Okay, this email is a follow-up… it’s Part 2, if you will. Last time, I talked about how important it is to always set up your transactions so everyone involved wins.
Creating win-win-wins on every deal for every participant: you, seller, buyer, realtor, landlord. Everyone.
In my last email, I talked about how the seller can be a big winner in a lease option deal.
Now, I’m talking about creating wins for buyers: investor buyers in your traditional selling deals and tenant-buyers in lease option deals.
Investor buyers first…
It’s important for you to always, always, ALWAYS tell the truth. If you know something’s wrong with the property, don’t try to hide it. Tell them. It may kill the sale, but always give full disclosure of everything you know. That’s just common sense.
And, always underpromise and overdeliver. What does that mean?
Well, if the rents are $700-$800 a month, you should tell them it’s $700 a month. If the repairs are $20,000-$30,000, you should say $30,000. If the comps are $80,000-$90,000, say $80,000.
Why? Because a $50 to $100 swing in the rents can make a huge difference on the cap rates for the ROI calculations.
There’s no faster way to lose credibility than you advertising a house for $45k and saying that it’s worth $80k. Everybody who knows anything about deals in that market is going to think you’re nutso. And, the next deal you send them may actually be a good deal, but they’re not going to pay you much attention. That’s important to remember.
Let’s talk about why a tenant-buyer would want to do a lease option.
- It gives them time to fix their credit.
- They get to lock in a good price on a home.
When I’m advertising a lease option property, I’m not marking it up 15% or 20% higher than current market value. I may be marking it up 5% higher than current market value if it’s a home in San Diego; maybe 10% above current market value for 2 years. But you want them to have some incentive to want to buy the house when it’s time to get a mortgage.
You’ve got to be careful with overblowing your option price of the home. So, make sure it’s a good, fair price… a price that they’re going to want to buy it for when it comes time to buy.
Remember: You never want to put a tenant-buyer in a house who does not have a realistic chance of getting a mortgage in 1 or 2 years.
Don’t make this mistake: “Well, Joe, if they don’t buy the house, I just get another tenant-buyer in, which means another down payment in my wallet, so…” I’m telling you, that’s bad for business. A disaster waiting to happen. Don’t do it.
If someone has $300,000 of unpaid child support or unpaid taxes, there’s no way they’re going to pay that off in 12 or 24 months. So why would you give them a lease option with a deadline to buy a house that’s just not going to happen?
Don’t ever do that. Always prescreen tenant-buyers!
Make sure they can afford the home, and that it’s not going to be their last penny every month. It doesn’t matter if you’re getting $5k down on a house or $20k… DON’T do a lease option with them if you know they can’t get a mortgage in 2 years or less.
It’s just not right.
Here’s another important piece with tenant-buyers: Make sure they get a professional inspection done on the property because you don’t want them moving into the house and then later realizing there’s termites or a foundation problem or sewer issues.
If they don’t want to get an inspection, make them sign a document that becomes part of the contract that says, “I, the tenant-buyer, have waived my right to get a professional inspection.”
So, lease options really are great for qualified tenant buyers.Think about it… they live in what’s going to be their house for a year or two, boost their credit 20-30 points, and then qualify for a mortgage and buy that house. So great!
Lease option Pro Tip: Make sure you use a 3rd-party escrow service to collect the initial option deposit and also the rent.
See, if you’re assigning the lease option, you’re stepping out of the deal. So, you want to make sure you have a 3rd party collecting the rent, like an escrow company collects the rent, pays the mortgage, and then sends any difference to you or to the seller.
You want to avoid being directly involved in the payment situation. Unfortunately, I’ve seen this happen a lot (not in my own deals), where the tenant-buyer pays the rent to the seller and the seller’s not paying the mortgage… and all of a sudden the house gets foreclosed on and this tenant-buyer who’s put $5 grand down and pays the rent on time gets screwed. Not okay.
So, when you’re doing lease option deals, make sure you’re setting tenant-buyers up to win… not setting them up to fail. That’s so important.
Well, we’ve covered how the seller wins in the previous email… and how buyers win in this email. So that means next up is how you — Mr./Mrs. Investor win.
See you soon for the third win, folks.