How Does Lease Option To Buy Work?

If you’ve purchased a property and you’re looking to rent it out, you may want to consider doing a lease option. But how does a lease option to buy work? And is it right for you?

There are several simple steps to set up a lease option and start your journey to growing your investment portfolio. 

What is a Lease Option? 

A lease option is a way to keep ownership in an investment home without spending money out-of-pocket each month. The property is rented to a tenant, who has interest in purchasing the property, but can’t because of poor credit or no down payment. 

By paying a fee for the first right to buy the tenant can purchase the property during their lease term if you sell. However, if they don’t end up buying the home you keep the fee, and all of the rent paid. 

Steps to Set up a Lease Option

A lease option is something that credit challenged buyers would be interested in. They want to be homeowners, but can’t get approved through traditional methods. 

There are several steps to take to set up a lease option. 

1. Determine the rent and payment options 

Before you look for a tenant you need to decide what rent you will charge and the amount of the first right to purchase fee that will be paid at closing. 

Because a lease option is for tenants who don’t have an option to buy a house through a traditional method, you can set the rent above the fair market rent, sometimes by as much as 20%. 

You can also set a rent credit that will be deducted from the sales price if they do decide to purchase within the set timeframe. For example, if the tenant pays $1,000 per month they won’t get a rent credit. If they choose to pay an increased rent of $1,200 per month you can offer a $300 rent credit. 

If the tenant does not purchase the home, you keep the right to purchase fee and all the rent paid. 

2. Prepare and market the house

After you decide on a rent amount you can prepare to market the house. 

Staging

You don’t need to spend a lot of money or do extensive work on the home. Preparing the home can be as simple as a fresh coat of paint and some welcoming touches like bathroom towels and a bowl of fruit in the kitchen.

Signage

When the house is ready, you will put a sign in the front yard and a visible flyer in the window. You can also put up bandit signs in the neighborhood for drive by interest. The marketing should be clear that someone can start the process of owning a home with bad credit.

Advertising

You do not need to spend a lot on advertising. You can market the rental for free online with craigslist and other online marketplaces. It is also very effective to have a phone number to advertise where there is a pre-recorded message explaining the process of the lease option. 

If you have extra funds, you can start a direct mail campaign. 

3. Find a Buyer

When you have interest you can pre-qualify the tenant with a set list of questions about their maximum monthly payment and how soon they need to move. If they see the house and are interested, screen the buyer to make sure they meet your qualifications. This includes: 

• Credit report 
• Recent bank statements 
• Pay stubs 
• How much they have for an earnest deposit

If the buyer qualifies, you can move on to closing. 

4. Closing

It is important to set up the closing as soon as possible. There are a few things to keep in mind: 

• Do a final walk through before closing to note any damages
• Have an attorney at the closing
• Set up automatic payments to collect the monthly rent

Last Week’s News –

3 Components of Choosing an Exit Strategy for Your Real Estate Investment

You have found the perfect home for your next real estate investment. The pieces are falling into place: the motivated seller, a quality property, and numbers that look promising to make a profit. Now it’s time to consider what your exit strategy for your real estate investment will be.

But, what will you do with your investment after you buy it? That is where the money is made! I use three components, or what I call the decision triangle, to determine an exit strategy for my investments.

Decision Triangle: How to Choose Your Exit Strategy

Your Personal Finances

The first aspect of the decision triangle is to consider your own personal finances. Do you need to cash out of your real estate investment deal quickly, or can you wait for a larger profit in the future?

If you need cash right away, the best is probably to sell outright. Selling right away means you will get cash quickly. However, I only suggest selling outright if profit is over 10% of the home value. Also, selling outright has costs like commissions and closing costs. 

Selling on terms, like subject-to the existing loan taught in the free Unlimited Funding course, means selling will cost less. You will have the chance for more profit in the future than selling outright.

The Market Conditions

The market conditions also play a part in deciding an exit strategy for a real estate investment. 

For instance, if the market is going down quickly, it might make sense to sell outright. If the market crashes, the potential for profit in the future dwindles. 

However, if the market is neutral or appreciating and you don’t need cash immediately, selling on terms, like a wrap or subject to the existing loan, gives the potential for more profit in the long run. 

The Deal Structure

How you purchase the investment property is probably the most important part of the decision triangle. It has three considerations:

Purchase Price

The discount you negotiate when purchasing from a motivated seller can determine what exit strategy to use. 

If you want to sell outright as an exit strategy, the purchase price should be at 75% or less of the Fair Market Value (FMV). The FMV is what the home is worth in the current market conditions and based on comparable sold homes. 

Selling on terms you can still make a large profit with a smaller negotiated discount. For this type of exit strategy, I suggest a FMV or 80% or less. Although, a bigger discount means a happier bank account! 

Type of Financing and Interest Rate on Existing Loan 

When selling outright the type of financing and interest rate on the seller’s loan doesn’t matter. You will sell so quickly, their financing won’t affect your deal. 

If you sell on terms where you will keep the current loan in place, this information is very important. The best-case scenario is to find a motivated seller with an existing mortgage with an interest rate of 7% or less. You should also avoid adjustable rate and balloon mortgages.

Source of Funds Used for Purchase 

Like with the financing and interest rates, if your exit strategy is to sell the investment property outright, the source of funds isn’t important because you won’t own the home for long. 

There is a right way and a wrong way to buy real estate. The most beneficial way to purchase an investment property on terms with zero money down. However, if you need cash try to source long-term, low-cost money from a private investor. I always teach that it is best not to use your own money, unless absolutely necessary. 

Using these components can help you determine a profitable exit strategy for your next real estate investment, but there is so much more to learn!

How to Use a Real Estate Cold Call Script to Close Deals

Nervousness when making a real estate cold call is normal, even for experienced investors. Having a script can help ease some of your tension and give you direction to lead you through the call. 

You might think of a script as something you need to read line by line, but that isn’t what this type of script is. It is just used to help you gain confidence and make sure you gather all the information you need to determine if there is a potential deal.

Benefits of a Real Estate Cold Call Script

A script is something that you can develop and update as your business grows and changes. Making improvements to it as you close more deals will help you grow your business and confidence in your cold calling skills. 

There are many benefits of using a script. Let’s discuss a few of the most important.

Decrease stress and anxiety

When you have a real estate cold call script to refer to, it almost feels like someone is there holding your hand through the call. Knowing you have something to fall back on can decrease the fear that sometimes comes along with making cold calls.

Make a Good Impression

That you aren’t nervous will come across to the person on the other end of the call. Also, having answers to common objections will show the seller that you are confident in your ability to help them out of a distressing real estate situation.

Gathering Information

When you are on a call, it’s easy to forget the questions you need to ask. Having a list of the relevant information you need ensures you won’t hang up the call and realize you forgot something. I provide my students with a phone form that covers specific information like the property basics, how much the seller owes on their loan, and if the seller is in default, among other details.

Helps You Handle Objections

In your script you can have a quick outline of common objections and how to handle them. You can add to this list as you encounter more objections and learn more about the business. Having the information written down will help avoid sounding uncomfortable if a seller asks tough questions.

The Basics of a Script

While scripts can vary based on your own style and the investment method you are planning to use, there are some items that you should always include.

1. A natural introduction is essential. The last thing you want to do is to appear as a spam cold caller. Having a generic interest in the property can help get the seller’s guard down. For example, instead of leading with your business you can say, “Is the property at 1234 Main Street still available? What can you tell me about it?” 
2. A transition into telling the seller about your business. You might ask them if they would like to avoid foreclosure or default, or ask them if you can get a few more details about their home. 
3. A list of specifics to gather about the property will help guide you through the call. 
4. A list of objections you might encounter and bullet points of how to combat them. 
5. Closing strategies for different scenarios. For example, are they ready to schedule an appointment? Or, if they aren’t interested, asking if they would be okay with a follow-up call in two weeks.

While using your script, the primary goal is to get them to talk. Listening is key, and the script is just a guideline, not something you need to say word for word. 

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