifics. This saves a lot of paperwork because you only fill out the other paperwork when you have an agreement on the proposal.
B. Letter to get into the brokerage office – I tell the broker what I do and don’t be anxious on the proposals – make it low pressure. When you’re first starting out, you‘ll want more deals to go through because there’s a great excitement in the newness of the game. Don’t get too wrapped up in a deal happening, because a lot of them don’t happen. I probably get about 40% of the proposals I put out- which means that 60% come up empty.

3. Unwanted Buyers
A Realtor will get a pre-approval letter from a mortgage company before they show a home to a prospective buyer. Otherwise they’d be wasting valuable time and energy with a lot of people who are looky-loos and not serious buyers. The Realtors don’t want to waste their time with those buyers, but those are the buyers I want and I need the names from the Realtors. So I send the Realtors a “Garbage letter” which basically says, “Don’t throw those names and numbers in the garbage! I can help the buyers get into a home with lease options. I offer a $1000 finders fee for every name that ends up in a deal.” This is another incentive to Realtors to work with me. I’m not out to steal their business – I’m here to help them and to offer a unique service to buyers with financial history difficulties. I want to help them move their inventory, so I am interested in the buyers they can’t help in traditional methods.

Working with Realtors is key in any lease option deal.  For more information about Generating Leads through Realtors check out my book Investing in Real Estate with Lease Options and Subject-to Deals.

Learn what a Cooperative Lease Option is and when investors should use them.

Learn what a Sandwich Lease Option is and how to make a profit from the deal.

When qualifying a good buyer for a lease option you are looking for someone that had a blip in their credit and now they are on their way to financial stability.  When you look at someone’s credit, see if they are on their way up or not.  You can see what they have paid recently and what is still behind.   This will show up on their credit report.   Learn to read credit reports and get set up on a system that works for you.  If you don’t know which system to use, talk to others in your real estate investors group.  They will know which companies provide which services in your area.   You can also work with a mortgage broker to run credit and do the lease option approvals.

Once you have approved a tenant for your lease option home; all you have to do is draft the paperwork and have them sign it all.  You need not give more than 12-18 months to the buyer on an option. This timeframe is most often enough for a good option tenant to get a mortgage.  If at the end of the time period they just need a few more months or they want to extend, it is your option to decide if that is what you want to do.    This is when you can also renegotiate.   Maybe the homes in that area appreciated more than you expected, then you would want to extend, but increase the purchase price somewhat.  You could also ask for another $500-3000 option fee, to extend the option.  You can also raise the rent slightly.   There are times I have given my tenants an extension for free, because of circumstances.

For more information on How to Qualify a Buyer  you can check out my book Investing in Real Estate with Lease Options and Subject-to Deals.

In a recent post I discussed why Soft markets are GOOD rental markets to invest in. Now is the best time to buy Real Estate.
Here are the 3 best ways to Buy Real Estate in a Down Market:
#1 Lease Options
Lease options are Great for down markets. The opportunities are plentiful because there are lots of sellers out there having trouble selling their homes. This means they are looking for alternatives, and what you can offer them with a lease option is a whole lot better than just renting out their home or having to do a massive price cut.
The other great thing about lease options in down markets is that you have extremely low risk. No matter what happens in the market you’ll come out okay, because you aren’t obligated to buy. But even if the market were to go down more you can always try to renegotiate with the seller and get a better deal so you can still close. To learn more about lease option investing visit my website at http://www.wendypatton.com

#2 Wholesaling A.K.A Cooperative Lease Options
Cooperative Lease Options is a safe form of investing in down real estate markets, provided you have end buyers lined up before you close. There will be plenty of opportunities for wholesale deals, but the challenge may lie in finding your buyers.
If you are doing Cooperative Lease Options it’s a good idea to have a strong buyer list lined up. You don’t want to close on the property without an end buyer because you are in a down market. If the market continued going down you would be stuck holding the property as the value declined.
What I really like about wholesaling is that you can keep your risk level low by not having to own the property. You just flip it to your end buyer. Minimizing risk in down markets is very important. To Learn More about Cooperative Lease Options Click Here.

#3 Cash Flow Rentals
Some down markets are positively flush with great cash flow opportunities. Down markets mean that the renter pool has grown as well. If you make sure the numbers work and that the rental market is strong you can do very well with cash flowing rental properties. Passive income every month is a great way to build your wealth.
While there is some risk associated with a rental property in a down market, because you do actually own the property you can easily mitigate that risk by making sure the numbers work before you buy. If a property cash flows you can hold it forever without having to worry about what the market does. To learn about some great cash flow opportunities, the same area that I’m buying in right now, Click Here