the lady up front.
Not a bad deal, huh? This is almost a $30,000 deal. The great thing about it is that the buyer has pretty decent credit. She could qualify for a loan on this property right now if she wanted to, but is going to wait about a year to get her score up from a previous divorce (her husband had a few late pays). Not only that, but if she doesn’t pay me, it’s no big deal. I’ll just do this whole thing all over again. I also negotiated with the seller that if for any reason I have a tenant that stops paying me that I don’t have to make payments until I get another tenant in the property.
This property was listed on the MLS for 6 months at $155K with no luck. The fact that I offered it on a lease option and had a pretty good marketing plan allowed me to get MORE than a realtor could get. (The house was in great overall condition, it was just a little bit outdated compared to the rest of the neighborhood.) The seller had moved to Texas and it was sitting empty for 4 of those six months, so he was obviously motivated.
Thanks for showing me the ropes on this one Wendy! I love it!
Shaun McCloskey, Missouri
Lease Purchase Case: Cleberto Has Multiple Exits
This situation shows that even though Cleberto had an exit in mind when he bought the property, market conditions in combination with the nature of buying on a lease opened up additional opportunities. Cleberto found a property listed with a realtor. It was in a nice area of Orlando where he holds most of his properties. He has a good understanding of the market and home prices there. Recognizing the below market price per square foot, he followed up on the property.
It was a 7-year old home in a nice gated community in Orlando. It had been listed for 2 months at $339,000. The following drew our attention:
The price per square foot was below the subdivision average.
MLS remarks: Motivated seller, $2000 bonus.
Driving by the property we noticed a recent "FOR RENT" sign. Now it was becoming really attractive. We figured the owners must need some cash flow soon, and we wrote our offer accordingly.
After some negotiation, the following was accepted:
1.A lease purchase at the $339,000 FULL price (to get their attention) for a 2 year term.
2.We would advance 3 months’ rent.
3.Advance $2000 of listing agent’s commission (towards purchase price)
Items a & b payable to owner on or before 60 days
4.$500 in escrow (towards 1st month rent)
5.Rent of $1895
6.We also requested that the $2000 bonus offered by owner be paid to listing agent (that way the agent would have $4000 of his commission paid soon)
We had previously experienced problems taking too long to rent or rent-to-own a property, and had decided for this one to have a fallback plan, in case it was taking too long to market.
Our Lease Option plan to find a buyer was as follows:
1.Rent $1,995 (to move it fast)
2.Option fee of $10,000
3.Price : $379,000 for a 12 month term or $389,000 for an 18 month term
This should give us a profit of more than $35,000 and $45,000 for the 12 and 18 month periods, respectively.
To our surprise, along came someone offering us $2,295 for a straight 12 month lease. We accepted it because it increased our monthly cash flow to $400/month, and there was an uptrend in our real estate market. We believed that trend would continue over the next couple of years.
As the end of the current 12 month lease with tenant approaches, the market has experienced the tremendous appreciation as we expected. At this point, these are some of the alternatives we are considering:
Sell this property for at least $390,000 and realize more than $40,000 in profit. Comparables are already there to support the price.
Put it back on the market as a Lease Option with a price increase of some $40,000, providing a future $70,000 or more in profit.
Buy it early from the owner and hold it longer. Since we would be closing earlier, we may request some breaks from them.
Cleberto, Florida
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CHAPTER 3
Finding Motivated Sellers for Lease Options
Motivated sellers are out there in every city, every town, every state. Finding them isn’t as difficult as it might seem – if you know which techniques work for attracting the attention of a seller who wants to work with you on a lease option.
I recommend looking for motivated sellers who have nicer homes that require little or no work. This way you spend less time working on the house and less time working to find a good buyer. Also, I like to focus around the median price range and above. In my area, in Michigan, the median price range is currently $120,000 to $170,000 – therefore I have focused on the $100,000 to $200,000 range (so a little below and a little above on each side). These nicer homes are much easier to resell on lease with options, and generally much more profitable than less expensive homes. It’s also a lot more fun working on nicer homes for more profit than dumpy homes in rough areas for less profit – especially when you can buy the nice ones for little or no money down. So how do you find these?
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 job transfer, bankruptcy, foreclosure, 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 markets – buyers and sellers – which also affect their motivations. For real estate investors it is crucial to buy homes from truly motivated sellers -- sellers who have an extra urgency, usually financial. You can’t get a good deal from a seller that is not motivated, because if they’re not motivated, they have no reason to negotiate or give on any part of a transaction.
There are different degrees of motivation 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, short sale, lost their job, divorced, foreclosure, etc or
2.Stressed but not 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 landlord, 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 usually fall into #2,
