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 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:
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.

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

• Higher Purchase Price – Rent-to-own sales typically command a price premium over traditional saes.  The buyer is paying extra for the flexibility he recieves by not having to do an outright purchase immediately
• 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.
• Cash Flow – If your monthly payments are less than the monthly rent, the difference goes into your pocket.
• 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.  Eitehr way you win.  If you were to just rent the home, then 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.

Rent-to-Own

Excerpt from Rent-To-Sell: Your Hands on Guide to SELL Your Home When Buyers are Scarce.

Scenario 1 – No Equity

If you need to sell your home and you have no equity, how do you do it?  In other words, you owe as much on your home as it is currently worth.  How can you pay the real estate agent a commission and also other closing costs?  Sometimes we don’t always have the option of waiting until we can afford to sell, even in good markets.

You can try the “For Sale by Owner” route, but even in good markets that tends to have only modest success and, let’s face it, is fraught with pitfalls.  Selling on a rent-to-own basis can allow you to get a higher purchase price than a conventional sale.  This can help give you some room to cover the cost of selling.  Plus, having a tenant-buyer in place for a year or two paying your mortgage can help pay down the principal giving you some equtiy as well.

Excerpt from Rent-to-Sell: You Hands-on Guide to SELL Your Home When Buyers are Scarce.

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.

As promised, the remainder of the "Script for Calling a Realtor about Rent-to-Own and Lease Options".

Use this follow-up sentence on any of the

statements below where it applies.  You always

want to dig to see what else they have that might

work for you.

Sally may also respond to the rent-to-own question like this:

“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).

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

If this is the response, encourage the agent to talk with her clients.  Remind her that you are looking for a rent-to-own home in that area and her commission would be paid in full when you buy the home.

“What are you talking about?”

Not every agent knows what rent-to-own is so you need to give them a brief explanation.  Be prepared to tell them something like, “Well I would rent the home and buy it later.” Keep it simple.

“Why do you need a rent-to-own?”

Most likely it’s because you can’t get a mortgage right now or because you don’t want to get a mortgage right now.  You 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 and ask her if this home or another listing of heres might be a candidate for rent-to-own.  Keep your answer brief, but do be honest.  If you had a bankruptcy or a foreclosure, it will be important that they know that.  Don’t spring that on them later.  If you had perfect credit, you probably wouldn’t need a rent-to-own in the first place.

Excerpt taken from Rent-To-Buy: Your Hands-on Guide to BUY Your Home When Mortgage Lending is Tight, Chapter 5, Pages 68-71. 

Once you have the agent on the phone, here is what I usually say:

“Hi __________ (the agent’s name), my name is

___________ (your name) and I was calling about

the home you have listed at ___________ (the street 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 noticed it has been listed for a while”…

(Assuming it has been listed for more than four

months).

Wait and see what they say without saying anything else.  They might say, “Yes…” and I would go on to the next question, or they might start to talk more – which is what I am hoping they will do.  I want them to start to talk and tell me more.  Maybe they will tell me why it has been listed a long time or what the status is.  You would be amazed at what others will tell you when you zip it and listen.  My next question is:

“Well, I wondered if the sellers would be open to something creative.”

Again, I leave it at that and say nothing more.  Sometimes they

will volunteer a long explanation of what the seller will or will

not do or sometimes they say, “Like what?”

“Well, something like a rent-to-own or a <span style="text-decoration: underline lease option.  I am

a rent-to-own buyer looking for a home in this area.  Would

your seller be open to something like that?”

Don’t say anything until they respond. You’ll get one of five responses.

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

response, the next question to ask is, “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 with Sally agent to look at the home.  Note:  Sally will try to become your Realtor.  This might not be bad if Sally is creative and willing to read this book along with you, but otherwise don’t sign anything to commit you to Sally except for this home.  If Sally is really good, you might want her to be your agent.  If the terms are not within your scope, then ask the following:

“Do you have any other listings where  your

seller might have said to you, ‘Sally (remember

to use their real name J), if you don’t sell my

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

you think of any of your listings like this that

might work for me?”

To be continued until tomorrow!  Join me tomorrow as I go over possible Realtor answers.

Excerpt taken from Rent-To-Buy: Your Hands-on Guide to BUY Your Home When Mortgage Lending is Tight, Chapter 5, Pages 68-71.