How to find Motivated Sellers for Lease Options

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.

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.

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.

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

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

Earlier this week I did a post on Lease to own training – seller objections, today I want to look at Subject To Investing and seller objections.

Here is a common seller objection when it comes to subject to investing: “Why should I give you the deed and control of the property when I’m left on the hook for the mortgage?”

This is a legitimate question and one I would certainly be asking if the roles were reversed.  It demonstrates why it is so important to build rapport with the seller and make them feel comfortable with what you are suggesting (rapport is important whether you are doing subject to investing or lease options).  Remember, subject tos will not work with everyone. To answer this question you might want to offer references or testimonials from other sellers.  Here is an answer one of my students gives to their subject to sellers -

“I can understand your concern, and I would probably feel the same way if I were in your shoes.  All I can tell you is this:  The bank will not let me assume your mortgage, and in order for me to make a fair return on this deal, I can offer you$X.  I’ll be glad to buy it right now at the price I’ve quoted, but then how would you cover the difference to pay off your current loan?  You are actually being very savvy and getting top dollar for the property by letting me take over your payments; we both save all the costs that we’d incur – commissions, closing costs, and so on – if I were to just buy it from you.  The minute you okay this paperwork, I kick into owner mode.  I will be doing everything possible to sell this house as quickly as I can, using my expertise.  I’ve spent thousands of dollars on training to do this business, legally and morally.  It would be futile for me to let this property go back to the bank just because I didn’t make the payments.”

Remember, when a seller raises an objection either in a lease option or subject to investing deal it means they are considering your offer.  Learn to love those objections!

When you are doing lease to own investing or rent to own investing a critical step when you find a deal is to do your due diligence.  That means you, as the investor, need to do some checking on the home seller to make sure there aren’t going to be problems.  What are some of the due diligence steps I take, or train my lease option students to take?

1. Order Pretitle Work – you need to look at the seller’s title to see if there are any clouds or other things that would prevent the seller from selling to you

2. Check IRS/State Tax liens – usually these will show up on the pretitle work.  But the home can’t be sold without paying off these liens

3. Check if the Mortgage is up to date – get a signed bank authorization from the seller to allow you to verify that their mortgage is current. It’s also a good idea to verify the amount of the mortgage payment, because if the payment is higher than your agreed upon rent the seller will have to cover the difference.

4. Check if the property taxes are paid – The seller won’t be able to sell the home without satisfying these debts too so you need to make sure they are being properly taken care of.

Not only is it a good idea to verify these things before you sign the deal, but it’s not a bad idea to check up on some of them during the deal as well.  You want to make sure that the seller is going to be able to sell you their home when it comes time.  When you are doing lease option investing, or rent to own investing due diligence is a step you don’t want to ignore.  For more on due diligence see my book, Investing in Real Estate with Lease Options and Subject to Deals.

As part of my lease option training I talk about how to handle seller objections.  Sellers who raise objections are great.  You know why?  It means they are seriously considering your offer.

Here is an example: “What kind of people are going to rent my home?”

Here is the answer I give them – “The best kind.”

Some sellers want to discriminate regarding the types of tenants that move in, but I have to tell them that by law I can’t discriminate (neither can you).  If discrimination issues are important to the seller, I tell them that I’m not the right person to buy their home. You need to take this approach too – no deal is worth violating the Fair Housing Act for.

But I do reassure the seller that I’m going to take care of their property and put someone qualified into their home.

Handling seller objections is an important part of your lease to own training, but they really aren’t anything to get worried about.  A seller who objects is a seller who is considering your offer.  Give them the best answer you can, mostly they are looking for reassurance.

Now is one of the best times I have ever seen for buying and selling homes as lease options or rent to owns.  Real estate market conditions are practically ideal for this type of real estate investing.  There is a glut of homes on the market forcing sellers to consider alternatives to selling their homes.  Many sellers think their only choice is to rent their home if they can’t find a buyer.

Since their minds have already gotten past the hurdle of having renters in their home they are the perfect candidate for selling on a lease option or rent to own.  They may not know about selling their home as a rent to own, but they need it.  This is the time when lease option investors should be going out and putting together lots of deals.  This is the time when real estate agents should be learning how to put together rent to own home sales to help their buyers and sellers.

Financing is harder to get now than it has been in quite some time.  This means that many would be buyers are getting left out because they can’t qualify for a mortgage right now.  There are lots of potential buyers out there like this right now.  Every time I post rent to own ads on Craigslist I get tons of responses.  It’s so funny when I hear people say there are no buyers right now.  What they mean is there aren’t many conventional buyers.  Lease option buyers are everywhere right now.   This is also the time when rent to own investors should be making use of free marketing to attract buyers.  Real estate agents should be doing the same thing.  In this kind of market if you have the buyers you are golden, even if they are lease option buyers.

As I said now is the time for rent to own or lease options.  This is one of the greatest times there has been for lease option investors to be putting together deals.  This is also a great time for real estate agents to learn how to do rent to own sales and really boost their business.