Carefully selecting buyers greatly increases an investor's probability of succeeding with the rent to own homes strategy. The pool of people wanting rent to own homes is growing every day. Investors have plenty of buyers to choose from.

Rent to Own Homes are Good for Investors

Rent to own homes strategy is different from the traditional flipping strategy. Traditional flipping involves the end buyer taking out a traditional loan to pay off the investor. The Rent to own homes strategy requires investors provide seller financing for a few years. After between from 2 and 10 years the buyer will be expected to obtain other financing to pay back the rent to own homes investor with a balloon payment.

While the seller financing is in place, the investor can be expected to collect a healthy 8% to 12% interest rate. The rent to own homes strategy is one of the most secure investments with a high rate of return that you will find today.

The large inventory of bank owned real estate is depressing house prices but makes it a great time for picking up rent to own homes at rock bottom prices. The rent to own homes strategy sells these houses for a price approximately 10% above market value. Investors profit twice. Once when they sell the house for considerably more than they bought it for and again when they collect an interest rate that's well above the market rate.

How to Select Buyers for Your Rent to Own Homes

People that have had their credit damaged are not all deadbeats. Plenty were paying mortgage payments on time for years until the economic downturn cost them a job or some other temporary financial trouble hit. Those with a history of on time payments and that are back into decent paying jobs are your best candidates for rent to own homes. The key is the set back has to have been temporary and they have to have recovered.

Along with a history of making on time payments, you need to get a decent down payment. The higher the down payment, the more skin they have in the game. The more skin in the rent to own homes game, the harder they will work to stay current with the payments.

The size of the down payment and their credit history are used to determine the interest rate you will charge. Just like with traditional financing, rent to own homes interest rates are based on risk. With a large down payment and only one major incident on their credit report, you'll probably be near the low end of the interest rate scale at 8%. Smaller down payments and multiple credit problems brings the interest rate up to 12%.

Investors have gotten up to 14% interest for rent to own homes but the risk is to high unless you don't mind going through the foreclosure process to recover rent to own homes. That's where the security comes into play. As the mortgage holder, you are in first position if the buyer defaults. You have to go through the foreclosure process but when you come out the other end, you are able find another buyer, sell above market value, and collect another down payment. The rent to own homes strategy is your ticket to success in today's real estate market.

Investors typically go with modest homes for the rent to own homes strategy

Please leave your comments or questions.

Option Lease is Superior to Rentals

Although many people consider renting residential property to be passive income, there can be considerable work involved maintaining the property and the ever-dreaded call in the middle of the night to unplug a toilet. It's these types of irritations that make the option lease superior.

An option lease can be a great passive income

In an option lease, the lessee makes a down payment granting them the option to buy the house at a set price before a specific date. Along with the option come additional responsibilities not normally associated with tenants. Repairs and maintenance up to a predetermined dollar amount become the responsibility of the lessee under this arrangement. That makes it easy to understand why the option lease is more passive than traditional rentals.

Option Lease - The Almost Nothing Down Method

Option lease can be achieved with almost nothing out of the investor's pocket and the little that's required is quickly recovered. You don't have to own the house to option lease it to an end buyer. Instead, as an investor, you take out an option lease yourself. You need to do this for less than you turn around and lease it to an end buyer.

For the cost of the option lease (down payment), you take control of the property. Next, you find an end buyer capable of making a larger down payment than you made and able to pay a higher monthly rent then you have in your lease. Now you have a passive income at almost no cost to you as an investor. Each month you collect the difference between what the end buyer pays and what you pay.

When the end buyer exercises their option to buy, you do the same with your option lease. Of course, the amount you've negotiated to pay is less than what you are selling for. Now you have a nice profit with none of your money still in the deal.

Option Lease - Where to Find End Buyers

There are more willing end buyers than you might imagine. The foreclosure catastrophe is creating them all around us. People going through foreclosure have their credit scores destroyed. Additionally, Fannie Mae and Freddie Mac require up to a five-year wait period before they will underwrite loans for these people again. But not all of them are good candidates.

You want to find the ones that went through a foreclosure or short sale that was no fault of their own. People that lost their house when they became temporarily unemployed. Now they are fully employed again and able to make monthly mortgage payments. Other than the foreclosure, they may not have any other serious blemishes on their credit report. Before becoming unemployed they may have regularly made their mortgage payments for years. These people want to own a home but can't get a loan for a few years. The option lease can be the perfect vehicle to make it happen for them today but they don't exercise the option for a few years when they again qualify for a mortgage.

Everyone wins with the option lease.

Please leave your comments or questions.

The humor in the blog came from a thought that you can learn how long a house has been vacant by looking in the refrigerator. This picture of pizza slices isn't extra cheese. It's petrified cheese from being in a warm fridge for probably 2 years or more. At least that's how long the owner finally divulged.

Petrified Pizza is an indication it's time to consider a lease purchase

Now back to our lease purchase lesson.

Lease Purchase When a Short Sale is Slightly Below Market Value

The house I went see about a short sale had been kept up by the owner since it went vacant a couple of years ago. That can make it attractive for a lease purchase because neither the seller nor an investor needs to sink a bunch of money into repairs.

When a seller can't get the lender to approve a short sale they can try a lease purchase. But only if the value of the outstanding loan is close to the current market value or the lease/monthly payment will cover the current monthly loan payment.

I think you see where I'm going with this. A lease purchase it typically for more than market value. Typically about 10% more. So if the house value is within 90% of market value, the seller can use a lease purchase to put a tenant in the house at a monthly payment covering his or her loan payment during the lease phase. When it changes to a seller financed mortgage payment, the monthly payment will still cover the seller's original loan payment. Finally, when the lease purchase balloon payment comes due in a few years, the seller pays off the original loan in full.

There's a possibility this can be done even if the market value is a little less than 90% of the original loan. A lease purchase comes with an above market interest rate. The interest portion of the monthly payment can conceivably make up another few percentage points that the house value is below the outstanding loan.

Investor Version of a Lease Purchase With a Short Sale

The previous example is a creative use of a lease purchase bailing out a seller that can't get approval for a short sale. The investor version of a lease purchase is more common and done more frequently.

It's simply negotiating a short sale for well below market value. This can and is done frequently. The reason is that the short sale costs the lender significantly less than a foreclosure. The lender avoids all of the legal costs. They never take possession of the house so they never have to pay taxes, maintenance, and other associated costs.

There can be a nice profit when an investor buys a short sale and flips it with a lease purchase. Negotiating a below market value short sale and then selling for about 10% above market with a lease purchase can create a nice spread that becomes all profit for the investor. Sweetening the deal is the above market interest rate the investor will collect monthly until the lease purchase balloon payment comes due.

Oh, one more comment about the pizza. When I opened the frig and noticed the power was on and there was a large bottle of Mountain Dew along with the pizza box. I should say the power to the frig was on because there was a light that went on, but the frig was not cold. I did the unthinkable - OPEN THE PIZZA box. What I found was GREEN/YELLOW petrified pizza in there. The funny thing was it was so old it really didn't smell bad anymore. I am still wondering exactly what type of pizza it was originally . I started to laugh and asked if I could take a picture for my blog. The seller thought that I was quite crazy I am sure, but I found it the funniest thing that happened in my day.

Learn to laugh at the small things in life that can keep you going. This business does have some weird things that happen, learn to enjoy them.

Thanks for reading the blog. Your turn now, please leave questions and comments below.

I have recently put a few shortsale offers in due to the shortage of REO (real estate owned) / Bank Owned properties on the market.   What I have found interesting is there is not nearly the competition from other investors.  For instance, with all bank owned deals that are any good, they all seem to go to "highest and best".  Highest and best means each person has 1 time to come back and put their best offer in. Then the bank usually selects one of those highest and best offers.  It becomes very competitive and hard to guess what to offer.

Recently I put have put in 4 shortsale offers.  They all got accepted as is, and there were no other offers.  Now I understand I might not get them all, but that is ok.  If I get half of them, I will be happy.  It is like putting a few deals in my pipeline for the future.

A few tips I would like to share when making a shortsale offer:

1)  Try to make your inspection for AFTER the bank approves the shortsale, otherwise you could be spending money on a deal that doesn't ever go through.

2)  Try to make your earnest deposit either very low or not to be deposited until the bank approves the shortsale offer.

These two things have really helped make my shortsale offers easy and risk free.   Now, I will say that a few agents won't allow these, but because I am a real estate agent and know many agents in my area, this has really helped me get these through.  It might be something you have to work through over time to create a proven track record, and you might want to consider getting a real estate license.   See my article and quick video on Getting Your Real Estate License for Real Estate Investing.

What is my exit strategy?  For the most part, I am using a lease option for 1-2 years and then converting to a land contract (seller financing) if they can't get a mortgage.  I could flip some of them or go straight to a land contract, however, I don't want short term or "dealer" status with the IRS. I want to keep the majority of the profit in my pocket and not Uncle Sams.

I have spent some time recently talking to shortsale negotiators and they have shared that 80-90% of their deals are getting approved now.   So is it worth it?  I think so. Consider shortsale investing.

LEASE OPTION QUESTION:

So far I have two really good properties that I am putting contracts on.  I do have a quick question as I continue my search...

I am using Craigslist and the newspaper primarily... searching the "homes for rent" section.  My question is this...  if I call on a property that is already listed in one of these, for "x" amount of dollars per month.... what is my thought process supposed to be on either "sandwiching" (sandwich lease option) or "wholesaling" (cooperative lease option) the deal?...  I may need to advertise the property at the same price or a slightly higher price (on Craigslist or newspaper).  Doesn't make sense that this would be possible if they hadn't rented it yet at that same or lower price.  I don't have a big pool of tenant/buyers right now (yet)... just want to get my head on straight about this process.  thanks in advance for the input.

Chad

LEASE OPTION ANSWER:

Chad,

if you are advertising the same home it would be for a lease option and not for lease...different audience - different tenants....BUT getting it locked up with the sellers should be important so you can advertise it.  Most sellers will stop advertising when they feel comfortable that you will be helping them lease option their home.  Remember you are looking for a motivated seller that couldn't sell so they decided to try to rent.  Right now, however, the rental market is pretty hot, so getting them on the phone quickly to find out if their priority is to sell, would be key.

I hope this helps.

To Your Success
Wendy Patton

I looked at approximately 15 homes and made offers on 5! As an investor, it's highly unusual to find that high of percentage of houses to make offers on in that short of time. It just goes to show how hot the current market is for investors. The rent to buy market is just as hot!

Start Your Rent to Buy Program Today!

Rent to Buy Deals on the MLS

Here is one deal that I found this weekend - right on the MLS!

$34,000 - brick home with 3 bedrooms, 2 baths, basement and garage. It has good schools and in an all brick area. It is NOT in the hood or in Detroit at all. I can rent this home for around $1100 per month or do a rent to buy for around $99,000. So? Why am I not doing more of these rent to buy deals? Great question! I am kicking myself right now, as I haven't done enough rent to buy deals lately.

But I'm back in the saddle both doing my own deals and sharing with students and readers here on my blog. Just as I thought, this is a great time to be investing. It's a buyers' market with the added benefit of being great to rent or flip houses with a rent to buy program.

Might be a Round Trip With This Rent to Buy House

I also put an offer in on one for $27,000 that I sold about 7 years ago for $132,000. Imagine doing so many deals that you start to buy back your old inventory . I could sell that one on a rent to buy contract for close to $100,000.

So you might ask, "Why would someone sell it to me for that low price?" Cash is the secret weapon in today's market. Very few buyers can make all cash offers. Distressed sellers want to sell now. They could accept multiple offers for considerably more than my offered but their chance of closing the deal is slim.

In today's market, the seller has two big challenges when it comes to a financing contingency. First, lending standards are so tight with banks that most people can't qualify for a loan. That's part of the reason there are so few buyers in the market. Of course, most realtors require a buyer to prequalify before they'll spend time showing houses.

So, you would think the buyers in the market would make a similar low ball offer to what I made and the seller would accept the higher of the two, knowing the other buyer is prequalified. Nope, cash is still king. When you can buy with cash, you can run a very profitable rent to buy program.

You see, those with a financing contingency need to have the house appraised. Lender appraisals are like the loan standards. Appraisals are very conservative now and some even assume the market has not found the bottom. So again, the financing contingency is not a sure deal for the seller.

On the other hand, my all cash offers have no financing contingency and don't require an appraisal. And there's no lender anywhere in the deal. It's just me and the seller. We can close the deal in two or three days if the seller needs to get out that fast. And I can move on to my next rent to buy deal.

I hope several of my offers get accepted. I'm excited to turn them into rent to buy deals.

I also have a Realtor team if you want one of these rent to buy deals yourself - let me know. There are enough out there for you also.

Question:

Hi, Wendy, first I want to thank you for these very informative coaching sessions and your book on Lease  Options. The rent to own / lease option book is very easy to read. I have 2 questions. What do you tell a home owner that you want to enter into a rent to own agreement with his/her property and you want to get a tenant in that house, but you do not have a track record doing this time of business. For example when you have a very brand new lease option company.

Answer:

When you are doing a rent to own or lease with an option to buy, and you are subletting or doing a sandwich lease option; you just need to be straight with them on it.  I do however, build some rapport before I share that with them.  I think building rapport with an owner on a rent to own home, is the best way to start the relationship.  The book covers ways to build rapport and also how to address this with them. I assume you are not quite to that part yet.

Question 2, I am from New York/Brooklyn and I want to do L/O in another state. What are the best markets for lease with option to buy today?

Answer:

Really any state in our country is good right now, but for the cooperative lease option, I think higher priced states will net you the most profit, however starting in your own state to get experience would be wise.  This way you can flip or wholesale a lease option deal for about 3% of the purchase price and never own it or take title.  No management either.  Definitely read the article on cooperative vs. sandwich lease options.  When you are doing sandwich lease options, you should be close by when you are starting as you are technically a landlord during the time period.  You can later venture out if you want to, but you do not need to.

Finding any rent to own homes or lease options are very easy in today's real estate market.

I hope this helps...

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When searching for a tenant buyer you will want to consider a few things, but first you might want to send a note like this - this came from one of my students.

Assume you send this after you have someone responding to your Craigslist ad for a rent to own home. In the future we will cover a skip for what to say to tenant buyers when they call on the phone.

Dear _______,
I wanted to touch base with you about your interest in our rent to own home, and welcome your input regarding the type of property you are looking for. Please let me know what you will need in terms of the following:

* location - town & neighborhood, proximity to public transportation of any particular sort; other?
* square footage
* number of bedrooms & baths
* accessibility factors -- e.g., stairs? elevator?
* age of home
* other requirements and preferences (e.g., basement, fenced-in yard?)
* maximum rent rate per month that you are able and willing to pay
* maximum deposit for option to buy that you could put down up front to do the rent to own (note this will go towards purchase price when you buy the property)
* household income, so we can better determine how much house you can afford

There will be a $20 tenant application fee per person over 18. We look forward to working with you in the near future. Feel free to contact me at 123-456-7890 for any questions you might have about this rent to own home or any others we have.

Wendy
---------

Free free to use any of this you would like. Feedback? Additions? Comments?

1. When a seller gives their bank the Letter for Bank Authorization and I make the mortgage payment directly to the bank, would this not trigger the due-on-sale clause?

NO anyone can make a mortgage payment for anyone. People do this all the time. Due on sale is not much of a concern at all for lease options but more so when do you a wrap mortgage or subject to deal. (which even then it is very very rare)

Have you ever had this happen on a lease option?

no and never heard of one either.

Then does the seller have to pay off the complete mortgage balance?

Yes, that is what a due on sale usually means, but I do not know too much about them as it so rarely is a real issue. Could the seller sue me because I have not alerted them to that possibility?

Anyone can sue anyone for any reason. Do you have prepaid legal to give you protection if you are sued? or to get legal advice on these questions? to find out more http://www.gotlegalplans.com

2. Regarding the Rental Agreement when selling on a lease option --you talk about applying money to the tenants account. The seventh application is cost for releasing the property - if applicable . Could you enumerate?

In the rental agreement it is always important to discuss how their payments will be applied to their account. It doesn't matter when they pay in full each month, but when they don't you need some way to define what will be paid first and what is last. That statement about releasing is if they move out and you have to release the property (the cost to do so).

3. Selling Lease Option -Offer to Purchase - On page 22, #4 you state purchaser agrees that any repairs, major and minor paid by Seller/Optionor will be added to the purchase price prior to closing. Wouldn't this affect the appraisal?

The purchase price has nothing do with the appraisal, but the property might not appraise, true. That is something you will have to decide when that time comes. Do you want to give them longer? Lower the price? or stay tough luck? it is all up to you at that point.

The optionee may feel overwhelmed with costs, especially if money is tight and ask me to pay only to say a year down the road that they do not want the house. Then I am stuck.

This is something to consider about the deal before you buy. Did you get it inspected to see how many repairs should be done before you buy it? or what you might be up against?

Also, consider a Cooperative Lease Option vs a Sandwich Lease Option if you are not sure you want to deal with anything down the road.

4. What do you mean when you say make sure bankruptcy is discharged. What if a tenant files bankruptcy shortly after they move in re old debts, medical bills, etc.

Even if they do file bankruptcy, you might be fine, because they may want to stay, BUT if they file bankruptcy when they move in, they will need longer to get a mortgage. Do they have enough time on the contract with you? Usually, when you are checking someone out to move in you do not want someone with credit that is considering filing, you want someone that has filed or is paying those debts off.

Wendy

Question:
Hello Wendy,
I spoke with a prospect this morning. I have had several conversations with her and she and her husband both really like the idea of lease optioning with me. It is my goal to find the right person as quickly as possible. She is very excited.

Now the numbers. She worked for the county where the house is (and where she lives) and helped develop their website. So, they looked at numbers there are trying to find out what neighbors have sold their houses for. I have run the comps for the area. Only one house within a 1/2 mile has sold recently and it is only 16yrs. old, as opposed to hers which is 36 yrs old. Within 1 mile, houses within her age range have averaged to $174K. I think she is looking at getting $170K. Her monthly PITI is $1375. I have attached the Profitability Worksheet I used for this to determine if I could give them what they want. If the terms are right for both of us, I think the deal could be really good. I have put in the worksheet a $500 rent credit for myself because they have owned the house for over 12 years, so they have some equity to work with.
One question: does the Tenant Buyer usually get rent credit? I had been told from someone I could not give rent credits to the tenant buyer because they would want to be building equity in the house and because they did not own it, they couldn't. Is that true? Do you give your tenant buyers rent credits?

By the way, I told you on the phone yesterday that I have had a great time developing a relationship with her very quickly. I told her up front that I was helping a friend find a home, but this home was too much for her, and it is. But I asked her if she would still be interested in Leasing it to me with an option. I explained to her that you are a fellow investor and are teaching me about Lease Options, so if I can't answer a question, I will ask you for help. She is a very nice, hard working woman and I have to laugh. She thinks this is such a great idea, she said, once I learn it, she might want me to teach her how to do this!

God is good and has a way to bring a smile to my face. Thank you, Wendy for your webinars, phone calls and emails. I feel blessed to be working with you and can see the work will pay off. You are, by far, the best coach/mentor I have had!

Answer:
Yes you can give your tenant buyer option credits. I do with sandwich lease options or my own properties that I sell on a lease option.
I think if you can do very long term and make the numbers work with the $500 credit a month, then maybe a sandwich lease option would work, but I would like to see you get a contract in place with her for the 174-175k and keep 4-5k which would still net her what she wants to make (170k). Take your profit of the 4-5k now, since you shared with me you need the cash now!
I hope that helps.