Baltimore Real Estate Investors Association
THE R.E.I.A. NEWS
SEPTEMBER / OCTOBER 2009
Making Hard Cash in a Soft Market using Lease Options
President’s Message By Bill Fell
“Subject-to Purchases,” Let’s Review It Again
again.
by Wendy Patton
In May/June 09 Contrarian Article for our newsletter, Bob Feol wrote extensively about “Subject-to Purchasing.” Also, with Wendy Patton speaking this month, I felt it appropriate to touch once again on this cutting-edge topic that has been used for decades and is back in vogue once
Come see Wendy Patton, Real Estate Investor, National Speaker and #1 Best Selling Author at the Baltimore REIA General Meeting on Thursday, Sept. 17, 2009 at 6:30PM and All-Day Saturday workshop, Sept. 19, 9am - 3pm Powerful Strategies for Getting More when You Sell, and Paying Less when You Buy!
I remember back in 1968 when Mr. Watson walked into my office and said, “Hey Bill, would you like to buy my house?” I said, “Mr. Watson, I’m broke.” “I’m just starting my business and don’t have that kind of money.” He said, “Why not pay me off monthly?” “ Mmmmm, sounds interesting,” I said. “How does that work?”
On Thursday evening, September 17 at 6:30 PM and All-Day Saturday, Sept. 19, 9AM – 3PM, learn the best techniques for real estate investing in this crazy economy. Understand how to structure Win-Win-Win deals in this Buyer’s Market with Lease Options. In a weak market, there are many motivated sellers and your creative strategies are going to set you apart.
Well, that was my first exposure to buying houses without money or credit and to a whole new life. Within the next 90 days, I bought four more houses for $l00. down payment each and didn’t use any of my credit. But nobody told me about the other side of the coin, which was servicing debt and being a landlord. I hated it. I needed a way to obtain and manage properties that didn’t take money away from my family. Finally, I came upon an investment technique that allowed me to do just that: Purchasing homes “Subject-to” the existing financing.
Who should attend? Real estate investors, both novice and seasoned. Learn how to invest in this current market. Realtors—both buyer and seller agents. Introduce your frustrated clients to a viable alternative to a traditional sale.
What is a subject-to purchase? Well, the typical home owner has both a deed to the property and a mortgage. In a subject-to transaction, the home owner conveys the property title to me “Subject-to” the existing mortgage. In other words, the seller is still liable for the mortgage, but I now have the deed (ownership) to the property. In return, I agree to make the mortghage payments for the seller. Depending on the circumstance, I may (or may not) renovate the property. I then sell or lease it at a substantial profit.
Wendy has been involved in over 650 lease option deals in many states and has been through the market ups and downs. Learn from her mistakes and successes. Topics to be covered: • How and where to find motivated sellers— signage, scripts, and offers. • Evaluate profitability for a truly Win-Win-Win deal. • How to structure a Lease Option to be very lucrative for everyone.
Although there are many variations to making a profit buying properties “Subject-to,” it boils down to five easy steps: 1. Finding the property
• The benefits of Working with Realtors 1
Bill Fell continued
2. 3. 4. 5.
Wendy Patton continued
Working with the seller Finding the money Renovating the property Selling and collecting your profit
• Steps to Buying and Selling on Lease Options from beginning to the final check. • How to get Realtors to put you on their “speed dial” list as a favorite person to send deals to.
I use a formula that enables me or anyone to make a very good profit on every subject-to purchase. What’s even better is that I don’t need any of my own money or credit.
• Tested & proven newspaper & Internet ads— word for word—that attract sellers like a scrap yard magnet.
No Money and No Credit Needed:
• When Realtors and other investors throw up their hands at obstacles in a deal, you’ll be clapping your hands at the money you know you can make on that deal.
“It takes money to make money.” How many times have you heard that old saying? For some businesses it’s really true. Just try running a car dealership without cars!
• Five reasons why homebuyers will gladly pay more than the retail value of a home...IF you know Wendy’s secrets.
Luckily, though, this isn’t retail sales. With subjectto purchases, all you need up front is enough money to market your business. While marketing can get expensive, it doesn’t need to. You can have signs made for just a few bucks each. The average word-processing software (something you probably already have) can generate great-looking postcards. It doesn’t cost a thing to answer “For Sale by Owner” ads in the newspaper.
• Why your ethics and reputation are everything in this business, and how Wendy’s techniques are truly a “win win” for you and your customers. Wendy Patton is widely recognized as one of the most inspiring speakers on “Little or No Money Down” real estate investing. Her real estate savvy, great depth of experience and viable knowledge has helped her in orchestrating the most complete and easy to follow “Lease Option & Subject To” program in the country. With over 24 successful years in general real estate and hundreds of transactions using Lease Options, she is the country’s leading expert on lease options and working with Realtors to acquire lease option deals. Wendy loves to teach others and assist them to achieve the same level of success that she has personally experienced. Wendy is a published author and well known public speaker. Her first book is titled Investing in Real Estate with Lease Options and Subject To Deals and has received rave reviews on Amazon.com and other real estate investor websites. Her second book was immediately a #1 Best Seller on Amazon.com. How to Make Hard Cash in a Soft Real Estate Market, cowritten with her business partner, Justin Ryan has since been consistently in the top 10 on Amazon.com for Real Estate books. She also recently appeared on HGTV’s, My House IS Worth What? Her newest book, Rent To Sell and, soon to be released, Rent To Buy are just hitting the bookshelves.
So if I’m not using my own money, how do I make the payments on the mortgage and make repairs to the home? The answer: I find private investors. In exchange for a nice interest rate, these investors give me enough money to make the payments, renovate the property, and even give the seller some cash. You can find the money too without using your own credit! Here’s an Example: A seller contacted me and said that her home was in trouble. She couldn’t make payments and wanted out. The home is worth $235,000 after we repair it. She owes $146,000 and is $12,000 behind on her mortgage plus she needs 5,000 to move. A total of $163,000. If you do the math, you can see that the property still had over $70,000 worth of equity left in it. By taking the property over subject-to existing loan balance, we will not have to bring $163,000 to the table. All we have to do is borrow enough money to reinstate the loan, which was $12,000 plus the money that we have to give the seller. By using a private lender, I will be able to borrow the necessary funds to reinstate the loan, pay the seller what she needs, renovate the property, and put enough money in our account to hold and market the property for about four months while we repair it and sell it. We expect to profit over $40,000 on this property alone.
Don’t Miss this Special Presentation on Thursday, Sept. 17, 2009 at 6:30PM, and the follow-up Workshop on Saturday, Sept. 19 at 9:00AM at the Holiday Inn Towson at Cromwell Bridge Road.
Now, that’s just the basics of what I’m doing with this house. There’s a lot more to it, of course. There is no magic to it. Just faith, hard work, and a workable system that can be duplicated by anyone over and over. Just look at the results: 1. A great income 2. More free time 3. An interesting livelihood 4. Almost no risk 5. The satisfaction of helping others out of a jam
Go to www.BaltimoreREIA.com for further details 2
Let’s imagine a family that’s gotten into financial trouble. The parents are four months behind on the mortgage. If something doesn’t happen and fast, the bank is going to foreclose. There are only two “somethings” that can prevent foreclosure: bankruptcy or a quick sale. If you were head of this household, which would you prefer? By approaching them in a non-judgmental way, and offering them immediate relief, you provide the family with some semblance of dignity. At the same time you are removing a big financial obstacle.
A Solution For Lenders: The great thing about “Subject-to purchasing” is that everybody comes out ahead. Take lenders, for example: I take properties from owners who NEED to sell their homes, and oftentimes, the homes are in danger of foreclosure. Most lenders would much rather get paid on time than foreclose. Foreclosure is costly, and while the bank can attempt to collect legal fees and damages, there’s always the risk that the mortgage balance and the fees will total more than the house is worth, especially if the house is in poor condition. Also, foreclosure means a lot of extra work for the bank’s employees. There is a lot of incentive for the bank to work with you.
A Windfall For Private Investors and For You: As of this writing, the prime interest rate is around 4%. The stock market is in the dumps. So imagine the reaction I get when I offer my investor 8% to 10% simple interest if they’ll provide money for a real estate transaction! It’s a great way for individuals, churches and nonprofit corporations to increase their capital. Also, because I use thorough pre-screening techniques to find the properties, my investors face little risk. The investor has a mortgage on the property and is backed up with an insurance policy on my life. There is absolutely no risk.
What about the due-on-sale clause? Will the bank turn around and demand the entire balance of the loan? Not if the transaction is done right. By using the right documents and forms, the due-on-sale clause just won’t be an issue. Taking Advantage of Home Owners in Crisis? Just the Opposite!: A friend once told me that he won’t do “Subject-to purchases” because he doesn’t believe in making money from someone else’s misfortune. If that’s what “Subjectto purchases” were all about, I wouldn’t do them either. After all, I’ve got to look myself in the mirror every day, just like you do.
Meanwhile, my system has allowed me to build up a substantial nest egg for my retirement days ahead, and all with no money and no credit! “Subject-to purchases” can bring you generous paydays with almost no risk. There’s no magic involved..... just winning solutions for everyone. Till next time........ Bill
Luckily, though, my friend is wrong. While it’s true that the best deals involve motivated sellers, you are not the seller’s problem. You’re his solution.
Baltimore REIA’s “Meal N’ Deal” Educational Meetings!
Come and learn about an exciting topic in real estate investing and enjoy a fantastic buffet while there! At 6:30 p.m. on September 8th, the topic is: “Rehabbing for Profit, It’s just Simple Arithmetic” with Bill Fell At 6:30 p.m. on October 13th: Baltimore REIA’s own Larry Blizzard Members: $19.00 • Non Members: $29.00 • Price includes Meal & Meeting. Seating is Limited!
Pre-pay & Register Online at www.BaltimoreREIA.com “Meal N’ Deal” Meetings are held at “Schooner’s Restaurant” 7703 Belair Road, just inside of Baltimore Beltway Exit 32-A, Schooner’s will be on your left.
Don't Miss These Exciting Upcoming Events: Wed, Sept. 2
SWING Meeting - Joe DiMaggio, an Evening with Joe DiMaggio
Tues, Sept. 8
Meal N’ Deal with Bill Fell - Rehabbing for Profit
Thurs, Sept. 10
Auto Pilot System support group at Schooner’s
Thurs, Sept. 17
General Membership Meeting - Guest Speaker, Wendy Patton
Sat., Sept. 19
All Day Seminar with Wendy Patton (includes lunch), sign-up online
Wed, Oct. 7
SWING Meeting - 3rd Anniversary Meeting! Success & Challenge Discussion 3
Money Counts Have you ever said or heard the deal is only as good as the paper it’s written on? That’s because the contract is the final word in a real estate transaction. If something is a part of a deal, it must be disclosed in the contract. So how well do you know the contract you or your realtor is using? Are you using it to the fullest extent to protect your interests or create the best deal? One of the biggest misconceptions about the Maryland Association of Realtors (MAR) Contract is that it is non-assignable. Paragraph 51 clearly states it is assignable with the written consent of both buyer and seller. It also states that the original parties are still obligated to the original agreement until settlement. So feel free to use the MAR contract for assignments, but understand you will be obligated to follow through with the agreement if your assignee backs out. Transfer and Recordation Taxes are fully negotiable. You may at any time negotiate a contract where the buyer or seller is totally responsible for paying all transfer and recordation taxes on a purchase. Regularly you will see this in some bank owned contracts. The bank requires the buyer to pay all of the taxes. This option isn’t only for banks. The MAR contract states unless otherwise negotiated the transfer and recordation taxes will be equally split between buyer and seller and in Maryland it is common practice to split them equally, but it is not a requirement. A motivated seller may agree to pay them all to get a deal done or may take less on purchase price if the buyer offers to pay them all. Don’t forget this tool in negotiating strong contracts in the future. Cash offer may not mean a cash offer. The Baltimore City MAR contract addresses financing in Paragraph 9. No finance contingency generally implies a cash offer and a good realtor will require proof of funds before accepting an offer with no financing contingency. The reason I mention this is that although an offer may be submitted with no financing contingency, nothing precludes you from obtaining financing once the offer has been accepted. Just remember that the seller does not have to extend the contract so that your financing can be finalized. You are on the hook for closing at the specified time with the funds for settlement unless the seller agrees otherwise. A quick note to sellers, a buyer may seek alternate financing. For example, the offer is submitted as a conventional loan with specific parameters ie, loan to value, interest rate and fees which the seller accepts and ratifies. The buyer decides to pursue FHA financing to keep some cash on hand. The buyer may close with FHA financing, but unless the financing was renegotiated (FHA addendum signed by seller), the seller is not required to be responsible for FHA repairs or fees and the buyer may not withdraw from the contract based upon the new financing requirements. A real estate transaction is only as good as the paper it is written on! Make sure you know your rights and responsibilities per the written contract. Additionally, only a liscensed Realtor may use the MAR contract. If you are not using a realtor you should have your offers and contract by an attorney. Gail Foster 443-271-1864 gail@baltimorereia.com
Savvy Womens Investor Networking Group If you’ve missed the last few meetings of SWING , you’ve missed a lot!! So mark your calendars and get ready for October. Charles Blair has wowed the members of Baltimore REIA with his vast knowledge of the internet, websites and tools that can turn a ho hum business into a money making machine. Imagine 2 uninterrupted hours of questions and answers that can transform your business. Don’t miss this evening with Charles Blair, October 7th at 6:30 pm at the Jade Garden Buffet, located on the corner of Loch Raven and Taylor Ave. November with SWING brings the start of our third year of meetings. We will be meeting November 4th to share our successes and challenges in the past year. We will also be discussing the coming year’s meetings. This meeting will be your opportunity to share some ideas for the direction of SWING. So come full of ideas and enthusiasm as we start our new year. If you’d like more information please feel free to contact Gail Foster at gail@baltimorereia.com 4
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Everyone is welcome at Baltimore REIA! The Baltimore Real Estate Investors Association, Inc. is a non-profit organization of friendly people who meet monthly to share ideas and learn about the various forms of real estate investing. The association is geared to accommodate the beginner as well as the advanced investor. Memberships are $179.00 held on the third Thursday of each month, are FREE. Guests are welcome at $20.00 per meeting. Meetings per year and Spousal Memberships Dan Meyler Dan are Meyler at 7:00 P.M. (registration at 6:30 P.M.) at the Holiday Inn Towson on Cromwell Bridge Road. Baltimore Beltway exit 29. For more information call by guest speakers as practicing or accounting taxBelair its officers to dispense legal, not the intent of the association or 410-256-6699 It isRoad 410-569-0345. 9652 Belair 9652 Road advice. Such advice is given410-256-6699 should be sought from advice or other expert accounting legal, tax or appropriate individual Since each situation professions. of thoseMaryland members Baltimore, 21236 Fax:varies, 410-256-6741 Baltimore, Maryland 21236 Fax:assistance 410-256-6741 material is intended to be accurate, neither the Baltimore understands the specific situation. Consequently, although published a competent professional E-mail: who dan@accentprinters.com E-mail: dan@accentprinters.com Real Estate Investors Association, Inc. nor any other party will assume liability for loss or damage as a result of reliance on this material. Opinions expressed by speakers and in signed articles of this publication are not necessarily those of the Baltimore Real Estate Investors Association, Inc. or its officers. The Baltimore Real Estate Investors Association, Inc. is a member of the National Real Estate Investors Association. 6
The Contrarian Corner Identifying the Risk of Ruin Analyzing Risk and Expected Value of Real Estate Investment Profitability Before Committing To Purchasing an Asset Copyright© 2009, Robert C. Feol In the statistical world, or more specifically the world of probability, the term ‘risk of ruin’ is usually defined in terms as the threshold chance that someone’s risk of loss exists(relative to their current financial/ investing pursuit), in as much that if they were to suffer large and prolonged losses over a period of time, their capital base would be eroded to the point where it would be highly unlikely that they could continue their financial endeavors with any chance of success. This article is not a primer in statistical probability, but for the sake of this article it is helpful to understand what this term means a bit more to see its application for today’s modern real estate investor. Investopedia.com defines risk of ruin in the following way: What Does Risk Of Ruin Mean? The probability of an individual losing sufficient trading or gambling money (known as capital base) to the point at which continuing on is no longer considered an option to recover losses. Risk of ruin is calculated by taking into account the probability of winning (or making money on a trade), the probability of incurring losses, and the portion of an individual’s capital base that is in play or at risk. Also known as the “probability of ruin”. Investopedia Explains Risk Of Ruin as follows: Risk of ruin need not result in bankruptcy (although it often does), but rather the point at which continuing on would be unwise. It signifies a risk more relevant in trading and gambling, where there is a high probability of losing an entire bet or trade. Now that we understand what the term actually means, let’s get to the interesting part. Risk of ruin is most often used when discussing events which relate most closely to probability and earning money based on some element of chance, something we also know affectionately as gambling. Gambling carries with it the connotation of seedy, smoke filled casinos and other assorted personalities, so why would we be interested in this term if we are talking about real estate investing? Real Estate investing isn’t gambling…is it? Enter Poker as a Metaphor for Real Estate When chips, cards, and money get involved in some type of game, people immediately assume that gambling is what is going on. However, gambling usually refers to games of ‘chance’; that is, the idea that the outcome of such games are independent event horizons that have no effect on each other. For most people, since Poker involves cards and there is some element of randomness(known as chance or variance), there can be no skill involved and Poker becomes another form of gambling. However, since Poker offers a unique element known as ‘folding’, where a player can choose to not become involved in a hand or wager money based on the cards they received, in reality Poker becomes more of a strategy game than its casino cousins like Craps and Roulette, which are true forms of gambling. In Roulette, you lay down your money and when the wheel spins you win or lose – you can’t say ‘well, my number didn’t come up so I am going to take my bet back so I can use it and potentially win on the next spin.’ In Poker, you choose the hands selectively that you think will be profitable for you(known as having a positive expected value) and in doing so you essentially evaluate the likelihood of winning premium hands(such as tow Aces or two Kings) are strong hands and really do set you up for success, while as other weak hands may not have a positive expectation, and may lead to a potentially unprofitable result. Good Poker players pick their spots carefully, and recognize that Poker becomes gambling only if you choose to put your money into the middle of the table when the outcome/profitability is governed by the cards alone. The best players in Poker try to mitigate any chance of a random outcome through a combination of skill and critical information gathering. And good Real Estate investors do the same. Now, knowing this, we need to discuss the idea of risk of ruin as it applies to today’s modern investor, specifically, the new investor. New investors frequently look at real estate investing as a fertile ground where bountiful riches await, and they are eager to ‘get their money in’ as quickly as possible, often without knowing the probability or profitability of the potential outcome. Ironically, it is in this way that real estate investing can become all too much like gambling. How Risk of Ruin Relates To Real Estate Investing Professional Gamblers who want to avoid going broke exercise something called bankroll management. Bankroll management is simple – determine the amount of money you have to gamble with, identify that number, set those funds 7
aside and work within those limits to increase your bankroll over time. Natural downswings do in fact occur, but gambling within the specified bankroll and setting specific loss limits for sessions(and being disciplined to stop and take a break from a losing session), theoretically, prevents a gambler from going broke. Now, bankroll management from a practical example works like this – suppose a Poker player has $1000 as their bankroll. If he goes to the Poker table and plays in a game where the minimum buy in is $1000, he is way over their bankroll and his risk of ruin is extremely high. One losing session and he cannot hope to become profitable because he has no capital with which to invest in future sessions. By not exercising good bankroll management, our player has doomed himself to bankruptcy, because he simply choose to not exercise a practical approach to the volatility that exists in endeavors that have some element of a random outcome. Had our player played in a game that was within his limits(say, a $60 buy in for example) he would still have $940 left after a losing session and the possibility for future gains still exists as a realistic possibility. Our gambler’s Risk of ruin in that case was low. Now, today’s modern investor doesn’t think of real estate investing as gambling, they think of it as making an investment, and the caveat here is that often the inexperienced investor will think NOTHING of committing to a debt service payment on an investment property which is so high relative to their current income and financial resources it is akin to our gambler in the above example playing at a table with a $1000 buy in. Inexperienced investors tend to generalize and assume everything will go smoothly, or WORSE, be told that such a thing will happen by an unscrupulous wholesaler who is just trying to make a quick sale, and take their word for granted. The risk of ruin in these cases is so high that it is only after the new investor is on the verge of bankruptcy that they realize that something happened which probably could have been avoided – but by then it is too late. A Simple Example To Illustrate Suppose we have a new investor who wants to buy his first investment home to supplement income by renting the property to a paying tenant. Before he considers the money that potentially will be generated through the investment he must first identify the potential risks involved with purchasing an investment home knowing that, assuming he doesn’t have the capital to pay cash outright, financing carries with it debt service and that debt service needs to be paid on a monthly basis, lest the investment become jeopardized or the investor’s financial situation collapse in attempting to service it. Suppose our ‘would be’ investor brings home 2k every month from his full time job. What is an appropriate mortgage payment for an investment property the investor can realistically tolerate, assuming that an extended vacancy arises which keeps the investment property from producing income? Experienced investors understand that this question cannot simply be answered by looking at one’s take home salary and figuring out a number, but simple rules which help mitigate the risk of ruin certainly apply. Ideally, the investor should not be ‘investing’ more than 10 – 15 percent of their net monthly take home into long term unending debt service which is front loaded with interest. Why such a low number? Risk of ruin. Assuming 15% of 2k as a benchmark for debt service, our mythical new investor would be carrying a mortgage payment of about $300/month, money which was typically used for discretionary income but now must be permanently committed to covering the debt service of a mortgage placed against an investment property. However, while a $300/month mortgage payment would indicate an investment home in roughly the 30k range(which represents a very entry level type of rental home, at least in Memphis where I live) the investor here is exercising a manageable amount of risk – and in doing so the expected value of our investor’s profitability is positive. A profitable outcome is expected. Our investor can tolerate a few months of vacancy because he has purposely kept his risk of ruin low. Consider however, another investor who wants to make his first purchase and has the same level of take home income, 2k/month, but finds a deal they ‘can’t pass up’, which costs 100k. Assuming 30 year financing and an estimated payment of 1k/month as mortgage debt service, our investor in this case has committed 50% of their income to debt service which will have to be paid in the case of a vacancy. And it is in situations like these that I find new investors so frequently coming to me these days, asking me to resell their investment property for them before they go bankrupt. Usually these stories are pretty much the same - “real estate doesn’t work – I got ripped off by so and so who told me this would be a great investment”, but the finger of blame cannot be pointed by unsuccessful new investors who find themselves in these situations without first looking in the mirror and discovering that the problem first and foremost began there – inexperience and a lack of appropriate education coupled with a lack of understanding of the idea of risk of ruin allowed these people to put themselves into the predicament they found themselves in from the start. They are the reason for their own undoing. As you grow as a real estate investor, new and costlier(with potentially more rewarding) investment opportunities will come into your focus. When looking at these, before you sell yourself on the financial upside of a potential acquisition, be sure to ask yourself about the catastrophic effects of risk of ruin and if such a potential investment is putting you into a threshold of an adversely high amount of risk. In doing so, you are doing yourself, your portfolio, and your family a great service which shows you choose to invest only after careful and thoughtful analysis, using risk of ruin as a measuring tape of risk tolerance to prevent losing all of your accumulated assets and to insure continued and sustainable financial growth. Real estate was never meant to be gambling…but only YOU can determine if it is or isn’t. 8
Baltimore Real Estate Investors Association Vendor Discounts See why it pays to be a Member!
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Baltimore REIA Visits Memphis Tn. for Fun and Opportunity
10
The Basics of Buying & Selling w/ Lease Options by Wendy Patton
Real estate markets across the world are suffering right now. Sellers can’t sell their homes and buyers can’t get mortgages. As real estate agents it’s a lot harder to earn a living now. Gone are the days of listing a home and expecting it to sell – it is time to get creative to not just survive but actually thrive in this economy.
homeownership is not for them or if the real estate market changes significantly. Advantages for You – the Realtor® Now as real estate agents we understand how lease options can help our buyers and sellers we need to take a look at how lease options work to our benefit as well (in a nutshell—how do we get paid!). As much as we like to help our buyers and sellers we still need to get paid for our work. Not only can you still get paid, you can actually get paid more! I’ll get into that in just a minute. But first, let’s look at how you get paid. When the seller and buyer agree to a lease option the buyer will pay an option fee. This reserves the right for the buyer to purchase the home at a later date for an agreed upon price. The option fee is paid to the seller, however, when you represent a buyer or seller in a lease option transaction you would have them sign additional addendums for the lease option, part of which state you will be paid part of your commission upfront out of the option fee. I typically get 2% of the sales price upfront, split between the buyer and seller agents. The remainder of the commission is paid when the buyer purchases the home at the end of the option period. This creates revenue for you in the beginning as well as at the end. While this isn’t as ideal as receiving all of your commission upfront the way you would in a conventional sale it’s a whole lot better than: 1. Turning away a potential buyer that can’t qualify for a mortgage; 2. Having your seller just rent their home out because they can’t s1ell it; 3. Losing a listing because the seller blames you for their home not selling. Additionally, as a listing agent you are providing a premium level of service for your sellers. Very few agents know how to do this and this will put you head and shoulders above the pack. It is not unreasonable, therefore, to ask for additional commission as part of this premium service offering. If you would normally list for 6% commission, when you agree to list the home as a lease option you may want to ask the sellers for 7% commission if it sells as a lease option. Getting paid extra sure is nice when you would otherwise have lost the listing. If you want to stay in this business this is the time to get creative. Ask yourself—do you want to be in the business for 5 months or 5 years? Conventional methods are nice when they work, but you need alternative “tools” too. Adapt to the demands of the market and you’ll not only survive, you’ll thrive.
What is a Lease Option? Lease options are a way to buy and sell homes without an immediate conventional mortgage. It gives your buyers who can’t qualify for a mortgage right now the opportunity to get into a home right away while they improve their credit and build up a down payment while living in the home. It gives your sellers the ability to beat their competition, which we know in these kinds of markets competition is great. Sellers can reach a far greater pool of potential buyers. They will likely be able to sell their home quicker and for a better price. For some sellers it may be the ONLY way they can sell their home in this real estate market. How Does a Lease Option Work? A lease option works like this: The buyer and seller agree to an option which gives the buyer the right to purchase the home during a set period of time. During this option period the buyer leases the home from the seller. By the end of the option the buyer must either purchase the home or forfeit their option fee. While the option is valid the seller may not sell their home to anyone else. Advantages for the Seller Here are some of the advantages to your home sellers when selling on a lease option: Allows them to beat their competition. How many listings have you lost because the home sat on the market and never sold? The seller can collect rent on their home while it would otherwise sit vacant. They can often receive a higher purchase price. They can sell their home in a down market when they otherwise might not have been able to sell at all. Allows the seller to actually sell their home instead of just renting it. Have you lost any full commissions because the home was just rented instead of sold? Advantages for the Buyer Here are some of the advantages to your buyers when buying on a lease option: The buyer can get into a home now, even if they can’t currently qualify for a mortgage. How many potential buyers have you turned away because they couldn’t qualify for a mortgage? No longer!
To find out more about lease options, see Wendy at Baltimore REIA on Thursday, September, 17 and Saturday, September 19.
They can improve their credit and build up a down payment while they are already living in their future home. They are not obligated to purchase the home at the end of the option if they decide the home is not for them, that 11
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