Making BIG Money, in August 2009, Using the Rent to Own Technique
Written by: Zack Wiest PA Deals, LLC www.padeals.com
1] What is the Rent to Own or Lease Option Technique? The rent to own technique and the lease option technique are one in the same. There is absolutely no difference in the two, except the name. When using this technique you are simply leasing your property to an interested party and giving them the option to purchase the property from you sometime during the lease period. We call this interested party a tenant/buyer because they are a tenant today and hopefully a buyer down the road. Don’t confuse option with obligation. When using this technique your tenant/buyer has no obligation to buy, but they do have the option of buying, if they so desire. The reverse is true for you however. Should your tenant / buyer decide to exercise their option to buy you must sell the property to them. We call this a unilateral contract and you, as the landlord / seller are obligated to perform in the form of honoring your tenant / buyers option.
2] Why and When You Will Use the Rent to Own Strategy In most cases you will use the Rent to Own strategy as an alternative to either renting your property or retailing your property. Some of the reasons you would use the rent to own technique are:
A] Property may be located in an area that does not completely lend itself to an outright sale. Possibly an area where 50% of people are tenants and other 50% are owners. When you have the Rent to Own technique as part of your real estate arsenal you now have the ability to buy in tenant occupied areas and still realize the same profits you would in owner occupied areas. Having this broad of a market to buy in greatly increases your chances of buying at greatly reduced prices on a more consistent basis.
B] Property was listed for retail sale but for whatever reason is not selling.
C] Mortgage market has tightened up lending criteria making it more difficult for low to moderate income buyers to qualify for a mortgage
D] To avoid the expense of current income tax bracket creep.
E] To simply diversify your real estate strategy / portfolio. It’s all about
“Multiple Streams of Income”
in this business. The more streams the better. A perfect mix is accomplished by utilizing the Buy Fix and Sell technique, Buy and Hold technique and the Rent to Own technique at different times throughout the course of the year.
Your individual financial situation will determine which strategies you give the most focus, BUT, no matter what your situation, you MUST diversify by using all three.
F] To maximize your profits. When using the rent to own strategy you can usually command a premium sale price.
3] Who is Your Target Market When Using This Strategy? Your target market when selling properties on a rent to own agreement are hard working, honest people who for one reason or another have credit issues that are preventing them from obtaining a mortgage to buy a house the conventional way. Due to their credit issues they are willing to pay a premium to you in order to at least have a fighting chance of realizing their dream of homeownership. Another reason they are willing to pay a premium is the condition of the homes you will be offering on these creative terms. In most cases you will be offering creative terms [rent to own] on newly renovated homes. When screening a prospective tenant/buyer for one of your properties, you want to look for the following criteria:
A] Steady Employment â€“ They will need a steady job that pays a decent salary in order to eventually qualify for a mortgage to buy your property. They should be at their job for at least a year, and / or at least in the same profession for a year or more.
B] Debt to Income Ratio - Their debt to income ratio, using their new monthly house payment should not exceed 50%. To figure out debt to income ratio add up all of their monthly payments that appear on their credit report and divide that number by their gross monthly income.
Example: Monthly Expenses on Credit Report - $1,600 Gross Monthly Income - $3,000 $1,600 / $3,000 = .53 or 53% Debt to Income Ratio This person would not qualify.
C] Active Checking Account – The ONLY way to collect monthly payments from your tenant/buyer is by check, whether it be a personal check, bank check, certified check - GET A CHECK, period!
DO NOT EVER ACCEPT CASH PAYMENTS
You can’t track cash and the name of the game when renting to own properties is creating a documented paper trail.
Collecting rents by check allows you to create a paper trail of on time rental payments which will come in handy when it comes time to get a mortgage for them. Having 24 months of on time rent payments, verified with cancelled checks goes a long way with a lender and may be the sole reason your tenant/buyer is approved for a mortgage to buy your home.
D] Cash Reserves – You want to make sure they have enough money to satisfy your non refundable option deposit requirements. In addition to them being responsible for paying the non refundable option deposit they must have adequate money for any rent or pro rated rent that will be due, any utility deposits required and general moving expenses.
In most case your tenant / buyer will be giving most, if not all of their savings to you.
E] Credit History – All prospective tenant/buyers will have credit issues, that’s why they are renting to own and not buying. It is your job to find the ones that have a chance of eventually cleaning up their credit and obtaining a mortgage to
buy your house. We suggest you not consider anyone who owes more than $10,000 in collections. Why? Well for the most part all collections will have to be paid off prior to them obtaining a mortgage. Knowing this, you want to make sure that it is realistic they be able to accomplish this. Also, we do not suggest approving people who have collection accounts with past landlords or management companies. If they didn’t pay their last landlord, what makes you any different? We also do not like to see more than $1,500 in back child support. If they don’t care enough about their own flesh and blood, they surely won’t care about you!
We find out what our prospective tenant / buyers credit history is by pulling a credit report. To open an account which allows you to pull credit reports you may contact:
Merchants Credit Bureau at 706-823-6246.
There are three major credit reporting agencies. They are: Transunion
Each one is similar to each other but some gather more or less information in certain geographic areas than others. In Central Pennsylvania you only really need to be concerned with Transunion. When your tenant buyer goes to obtain a mortgage their lender will pull what is called a tri-merge. A tri-merge is a merged credit report consisting of data found on all three credit reports. Each report will have a different credit score. The lender will use the “middle” score as the credit score they will lend on.
The most important factors of anyone’s credit report are: Credit Score Credit scores range from 300 – 850 with 850 being the highest.
Current On Time Accounts These are active / open accounts that have been paid on time each month since opened.
Current Late Accounts These are active / open accounts that have had late payments. Late pays are tracked with 30, 60, 90, 120 day plus from the due date.
Collection Accounts Collection accounts have been charges off by the original creditor and usually sent to a third part collection agency.
Public Records These will include Bankruptcy Filing, Civil Judgments and Divorce Actions
When working with tenant / buyers who have credit challenges there may be situations where you can assist them with repairing their credit. There are many companies that specialize in the business of credit repair. I recommend using:
www.ovationlaw.com or call them at 1-866-639-3426
They are highly advanced and have a very thorough web based system for handling credit repair. The cost is minimal, with a small up front fee of $75 and then a few monthly payments of between $35 - $55, depending on what level of service you chose.
F] Good Rental History â€“ A good rental history goes along way. If they performed well with their past landlord chances are theyâ€™ll perform equally as well with you. The trick is getting through the real from the fake and being able to determine which ones are really good tenants and which ones are not. Believe it or not prospective tenant / buyers are smart and will create fake previous landlords. Plus even if they give the landlords real information they could be such
a bad tenant that the landlord will lie to you just to get the bad tenant out of their property. We’ll get into this in just a few minutes.
You can check past eviction filings at:
5] Benefits of Selling Your Properties Using the Rent to Own Technique Non Refundable Option Deposits – This deposit is the fee you charge to give your tenant/buyer the option of purchasing the property from you at a later date for a pre-determined price. The deposit should be priced at between 2-5% of the final sale price. This deposit should only be credited to your buyer if they decide to exercise their option to buy the property from you.
Premium Rent – When using this technique you will also have the ability to charge a slightly higher than market rent, but don’t get carried away with this. In most cases when investors charge a higher than market rent, they use the mark up as a “rent credit” given to their tenant/buyer. For instance an investor who is looking for $650 a month may charge $750 a month on a rent to own property but give the tenant/buyer $100 a month rent credit towards the purchase price. We DO 4OT suggest doing this in Pennsylvania as it has caused many situations where the courts, should an eviction take place, view this rent credit as the tenant/buyer having “equitable interest” in the property and therefore creating a foreclosure situation and not an eviction. You want to avoid this at all costs so do not ever give a rent credit to your tenant/buyers. That said, when offering your property on a rent to own arrangement you can usually get away with charging up to 5% higher than what current market rent is. How do you determine what true market rent is? Simple. It is the average of what all other property owners are getting for comparable properties. You can very easily find out what market rents are in a given area by watching the classifieds for a few weeks and then calling the owners of those properties to find out specifics. Take the average of say, 10 properties, similar to yours and within close proximity and that’s what market rent is!
Premium Sale Price – The philosophy behind this is exactly the same as the “Buy Here, Pay Here” car lots. If you have cash, drive away today for $10,000, but hey, we can finance it for you for $292 every two weeks no matter what your credit. The person who opted for the financing paid $14,000 for the same car you and I with our own financing or cash could have bought for $10,000, and renting to own properties is exactly the same.
Flexible terms = premium price.
Remember you are positioning your property to sell in 24 months or so and it is reasonable to expect your tenant / buyer to pay you what the house will be worth at that time, taking into consideration appreciation that may occur during the option period.
Tenants Mentality – In most cases the people you will lease to on a rent to own agreement have more of an owners mentality as opposed to a short term, “in and out in a year” tenant mentality. Also, they gave you a large non refundable down payment on the house therefore making it more important to them that they pay on time and maintain the property because they have more to lose than just a security deposit.
Tenant Improvements – We have had several tenant/buyers over the years finish basements, repaint, replace furnaces, install new kitchens and baths and even add marble flooring in their homes that they are renting to own from us. Ability to Do It All Over Again If It Doesn’t Work the 1st Time! If, for whatever reason your first tenant / buyer does not exercise thewir option to buy you as the owner have the ability to do it all over again, but At this time for a higher price all around.
6] Downsides of Using the Rent to Own Technique
Percentage of Closed Deals – It is important to know up front that only a portion of the people you put into a rent to own agreement will actually buy the property from you. In our experience about 50% of tenant/buyers actually end up purchasing the property they are in. Your closing percentage can be increased with proper screening up front. Also, your relationship and rapport with your tenant goes a long way.
Late Payments – Late payments are always an issue you need to take into consideration. Plan for them to happen and be prepared to deal with it. Don’t wait until it happens to try to figure out what to do. Set rules and guidelines and create a system to manage your rent to owns and stick to them no matter what.
Evictions – Where you have late payments you will have evictions. Once again, set up a system for your rent to own properties and work your system on every one of them.
Damaged Houses – When and if you deal with an eviction you run the risk of the tenant/buyer damaging your home. If this happens have a repair plan in place and act quickly. Once the property is repaired you can immediately set it up on a rent to own arrangement with another tenant/buyer but this time for a larger non refundable option deposit, a higher monthly rent and a higher sale price.
7] Setting Yourself up to Succeed If you are going to be successful in this business you must treat it as a real business. Before you even think about buying your first property you must take care of some fundamentals issues. Business Basics:
You will want the following information on your card: Company Name Your Name / Title Phone Number Fax Number Website Address E-mail Address Business Address Logo [if any]
You can design and print business cards at:
www.vistaprint.com Post Office Box The last thing you want to do is to have an angry tenant / buyer show up at your house at 9:30 at night complaining about a leaky roof and if they have your home address that is exactly what most will do. Never ever ever give your tenant / buyers your home address. Instead set up a P.O Box address at your local Post Office. They are very inexpensive and take 5 minutes to set up.
Once you have your P.O Box set up use it for all of your business dealing. Dedicated Cell Phone Number
Just as you do not want to give your tenant / buyers your home address you also donâ€™t want to give them your home phone number or even your personal cell phone number. If you do, you will regret it, as they will use and abuse it like you wouldnâ€™t believe!
As cheap as cell phone numbers are, get an extra one. It’s simple and easy and you don’t even need to buy another cell phone.
Call your cell phone provider and tell them you want to set up a second line on your existing cell phone. Get the cheapest plan they offer since you will only be using this phone number for real estate related business. You can always increase your plan later. Tell them you need to set this number up so that when it rings, the ring is different from your personal cell phone number, allowing you to determine if the call is business or personal. Once this is set up use this new phone number for EVERYTHING real estate related.
Lockboxes You will need 1 lockbox for every property you buy. Using a lockbox prevents you from having to be at the property every time someone needs access. You can purchase lockboxes at Lowes or online at: www.victorystore.com for between $20 - $35 each.
Signs You will need Rent to Own signs. We suggest you keep them simple. Your signs should read:
Rent to Own Easy to Qualify 555-5555 Ext. 5555
Colors really don’t matter just make sure they are easy to see. For instance yellow and black stands out very well. The size of your sign should be at least 24 inches high by 36 inches wide. You can order these sign from Fast Signs or any local sign maker. Expect to pay around $20 - $25 per sign for a 2 color Coroplast [corrugated plastic] sign that is 24 x 36 inches.
These are those clear boxes that hold Info Sheets on your properties. For the cost, we suggest you buy one for every one of your properties. You can use MS Publisher to create a nice, colorful and informative flyer to place in these boxes. You can purchase them from www.victorystore.com
for about $15 each.
You can not operate a business in today’s world without a fax machine. You can pick one up for under $150. Go buy one NOW!
Computer / MS Office Software If you don’t have a computer with MS Office, get one, period. And if you don’t know how to use MS Word and MS Excel take a class on it.
Digital Camera In today’s day and age you must be using a digital camera. We suggest: Canon Power Shot Series Price - $150 - $250
Digital Video Camera – The Flip With the release of websites such as YouTube you can not afford to be left out of the online video revolution. Online videos are becoming more and more popular and I suggest you not overlook this cutting edge form of self and property promotion.
You may be saying to yourself “Video is hard and complicated” and I would’ve have agreed with you a year ago. With the release of new technology however ANYBODY, including you, can shoot, edit and produce decent quality movies showcasing all of your properties.
We suggest purchasing The Flip. It is by far the easiest video camera to use and only costs about $150. The Flip is perfect for shooting videos that will use to post online.
Team of Professionals
Anyone who has been successful did not do so by themselves. ALL successful; people have a team around them. It is suggested that before you buy another property that you should assemble your team. You will need to make contact with and build relationships with the following people:
Real Estate Attorney
Handyman A handyman is who you will use for small repairs such as leaky toilets.
Specialty Contractors Electrician Plumber Roofer Carpet / Vinyl / Tile Installer
General Contractor You will use a general contractor for larger projects. When a tenant moves out and has caused damage you will want to use a general contractor.
Positive Supporters / Friends
Systemize / Automate / Delegate
If you look at any business that even has a modicum of success you will notice one common trait and that common trait is the creation and implementation of SYSTEMS. Systems provide a blueprint in which to operate from. If you are to be even slightly successful in this business you must be implementing systems as often as possible. Below are some ways we suggest you systemize and automate your business.
Recommended Reading 4 Hour Workweek by Timothy Ferris The E-Myth by Michael Gerber
Mapping Out the ‘Life of a Deal” Exercise Mapping out a step by step process for everything you do is the first step to creating systems. When performing this task you must detail EVERYTHING. I use www.bubbl.us to create charts that allow me to view the life of a deal.
Voice Mail System
In addition to your second cell phone line it is almost mandatory in today’s day and age to set up a voice mail system with multiple extensions. Years ago these types of systems were so expensive that most investors couldn’t afford them, but in today’s world they are very cost effective and have the ability to systemize your business. I suggest using:
If you go with their “Standard Package” you will get everything you need and more for $30 a month. This service comes in handy when advertising
a rent to own property because instead of directing your callers to your phone where you have to answer, you can direct them to a 24 / 7 recorded message about your property. This message will tell your callers all about the property, therefore relieving you of this duty. Once they listen to all of the details about your property you can then direct them to call you if they are interested in learning more.
Your recording should include the following information and in this order: -Address -City, State -Bedrooms -Baths -Description of property including what rooms, nice features about property, whether it was rehabbed or not and if so what was done etc etc. This is your chance to really sell the house. -Monthly Rent -Security Deposit / Option Deposit -Date Available -If you are interested in filling out an application for this home please call my assistant at 555-5555. You can also visit my website at www.yoursite.com Thanks for calling and have a great day.
Website If you are in business as a real estate investor GET A WEBSITE, period! I donâ€™t care if you are only doing one house per year, GET A WEBSITE.
A website will act as a 24 / 7 sales person for you and you can not run even the smallest real estate business without a website.
To get a website that does everything and more log onto:
go to Pricing and purchase the following package:
Agent Website Pro IDX
$299 Setup & $59/Month*
Service Includes: Complete Agent Website Pro Package IDX Property Search Property organizer for your clients Automatic email updates for your clients Advanced lead capture functionality Lead management system Learn More Check Availability No Contracts.
Virtual Assistant Virtual Assistants or VA’s are becoming more and more popular. Essentially a Virtual Assistant is someone who handles tasks for you on an “as needed” basis. This allows you to only spend money when you need something done as opposed to paying a part time or full time employee. Every week whether you have work for them or not. We recommend: www.teamdoubleclick.com
Live Call Center In addition or in sometimes in place of a Virtual Assistant can be a Live Call Center. We use: PAT Live www.patlive.com 16
PAT Live specializes in providing phone services to real estate investors. The cost is about $1.25 per minute. Property Management Software Even if your long term strategy is to sub out all of your property management duties it is still wise to give it a shot yourself first. How do you expect to tell someone else to do it or know if they are doing a good job if you donâ€™t know what to look for. We suggest you purchase Rent Right Property Management Software at
The cost to manage up to 25 units is $249 and they offer a free 30 day trial. I use this software to manage all of my rental units and rent to own properties.
On Line Auto Posters In a few minutes we are going to discuss many forms of marketing, including online posting sites. This task can be extremely time consuming so we suggest purchasing and using Auto Posters. The Auto Poster we suggest and use is CL AutoPoster which can be bought at:
They also sell all kind of other cool stuff such as My Space and Yahoo Account Creator, BackPage.com Auto Posters, G-Mail creators and more.
8] Get to Know Your Areaâ€™s Eviction Process On the following pages is the process for all residential evictions that take place in Pennsylvania.
Guidelines for Pennsylvania Residential Eviction 4on-Payment of Rent
Please note: This information and forms are applicable for residential evictions only TYPICAL LA4DLORD A4D TE4A4T COMPLAI4TS The likely reasons a landlord may file a complaint in the Landlord/Tenant Section of the Pennsylvania Court, Special Civil Part, include: Failure to pay rent. Continued disorderly conduct. Willful destruction or damage to property. Habitual lateness in paying rent. Violation of rules and regulations, after written notice to comply, as outlined in a lease or other document. Tenant's conviction for a drug offense.
4OTICE Before filing most complaints, a landlord must give a tenant written notice to correct a lease violation. A landlord may only proceed to file an eviction lawsuit if a tenant fails to correct the violation within the statutory notice period. In Pennsylvania a landlord or a tenant that is a corporation must be represented by an attorney in all matters filed in the court. No landlord or tenant may be represented by anyone other than a lawyer. THE PROPER EVICTION PROCEDURE The Landlord-Tenant Law of 1951 points out the only method for a landlord to evict a tenant. The Landlord-Tenant Law does not apply to people who are buying a home or who live in a hotel or rooming house.
1. The Eviction 4otice - The landlord must give the tenant written notice of the reason for the eviction and the date that the landlord wants the tenant to leave. NOTE: A written lease may provide for giving up the right to receive this eviction notice. The eviction notice must be personally delivered to the tenant or posted on the dwelling. An eviction notice, sent by mail is probably not enforceable. A written lease may state how many days notice must be given by the landlord before the landlord can evict. It the lease does not state how much notice is required, the general rule is as follows: If the term has ended, or it the landlord claims the tenant has breached the lease, the landlord must give the tenant thirty (30) days notice if the lease is for less than one year (this is usually month-tomonth), and ninety (90) days notice if the lease is one year or more. If the tenant is behind in the rent and has an oral lease with the landlord, the landlord needs to give only fifteen (15) days notice between April 1st and September 1st, but thirty (30) days notice between September 1st and April 1st. It the tenant is not out of the property by the end of the eviction notice, the landlord must follow the procedure through the District Justice's office as set forth in paragraphs 2, 3 and 4 below.
2. Complaint - The form pictured below is a Landlord-Tenant Complaint. The landlord files the complaint with the appropriate District Justice's office, and the landlord receives a yellow copy of the Complaint. The pink copy of the Complaint will be served on the tenant by the Constable, who may hand the tenant the Complaint or tape the Complaint to the door of the property. The tenant will also get an orange copy of the same Complaint through the mail. The Complaint says that a hearing will be held at the District Justice's office on a particular day and time. The tenant should tell the District Justice if the tenant intends to come to the hearing and present his/her side of the case. The Complaint always requests possession of the property and may ask for back rent or damages as well. If the landlord is also suing for back rent or damages, see Suits for Money. If the tenant has a claim to file against the landlord, this claim, called a "counterclaim", may be filed before the hearing. Both Complaints will then be heard at the same time.
3. The Hearing - At the hearing, both the landlord and the tenant will be put under oath to tell the truth. Either may have a lawyer to present his/her case. The landlord will then take the stand and present his/her case. When the landlord is finished testifying, the tenant can cross-examine the landlord -- in other words, ask the landlord any questions the tenant may wish to ask about the case. When the landlord is finished presenting his/her case, the tenant takes the stand and presents the tenant's side of the case. Again the landlord has the right to question the tenant after the tenant has presented his/her case. Both the landlord and tenant have the right to bring any papers, pictures, or other evidence which is important to prove their case. Either one can also bring any witnesses they may have. The District Justice will decide whether or not the landlord is entitled to a judgment for possession of the property. If the landlord wins his/her case, he/she will get a judgment for possession and the tenant must move out. If the tenant wins, the tenant may stay. The District Justice may also decide whether or not either the landlord or the tenant owes the other any money. (See Suits for Money).
If either the landlord or the tenant does not agree with the decision the District Justice reaches at the hearing, an appeal can be taken to the County Court House within thirty (30) days after the District Justice makes his decision. Either the tenant or the landlord will need a lawyer's help in filing this appeal. If either the landlord or the tenant does not attend the hearing he/she will receive notice from the District Justice which says what the District Justice's decision was and on what date the decision was entered.
4. Order for Possession - If the landlord wins a judgment for possession, which means the tenant must move, the landlord can then enforce the judgment. This means that no sooner than fifteen (15) days after the District Justice makes his decision and enters the judgment for possession, the landlord can have the constable give the tenant an "Order for Possession". This Order for Possession is a notice telling the tenant that unless the tenant is out of the property by a date set on the notice (no sooner than fifteen (15) days after the date the tenant receives the notice) the Constable or Sheriff can forcibly set the tenant and his/her belongings out of the house or apartment. This is a total of at least thirty (30) days after the judgment for possession was entered. If the Constable has to forcibly evict the tenant, and the tenant has not arranged for a place for his/her furniture and belongings, the Sheriff or Constable can store the furniture and belongings at a storage company at the tenant's expense. A tenant must pay any storage bill before getting his/her furniture and belongings back. If the tenant does not pay the storage bill or make arrangements regarding the furniture and belongings, they may be sold by the storage company to pay the storage bill.
Landlord-Tenant Complaint (AOPC 310A) Filing Instructions You need to have a copy of the Landlord Tenant Complaint for the Plaintiff, two copies for each defendant and a copy with an original signature for the District Justice office. You may photocopy the completed complaint to produce the needed number of copies, including a copy for the defendant's attorney. You will be charged filing costs and service costs when the complaint is filed at the District Court. No changes may be made to this form either in content or format.
Get to Know Your District Justice It is wise to get information on who handles evictions in the area in which your property is located.
9] Having and Using the Proper Paperwork Below is a list of the most important documents you will need to successfully implement the rent to own strategy:
-Rent to Own Applications -Residential Leases -Rent to Own Addendums to use with the Residential Lease -3 Day Pay or Quit Notices -Late Fee Notices -Move In Checklist -Pet Addendum -Renters Insurance Addendum -Script to Use When Calling Former Landlords [with trick questions] -Employment Verification Forms -End of Lease Notice -Mortgage Applications â€“ 1003
10] Property Selection The right property will attract the right tenant / buyer and that is exactly what we are after. When searching for properties that will work best for the rent to own strategy you want to take into consideration a few factors. They are:
Location â€“ 22
The nicer the area the better. Good areas will attract good tenant / buyers.
Price Point – Understanding who your tenant / buyer will be goes along way in determining what the right price point will be. You want to make sure that once your property is ready to be rented that you can price it at an affordable price for the area. Here in Central Pennsylvania we feel good price points to be at on average are: Sale Price - $70,000 - $150,000 Monthly Payment - $650 – 1,200 Non Refundable Option Deposits - $1,000 - $3,500
Overall Appeal – Just because most tenant / buyers have poor credit doesn’t mean they will accept or want poor houses. Overall appeal is crucial to your success as an investor. You want to make sure the property has a good flow to it, has adequate space and enough bedrooms for your target buyer.
11] The Rehab Process The renovation process on a rent to own is just like any other renovation. The standards are slightly different than that of a rental or retail rehab so I have included all three for your review.
Rent to Own Quality Standards -Interior Painting = 3-tone. Walls = Beige (flat). Ceilings = Ceiling White (flat). Trim = Bright White (semi-gloss). -Paint quality = 15 year (includes primer) -Walls/Ceilings patched to repair visible cracks (openings). -First Floor Walls/Ceilings patched to repair holes/dents. -Drop ceilings OK. Tiled ceilings OK. All ceilings painted. -Carpet is to be Berber Grade, Dark in Color with 4oz padding. -Kitchen and Bath = 15-year sheet vinyl (light in color scheme). -Cabinets = Stock Lowes/Home Depot brand quality or similar. -Dishwasher and Microwave/Vent in Kitchen (Contractor grade). -Appliance package = New (Contractor grade). -Windows and Doors Operable (Painted). -Mini-blinds on all windows (basic contractor grade). -Mechanical Systems to code and operable. -Light fixtures contractor grade. -All switch/receptacle plate covers new. -Ceiling Fans in Living Room and ALL Bedrooms. -Plumbing Fixtures and Valves = Mid-level contractor Grade (low-end mobile or modular grade is unacceptable) -Tubs=New or resurfaced with new surround (caulked/sealed). -Bath Accessories New (TP holder, towel bar, etc.). -Bath vent installed (ductless OK). -New medicine cabinet/mirror in Bathroom. -Shower curtain rods in place and operable. -All exterior paint to be 15-year quality minimum. -All wood surfaces to be scraped, caulked/sealed, and painted. -All city letter items to be addressed to minimum standards.
Rental Quality Standards -Interior Painting = 2-tone. Walls and ceilings = Basic White (flat). Trim = Bright White (semi-gloss). -Paint quality = 15 year (includes primer) -Walls/Ceilings patched to repair visible cracks (openings). -Drop ceilings OK. Tiled ceilings OK. All ceilings painted. -Carpet is to be Contractor/Commercial grade, dark in color with 4oz padding. -Kitchen and Bath = 10-year sheet vinyl (light in color scheme). -Cabinets = New entry level or painted. -Windows and Doors Operable (Painted). -Mini-blinds on all windows (basic contractor grade). -Mechanical Systems to code and operable. -Light fixtures = contractor grade. -Ceiling Fans in Living Room and Master Bedroom. -Plumbing Fixtures and Valves = Mid-level contractor Grade (low-end mobile or modular grade is unacceptable. -Tubs=New or resurfaced with new surround (caulked/sealed). -Shower curtain rods in place and operable. -Appliance package=Used/Refurbished with warranty. -All exterior paint to be 15-year quality minimum. -All city letter items to be addressed to minimum standards.
Retail Quality Standards -Interior Painting = 3-tone. Walls = Beige (flat). Ceilings = Ceiling White (flat). Trim = Bright White (semi-gloss). -Paint quality = 20 year (includes primer) -Walls/Ceilings patched to repair holes/dents (all floors). -Drop ceilings OK. Tiled ceilings OK. All ceilings painted. -Carpet is to be Contractor neutral plush grade, light in color with 6oz padding. -Kitchen and Bath = Ceramic tile (per customer allowance). -Cabinets = Stock Lowes/Home Depot brand quality or similar. -Dishwasher and Microwave/Vent in Kitchen (per customer allowance). -Appliance package = New (per customer allowance). -New Windows at street side. -Secondary Windows and doors made operable. -Mini-blinds on all windows (basic contractor grade). -Mechanical Systems to code and in good-excellent working order. -Homes with ARV of $150K or greater to have Central HVAC. -Light fixtures = New (per customer allowance). -All switch/receptacle plate covers new. -All switches and receptacles new (or shot-spray painted white). -Ceiling Fans in Living Room and ALL Bedrooms. -Plumbing Fixtures and Valves = Mid-level Builder Grade (per customer allowance). -Tubs = New soaking-tub or jet-tub. -Bath Accessories New (TP holder, towel bar, etc.). -Bath vent installed (ductless OK). -New medicine cabinet/mirror in Bathroom. -Shower curtain rods in place and operable. -All exterior paint to be 20-year quality minimum. -All wood surfaces to be scraped, caulked/sealed, and painted. -All city letter items to be addressed to minimum standards.
The biggest differences from rent to own to retail or from rental to rent to own are: Paint type Carpet type Flooring type in kitchens and baths Appliances Cabinet quality Bathroom tub / Tub Surround
On the following pages I have included the new PA Deals Rehab Pricing Sheet.
2009 - 2010 PA Deals Rehab Pricing Miscellaneous Items Standard Window Replacement -
$300 per window
Interior Door Replacement -
$150 per door
Ceiling Fan inc Installation -
$150 per fan
Light Fixture inc Installation -
$75 per light
Trash Out – Small Job Medium Job Large Job Drywall inc Install -
$750 $1500 $3,000 $40 per 4 x 8 sheet
Flooring Carpet / Padding inc. Install -
$1.60 sq foot
Ceramic Tile inc. Install -
$5.00 sq foot
Vinyl inc. Install -
$3.00 sq foot
Refinish Hardwood -
$4.00 sq foot
New Hardwood inc Install -
$6.50 sq foot
Kitchen and Bath Complete Kitchen Remodel / Standard Size – Rental Rent to Own Retail -
$3,500 $4,500 $5,500
Complete Bathroom Remodel / Standard Size –
Rental Rent to Own Retail -
$2,500 $3,500 $5,000
Painting / Patching – 2 Tone 3 Tone -
$1.25 sq foot $1.75 sq foot
HVAC Boiler Replacement –
Forced Air inc Duct Work – 2 story – 3 story – Central Air not inc Duct Work–
$4,000 $5,500 $3,000
Basement New plumbing for standard home - $2,500 Upgrade Electric to 100 Amp -
Replace Hot Water Heater -
New Main Water Line -
Exterior Items Replace Roof [varies] -
$3,000 - $6,000
New Gutters / Downspouts -
Landscaping [varies] -
$500 - $2,500
Appliances inc Install – Refrigerator –
Rental Rent to Own Retail -
$350 $450 $750
Range – Rental Rent to Own Retail -
$300 $400 $550
Contractor Profit -
10% - 15% of total rehab budget
12] Preparing Your Rent to Own Property for Showing / Occupancy Before an ad goes in you want to make sure that your property is prepped for what I call â€œMaximum Showing Potentialâ€?. In order to accomplish maximum showing potential you must follow this process:
A] Is the rehab complete? Do toilets operate properly? Do all faucets work properly. Do all drains work properly? Do all windows open and shut? Are mini-blinds on all windows? Do all heating / cooling systems work properly? Are appliances installed and working? Do all lights / ceiling fans work? Do all receptacles / switches work? Are all repairs done and does the home look great?
B] Has the house been professionally cleaned and smell great? Yes, definitely use air fresheners to liven up your home.
C] Has the house been staged? Staging to include most of the following items:
Kitchen: Displayed plate set - $25 Soap dispenser - $10
Paper towel holder with paper towels - $10 Flower in window - $15 Bottle of cheap champagne with champagne glasses - $20 Dish towels - $5 Small kitchen table with two chairs [if it is an eat-in kitchen] - $?????
Bathroom: Shower curtain - $15 Matching cup - $5 Matching soap dish - $5 Matching towels - $15 Matching floor rug - $15 Vase with flowers - $20 Toilet paper on the holder - $.50
General: Paintings - $50 Flowers - $30 Silk trees - $50 Clean area rugs - $75 Mirrors [These are important. They give the illusion that the house is bigger than it actually is] - $150 for at least 3 of them Furnishings that compliment the house [not stuff you stuffed in your basement 14 years ago however] - $????
Exterior: Front and rear door mats - $25 Patio set if there is a backyard or courtyard - $75 Tiki lamps [great for a courtyard] - $2.00 - $10 each Fire pit [once again great for a courtyard] - $65 or less Hanging plants - $15 each General landscaping - $???? All of the items mentioned can be purchased from a WalMart, TJ Maxx, Marshalls or any other cost effective store of your choice.
Setting the Terms and Price Setting the terms and price for your rent to own properties is simple.
Terms – We are suggesting you set up all of your rent to own homes up on an 18 month option term with a 6 month fee based extension.
Non refundable option deposit - The deposit should be set at between 2% - 5% of the sale price. Example – If you are offering a property for $100,000 on a rent to own agreement you would want to collect between $2,000 - $5,000 upfront as a non refundable option deposit. It is also important to mention that the worse your tenant/buyers credit and stability – the higher the deposit should be.
Monthly rent – In states where the equitable interest situation is not an issue I can justify increasing the monthly rent and giving a rent credit to your tenant/buyer. In Pennsylvania it is an issue and therefore I suggest setting your monthly rent at close to market rates as possible and not offering any rent credit at all. The easiest way I have found to price out the monthly rent of rent to own properties is by taking your sale price, subtracting the option deposit them amortizing the balance over 30 years at between 7% - 10% depending on current interest rates. To figure out what a monthly payment will be log onto: www.mortgageloan.com/calculator/
Sale price – Your sale price should be set at top market value if not slightly higher, due to expected appreciation that may occur during your tenant/buyers option period. Price is usually never an issue with tenant/buyers. For the most part the terms are what they are looking for and most concerned about and offering your property on a rent town agreement is enough of an enticement.
13] Advertising / Marketing Finding tenant/buyers for your property can be accomplished by utilizing well thought out marketing. It is not acceptable to simply place an ad and wait for the calls to pour in, that’s not going to happen. In today’s slowing market you must go above and beyond. Before you spend one dime on advertising you must address three specific areas. They are: Market – Who is your target market? You must get really specific with this. The more specific the better. Some questions to ask yourself are: How old is my target market? How much money do they make? How many kids do they have?
Message – What will you say? Your message will depend on your target market and make sure they match.
Media – How will you deliver your message to them?
Next you will find the methods we suggest using when looking for prospective tenant / buyers. A] Yard Signs - $25
Placing a sign on your property that readsRent to Own
Easy to Qualify 555-5555 Ext 1011
B] Classified Ads - $25 Classified Ads are a great way to let prospective tenant / buyers know you have a house available. . Ads should be placed under Homes For Rent, not Homes for Sale. It is important to realize that you will more than likely not be the only one running a rent to own ad. In order to make your ad stand out, use a killer headline. Some killer headline examples are:
Newly Rehabbed Rent Own Home!
Nicest Home in the Area, Rent to Own!
Rent to Own, Super Easy to Qualify!
BAD Credit OK!
Get creative with this and try to come up with headlines that make your ad stand out from all the others. The following is an example of an ad we ran for one of our clients. We had a great response and think we found a perfect tenant / buyer for him.
Midtown Magnificence! RE4T TO OW4, Bad Credit OK! 3 bed, 1.5 bath, vaulted ceiling ceramic tile, jacuzzi, too much to list. Extremely rare opportunity. Call now. 717-901-7763 Ext.1
C] Online Posting Sites – FREE Nowadays there are literally thousands of free online posting sites. Below are the most effective and the ones we suggest you post all of your properties to: www.craigslist.com
When using online posting sites there are some general rules that you need to follow. -
Headlines are crucial. Write headlines that make your ad’s stand out. Make BOLD statements such as: BEST Rent to Own in Harrisburg! Nicest Rent to Own Property EVER Offered! Attention Rent to Own Buyers. Do NOT Miss Out on This!
Pictures are MANDATORY. Don’t think for half a second about advertising a property online without pictures, it just doesn’t work.
Never use ALL CAPS.
Include the following information on every property you post: -Type of Home
-Beds / Baths -Square Feet -Type of Heat -Location -Information on the Neighborhood -Special features -Contact Info -Exterior and Interior Pictures -Monthly Rent -Option Deposit -Sale Price
Save your ads and use the Copy and Paste function.
D] Your own website. - $50 per month
E] You Tube – FREE
F] Flyers. See next page for an example. – FREE
Was that your landlord I saw out last night spending your rent money? Stop making your landlord rich and start investing in YOUR FUTURE as a home owner with our Rent to Own Program. 555-5555
RE4T TO OW4 HOMES COMPLETELY RE4OVATED ARE AVAILABLE 4OW! Easy to Qualify Low Down Payments
555-5555 CALL 4OW!
14] Application to Occupancy â€“ The more applications you get the better your chances are of finding a good tenant / buyer. I propose you use the following system for getting applications.
A] Direct all prospects to your Recorded Message.
B] Once a prospect has called you confirm they are interested in the property.
C] If they say they are interested then invite them to an upcoming open house you will hold. It is suggested you hold 2 open houses per week until the property is leased. Hold one on a weekday from 6pm-7:30pm and one on a weekend, Sunday from 1pm â€“ 4pm. This gives your prospects options. You will want to have applications on hand as well as clipboards. When holding an Open House make to sure to do the following before your prospects arrive:
Turn on all lights Turn on all ceiling fans â€“ lowest setting Use air fresheners to make the home smell fresh. We recommend Glade Plug Ins Open all mini-blinds and let the sun it. In winter make sure the home is warm. In the summer make sure the home is cool.
When holding an Open House greet your guests at the door and tell them to give themselves a tour. Never walk the property with them. Once they are through walking the property give them an application and tell them that you have other people interested so if they like the house they must fill out an application as soon as possible. Review their application before they leave and make sure it is completely filled out. Advise them that you will review their application and get back to them within 3 days if they are approved. Yes, you read that right you will ONLY call the people back
who you approved. To call everyone back who filled out an application, while polite, is just too time consuming. It is important however that you contact anyone who almost qualified and tell them that if they do “this or that” that you can approve them either for this house or another one you’ll have in the near future.
Reviewing Applications / Approving Prospective Tenant / Buyers -
Follow this process when approving / rejecting applicants.
1] Review application. If application is approved move on.
2] Pull credit report. If credit report is approved move on.
3] Contact the applicants previous landlord. Use the script provided to you in this course. In the real estate world we call this verification a VOR, short for verification of rental.
4] Contact the applicants employer. Use the employment verification form included in this course. In the real estate world we call this a VOE, short for verification of employment.
5] Make a decision based on all of your available data.
6] If approved:
Contact applicant and notify them that they are approved and that they have 24 hours to bring in the deposit.
If denied, make notes as to why you denied them in case they call and ask. Keep their file for 30 days and then shred it! Identity theft is becoming big business so make sure you keep their file safe and when the 30 days is up, shred it, no exceptions.
Move In Day –
On the move in date you must perform the following tasks.
Collect the balance of the option deposit if it’s not already paid. And what are we not going to accept? Did you get it? Cash! You are not going to accept cash.
Collect any and all rent due. In most case you will prorate it unless they are moving in on the 1st of the month. To pro rate you will take the amount of monthly rent divided by the number of days in that month. This calculation will give you the price per day. Once you have the price per day figured out simply multiply it by the number of days left in the month and that’s how much they owe.
Example Monthly rent = $700 31 Days in the month $700 / 31 = $22.59 per day They are moving in on the 10th of the month. They owe for 21 days. 21 x’s $22.59 = $496.98 pro rated rent
Confirm with all applicable utility providers that utilizes have been switched into the tenant / buyers name
Have pictures taken of the house in its current condition and get each one signed by your tenant / buyer along with a supporting document that states that this is the condition the property was in when they moved in.
Have lease signed by all parties and make copies. Keep the original!
Have the Addendum signed by all parties and make copies. Keep the original.
Make a set of keys for your tenant / buyer.
15] Management – Once your tenant/buyer is in place it is now time to manage your property and your tenant/buyer. We suggest having a contact with a maintenance man who can help you out with emergency situations. You also want to create a system for managing all of your rent to own properties. Below is a system that has worked well for us in the past. 1] Rent is due on the 1st of the month 2] Three day grace period is given so on the 4th the rent is late. 3] The evening of the 4th you will draft a customized “Late Rent Letter”. 4] The morning of the 5th you will drop the letter off at your tenant/buyers residence and place the letter either on the front door or in the mailbox in an envelope concealing the contents of the letter. As an alternative to placing the letter at the tenant / buyers residence you can always put a copy in the mail. 5] Now you wait until the 8th. If you have not heard from your tenant/buyer you need to draft a “3 Day Pay or Quit Notice” and place it on the front door. Make sure you retain a copy for your records and maybe even take a picture of it on the front door for later use. Also it helps to have a witness sign this notice proving you delivered it. 6] If you have not worked out an arrangement with your tenant/buyer by the 11th of the month you will want to immediately file for eviction with the proper District Justice. Take a copy of the lease, 3 Day Pay or Quit Notice and your checkbook with you. Note – Make sure you know which District Justice handles evictions for the area your rent to own property is located.
7] Once you have filed for eviction the District Justice office will notify you and your tenant/buyer to when the court date is scheduled. From here you simply wait for court unless your tenant/buyer pays prior to then. Your tenant/buyer must pay the monthly rent, late fee and court costs in order to cure their default.
It is also helpful to use some form of property management software to keep track of everything. We suggest:
Rent Right Property Management Software
It is very user friendly and easy to learn. You can find out more about their products at:
www.rent-right.com or call 800-RENT-065
Your success or lack of will absolutely depend on use of your system. Without a system to manage your rent to own properties you can really make a mess of them. Create a system, implement it and follow it everyday with every property. Your life will be so much easier, we promise.
Closing the Deal â€“ The whole purpose of setting your properties up on a rent to own agreement is to eventually sell your property for top dollar. In order to do this you must have contacts with creative mortgage lenders. However, having contacts is just not good enough. You need to basically hold your tenants hand throughout the entire process. Below are the steps.
1] Set up dates to personally contact your tenant / buyer to discuss how they are making out. The times to contact your tenant / buyer are: 6 months from move in If they have not done so already this is the time where youâ€™ll want to suggest they begin to work with a credit repair company such as Ovation Law
11 months from move in
Time is running out call.
15 months from move in Urgent they act.
18 months from move in Time is up. Are they going to pay the $500 to extend for 6 months?
2] Tenant/buyer notifies you they wish to exercise their option to buy.
3] Send your tenant / buyer to your mortgage broker to get pre-approved.
4] Once your tenant / buyer is pre-approved draft a Sales Contract between the two of you using the information outlined on the Addendum.
Well, that brings us to the end of this manual. I hope youâ€™ve enjoyed reading it as much as Iâ€™ve enjoyed writing it. If you are not yet a client of PA Deals I encourage you to consider becoming one. Log onto www.padeals.com to begin the journey. Take care and I sincerely wish you the best of luck in all you do.
Written by Zack Wiest Founder / CEO PA Deals, LLC
PA Deals, LLC Your #1 Source for Wholesale Priced Investment Properties. Phone - 717-901-7763 E-mail - email@example.com Website - www.padeals.com
Copyright 2007, 2008, 2009
Published on Apr 25, 2011
PA Deals, LLC is a residential real estate investment firm located in Harrisburg, PA. Visit http://padeals.com or call 717-901-7763