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.

Please ask anything else that will help you understand Lease Options relating to this post

Here is a lease option coaching question that I received recently.  When I do my lease option coaching, my students can ask me anything they like about their lease option deals. Some of those I have share on my blog. I hope you enjoy them.  Feel free to comment if so.

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Hello Wendy or lease option coaching staff,

I sent out postcards this week and just got a response from a homeowner who seems to be the perfect candidate for a lease option. She owns a condo town-home, which is my concern. Can this work with condo owners?

Sure IF you are in an area where condos are a "cool" or a "good" thing to own.  I live in the Michigan, and they are not the best here (but a few select areas), but in Chicago they are very hip. A lease option can work with a condo in the right areas.  Consider though who will pay the HOA (home owner association fee) - I would want the seller to remain responsible for this fee. 

Single woman in a three bedroom, three floors town-home. Wants to go to live in Germany part time and stay with her son here in NJ the other months. She has a lower mortgage (has not told me exactly what yet) and is willing to rent, no problem, and pay for the monthly HOA. When I mentioned would she sell she said yes!   She did ask me what I charged to do this and I told her nothing through my company. She asked how I make money then and I told her through the buyer. I also revealed I am a licensed Realtor and that I could charge commission.

The property was built 2003 and she bought it new.

The lady revealed that she has an appointment with a Realtor friend from the complex a few hours after my scheduled appointment with her on the weekend.

Please advise regarding the above. Thanks and I look forward to hearing from you.
What does the seller REALLY want to do?  Sell out right or get some cash flow?  The other important thing when dealing with any home owner that is considering a lease option with you and has suggested that they might list with a real estate agent is that you have them ask their Realtor to "Make YOUR NAME an exclusion to the listing contract".  This is Realtor language to protect the seller and you from the additional fees that would be charged if this were not in their agreement with their agent.  Write this down - as it is the exact language used by most real estate agents in the business.  This way if they don't sell it and you buy it the owner is not responsible for commission.  If they don't put this in there it will affect the seller's bottom line and therefore yours also.

Lease Option Coaching -  Feel free to share this post, comment or ask additional questions.   If you are considering lease option coaching check out www.wendypatton.com/wendyreplay to find out more

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.

Some banks are beginning to rent houses until they can sell them. However, they are using property management companies rather than allowing lease options. The reason being is the banks are not staffed to manage property and certainly don't have staff trained to manage lease options that involves dozens of real estate investors. The fact remains a cash purchase is your best real estate option for acquiring REO.

Cash purchase is the best real estate option for REO

Cash Purchase Is Your Best Real Estate Option for REO

This real estate option is a challenge for the beginning investor short on cash. However, depending on your location, many of these properties are selling well below market value and offer a big upside if you can exercise a cash purchase real estate option.

This real estate option is such an opportunity that if don't have cash but can obtain financing or find a partner with cash, I recommend pursuing a cash purchase. Once you own, you can than maximize your cash flow and long term profit by offering a lease option.

You'll maximize your cash flow and profits by offering a lease option because there are so many people wanting to buy but can't obtain financing. When you offer financing assistance as a real estate option to buy, you dramatically increase your potential buyers market to include those willing to pay above market value for the opportunity to own through a lease option.

Another Real Estate Option for Agents

Some agents might want to explore starting a property management side business. If you can contract with a bank or two to rent and liquidate REO, it will be a big boost to your business. A property management contract for REO gives you a major insider advantage to the best REO deals the bank has without needing to make cash purchases.

After you establish a track record with the bank, you could even broach the subject of allowing you exclusive rights to begin offering lease options controlled by your business. Remember, banks aren't going with this real estate option because they don't have staff trained to management and don't want leases options with dozens of investors. Being the single contact for lease options and being the only investor contracting with potential end buyers could open this lucrative opportunity for your business.

What are you seeing in your REO market? Lower inventory right now? Write a comment or ask a question. It's always a pleasure to hear from readers.

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:

What does this clause mean? From page 109 in the Lease Options book: "Seller agrees to change their homeowner's insurance policy to a non-owner occupied policy and to name the purchaser as an additional insured within three days of purchaser taking possession of the home." Are you talking about the agreement between me and the seller not me and the buyer/tenant right? How do you get the owner to not try to do this themselves after you present it to them?

Answer:

This clause is for the protection of the owner mostly. It insures they have the right type of insurance for their lease option on their home.  If they don't change their insurance and they have the wrong insurance, they might not be insured if something were to happen.  You get them to do this by letting them know they NEED to do this to protect their home.  Have them talk to their insurance agent to get the right type of insurance for their lease option home.  Usually the expense for insurance on a lease option to the owner is minimal if anything, but it is crucial for their property protection.

Question:

I am a real estate agent and how would I get paid because I am not sure where the money would go to. Would it got to my broker?

Answer:

Any commission always goes to your broker, but not the profit on the deal as an investor.

Question:

How do you make sure that the owner/tenants are really going to be able to get qualified for a mortgage? Do you get that information up front from a mortgage company about what is needed for them to get a loan. Then put it in their contract that they need to take steps to secure? (I hope you get that)

Answer:

You never know if anyone will be able to buy or not on an option but if you are talking about a Sandwich Lease Option then you are in the middle.  This means they are somewhat "sheltered" from the tenant anyway.  Get much longer with the seller then you will need for most buyers.  For instance, right now many buyers need 2-3 years so get 5 years from a seller. This gives you the time to put a second buyer in if the first does not exercise. If you are doing a cooperative lease option then the seller will be cooperating with you to select and finalize the tenant buyer.

Clear?  Questions?  feel free to ask more on this...

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

I have been looking at a small studio condo (410 sq ft) in a complex right on the beach in Redondo Beach.

It is one I've been looking at for myself, temporarily as my permanent residence... then as a weekend personal hotel spot when I start making real money with your cooperative options course.

Anyway, I'm not sure how to structure a lease option, in this particular case, and I wanted your opinion if it was too far of a reach.

This little condo is way over priced, even now, in my opinion.. and that is why it is sitting on the MLS for 112 days at this price... $275,000, prince falling down from 336,500. I looked at the history and it was purchased in 2007 for 379,000 and gifted to this owner it looks like for $1000 on 6-25-09.

There is another one, model match, that just went pending... 269,000 listed after many reductions, but it was sitting for a long time as well and maybe I'll just have to see if it actually gets sold and for what... or watch it go back on market.

I wanted to find a way to structure an offer that I could pay 900 or 1000 a month on a lease option, maybe for 5-7 years (or 10 or more), with nothing much down. I don't think this owner has any debt since he bought it for 1,000... unless they refinanced to buy toys. Just a guess.

Then there is the HOA issue, that I wouldn't want to pay extra for... $225... unless I paid maybe 675 rent and 225 HOA.

Anyway, I am paying $900 RENT right now for a place about the same size up the beach, and I'd rather have an interest in a property than just pay rent.

Also, I'd like to offer much less than 275,000... because I don't think it's worth that... looking at the few comps that there are. In 2003, it was 225,000. There aren't many of these 410 square foot units, most in this stretch of Condos on the beach are larger, and much more expensive for just a few more feet, so there aren't many comps.

Maybe this is a waste of my time, but I was hoping you could advise me.

Answer:
If condos are popular there then it could be an ok deal. What is the prediction of property values in the next year in that area?
Also I like the idea of you having an interest for your own future home but without having to buy it now. Consider getting the rent of $900-1000 applied each month towards the purchase price and get a long time period. For example: after 60 months you could have $60,000 built up off of the price (therefore you might be able to give them closer to their price) Definitely follow the lease option course on Buying on Lease Options; it will have the step by step guide for you to follow.

Comments? suggestions other ideas?

Call the contact person from the sign or advertisement and say:

“Hi Sally, my name is ___________ and I was calling about

the home you have listed at __________ (the address).  Is it

still available?”

After they say, “Yes, it is,” I would say:

“Can you tell me more about the home?  How much is it and

how large is it?”

Listen to see if it is something you would be interested in.  If so,

follow up with:

“I wondered if the builder would be open to something creative.”

Leave it at that and say nothing more.  Your goal is for them to launch into a long explanation of what the seller will or will not do.  Other times they’ll say, “Like what?”

“Well, something like a rent-to-own or a lease option.  I am a rent-

to-own buyer looking for a new home in this area.  Would the builder

be open to something like this?”

Like before, you will probably get several possible responses:

1. “Yes, they have mentioned that to me.”  If you get a positive

response, then ask: “Great!  Do you know what kind of terms

they are looking for or are they looking for an offer?”

If they are looking for terms that work for you or they are looking for an offer, make an appointment to see the home if you haven’t aready.  If you are working with a real estate agent, you should tell the salesperson on-site that you have an agent and tell her who it is.  Call your agent to tell him you found something you are interested in.  Even though the sales person on-site can show you the home and amenities, your agent can still help you with the transaction.

If the terms are not within your budget, ask the following:

“Do you hve any other new construction listings where

your builder might have said to you, ‘ Sally, if you don’t

sell that home soon, I might have to rent it,’ Sally, can

you think of any of your listings that might work for me?”

Sally may also respond to the rent-to-own question

like this:

2. “No, they need to sell now and wouldn’t be interested

in that.”

If this is the case, jump right to the question where you ask if she has

any other listings that might work.  You will need to know your price

range and what you can afford; as she will probably ask you about this

(we covered this in Chapter 3).

3. “I’m not sure.  I would have to check with them.”

If this is the response, encourage the agent to talk with her builder and to

call you as soon as she knows.

4. “What are you talking about?”

If she doesn’t know what rent-to-own is, you may have to give her a brief

explanation.

5. “Why do you need a rent-to-own?”

Your best answer is to simply tell her that a mortgage won’t work for you now,

but you do want to get into a home now.  Ask her if this home or another listing

of hers might be a candidate for rent-to-own.  Keep your answer brief and let her

ask you more questions if she has them.

Excerpt taken from Rent-To-Buy: Your Hands-on Guide to BUY Your Home When Mortgage Lending is Tight, Chapter 5, Pages 76-78.