Question:

Wendy, I really need guidance on how to purchase a property without having the funds or the credit needed to purchase it. I've read several blogs and other reading material but still not sure of how to do this. I really want to start investing in real estate but don't have a clue on how to get started.

I appreciate any guidance you provide.

Answer:
You are not alone. Many people do not have the funds to get started investing in real estate AND now the financing and qualifying is harder then ever. Most real estate investors do not qualify for a mortgage and need creative ways to invest.
There are several ways to buy property without money or credit:
Lease Options
Subject Tos
Land Contracts / Contract for Deed
Seller financing, etc.

Check out some of my articles to find out more on these topics: wendypatton.com/articles

Also my book on lease options and subject tos is a great guide to get you started with 2 of these concepts. You can order it on my site store. Also, if you want more help then you might want to sign up for my lease option coaching program.

Buying a home is almost always an emotion-based process. Once you find a home you like, you become emotionally attached to it. Emotional attachment can cause you to make unwise decisions when making an offer, handling negotiations, and so forth. Once you’ve fallen in love with a house and visualized it being your home, you’ll start to do WHATEVER it takes to make sure it becomes your home.

This is about the worst possible way to buy a home, but also may be the best possible home for you.  You do want to fall in love with your new home, but you also want to be careful.

You can literally cost yourself thousands of dollars, if not tens of thousands of dollars, by being too emotionally attached. Instead of letting emotions rule the game, try to include some common sense in the buying process. Real estate investors have a saying that goes, “Don’t fall in love with the house, fall in love with the deal.” This is easier for an investor as he won’t live there, but you should be aware of this, and use your head.

Having said that, I realize that you will always have some emotional attachment to your house. You need to like it. Your goal is to strike a balance between liking the house and using common sense to tell you whether you are sacrificing too much to try to get the house. If you find you have to make lots and lots of compromises to get a house, stop yourself and ask, “Is this really worth it?”

Remember to strike a balance between emotions and common sense in your home buying process. It will help you enjoy your home that much more once you actually move in.

What Makes a Motivated Seller

There are, of course, different circumstances and situations in the lives of people that motivate them to need to sell their home.  This can include a job transfer, bankruptcy, foreclosure, divorce or upgrading to a bigger home -- any number of reasons.  However, the circumstances of the sellers may also be affected by the state of the two vying economic real estate markets – buyers and sellers – which also affect seller’s motivations.  For real estate investors it is crucial to buy homes from truly motivated sellers -- sellers who have an extra urgency, usually financial, however, not always.  You can’t get a good deal from a seller that is not motivated, because, they will have no reason to negotiate any part of a transaction.

There are different degrees of motivated sellers and different reasons sellers need to sell their homes, but overall there are two basic categories of motivated sellers:

1.         Desperate and distressed (bad debt) – someone in trouble financially, behind on payments, going in a bad direction, lost their job, divorced, foreclosure, etc or

2.         Not desperate or distressed (good debt) – someone not in trouble financially, not behind on payments, but motivated for other reasons: possibility have two house payments, inherited a home, burned out landlords, job transfers, etc.

Most real estate investors only go after #1 above, but there is also huge profit potential with sellers that fall in #2.  All of the lease option sellers should fall into number 2, because these sellers are safer for a lease option buyer.

• 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.

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.

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.

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.

#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