Last month, I taught you about two ways to make money in real estate. I covered retailing and wholesaling. Those two methods generally involve buying houses that are in need of repairs at a deeply discounted price. This month, I will teach you about the other two ways to profit in real estate that is considered to be the Pretty House Business.
Lease-Options – Many people are not aware you do not have to buy a property to profit from it. In the case of lease-options, we lease it from the seller with an option to buy it at some predetermined price and term. Our objective then is to install another tenant-buyer in it, sublease it for a higher price and monthly payment, then collect a non-refundable option deposit from our buyer. In my case, the minimum is usually $10,000 except on a few very low end houses where I’ll accept about $5,000. This deposit never gets returned to the buyer if they do not close. It does, however, get applied to their down payment. But if they move out of the house and don’t close on it they lose the deposit. That’s made real clear up front, and since all of our transactions are closed with an attorney, it’s made clear at the lease-option closing as well.
I might point out, this same technique can be used to acquire one’s home to live in without actually buying it. About 25% of all the For Sale by Owners available in this country would consider a lease-purchase or other terms if asked. I know this because I have a whole floor of virtual assistants who call them daily for our students, and consequently we’re able to provide the reports and the math on the percentages based on the number of calls.
Of course this will require scripts, which I furnish to all of my students, but someone untrained in this industry may be shocked at how many people there are who will gladly take terms to get out of their house rather than sit around and wait for that almighty, qualified cash buyer that all builders and developers are fighting over.
Just so you know, 80% of the people looking to buy a house today cannot qualify at a bank. That leaves them all to us. Our whole industry in this side of the business revolves around people who can’t qualify right now but can, given a little time. So, the objective is very simple. Put them in the house, help them get their credit clean and fix whatever is broke so you can ultimately get them to the lender to get everybody cashed out.
Owner Financing – This is one of my favorite techniques because it simply means we buy the property with owner financing, the seller taking back monthly payments with a predetermined time to pay it off. This can be done on free and clear houses as well as houses that are leveraged, always with a personal guarantee over anyone pulling your credit report. About 1/3 of the people trying to sell their house will sell with owner financing if properly asked, much to the surprise of most folks. About 1/3 of those will sell with nothing down when properly asked. Of course, our scripts perfected over the years have taught us how to properly ask.
Let me give you an example of a property I just purchased with owner financing and then lease-optioned out to a tenant-buyer until they can get financing. It was a young couple that was leaving town in two weeks. They contacted us and upon visiting the home I learned they had a loan for $351,000 with a $1,925 a month principal, interest, taxes and insurance payment. They clearly said they’d sell the house for what they owe on it because a Realtor had it listed for the past six months and couldn’t sell it at $385,000, which was about its market value.
I agreed to buy it with owner financing, which means I had an attorney create a mortgage back to them for the exact amount they owed with the exact amount of principal and interest payment every month they were paying until the debt was paid off. They had no equity in the mortgage, and they will not receive any money, ever. However, their monthly payment is made every single month. So, what did they get out of it you ask?
They got debt relief and stress relief.
About a week after I met them we closed the purchase with my attorney and they knew they could leave knowing the house was no longer a problem. Yes, the loan will stay in their name until the loan is paid off, but there was no other way for them to get out of the house.
My exit strategy was very simple, but also very profitable. I advertised the property on a lease-option and located a tenant-buyer who had $50,000 to put down as a non-refundable option deposit, and I gave them two years to buy. Their credit was a little bit below the required score, but, they will get that credit up very quickly and be eligible to qualify.
In the meantime, they pay me $2,500 per month in rent, and I’m paying out $1,925 thus creating a $575 a month positive cash flow. In addition to that, they accepted all the responsibility for the repairs, as all my lease-option tenants do the day they move into the house. I don’t fix anything, it’s a condition of their purchase. I was in and out in 45 days with no risk or costly entanglements.
I sold the house for $395,000 when the Realtor couldn’t get $385,000. Why you ask? Because of one five letter word—Terms. When you make the house easy to buy, it becomes easy to sell. I have a five times better chance of selling the house on terms than anyone does selling it for cash. I look at terms as simply a delayed cash out. My buyers put up $50,000 so they have that credit coming toward the $395,000 price when they buy.
Everyone wins here. No one loses. A buyer gets a beautiful home they can call their own. The seller will get the debt paid off in time and the payments made until then. The bank will continue collecting payment until they’re cashed out. And, I made $50,000 on a house I got for free plus $575 a month.
They would have a hard time understanding this on Wall Street. It’s called leverage to the max. I had no risk, no money invested, needed no credit, no contractors, no Realtors, no short sales, no costly entanglements. I got in, I got out and I got paid as much on one simple little real estate transaction as many people make working an entire year.
The first two techniques I discussed, retailing and wholesaling, I call the Ugly House side of the business. Ugly houses that need to be rehabbed. The second two, lease-options and owner financing, I call the Pretty House side of the business. Beautiful homes in beautiful neighborhoods with absolutely no upper price range too high, once you learn to reverse the risk and not take on debt, guarantee debt or risk a lot of money and hope everything is going to work out okay. In my world today, we totally reverse the risk and make a lot of money by using our brains, not our wallet or our credit.
By the way, everything I just described can be done inside your IRA and never pay taxes. That’s right! I have students getting very wealthy, tax free, inside their Roth IRA, so when they retire they won’t be able to count their money, they’ll have to weigh it.
At this point, I’m reasonably sure you are loaded with questions that I won’t be able to answer here. If you would like to explore this real estate strategy a little more and find out how you can make this money for yourself, you can contact me at RonsWholesalingCourse.com and try out my program for a measly dollar.