How to find Rent to Own Properties for Lease Options

The best time to invest in real estate was 20+ years ago. The second best time is now. If you’re young and in your 20s or 30s or 40s, in 20 years you’ll be glad you invested today. Based on my decades of experience, I know how true this is. And I know that leases with an option to purchase are the best low cost way to get started.

Another major advantage is that lease options are the least risky but highly profitable niche for investors getting started (short of being given a house). Although rent to own has been a popular way to invest in homes for several decades, it’s still unfamiliar to many people. That’s why I continue to help people understand how this works. And why I often explain how to find rent to own properties.

Finding these properties is different from finding traditionally financed sales. Almost always, the seller is motivated to immediately start generating cash flow and finalize a sale in the not too distant future. When you do find a RTO seller, you want to learn what that person’s motivation is before drawing up a lease/purchase offer. When you know their motivation, you can more easily put together an enticing offer.

How to Find Rent to Own Properties That Work for You

Today’s market is beginning to lean in favor of buyers. That’s an advantage for investors that know how to find rent to own properties. As the sellers’ market slightly softens, there will be more sellers looking for a way to generate cash flow from a house that didn’t sell quickly. But that doesn’t mean the seller has given a single thought about a lease option arrangement. Very few will be advertising for this opportunity.

What you need to do is find these people and educate them about why a rent to own or lease option is a good cash flow opportunity for them. Once you have their attention, you help them further with a sandwich lease option that minimizes the work the seller has to put into the deal. In exchange for you being in the middle, you create three distinct profit points for yourself.

You want to begin by talking to local real estate agents. Although agents don’t typically specialize in how to find rent to own properties, you need this group, that is the most active in your local market, to know what you are looking for. Agents know sellers with a listing that is getting long in the tooth who need to generate cash flow from the property. Agents also talk to each other a lot. Even if the two or three you talk with don’t have any leads, they probably know other agents that have what you are looking for.

Reluctant Landlords – How to Find Rent to Own Properties

While reluctant landlords are always worth pursuing for lease options, you’ll find even more of these as the sellers’ market softens. Reluctant landlords tend to be people who have already taken action to create cash flow from a vacant property. People who take action are open to other opportunities. You offer to not only keep their rent cash flowing but to also the real possibility of selling the property. A double win for the reluctant landlord.

“For Rent” signs can be an even better opportunity for how to find rent to own properties. These can be either an experienced landlord with yet another vacant house they need to clean and find a new tenant for, or a want-to-be seller reluctantly getting into the landlord business.

Experienced landlords with vacancies have familiarity both buying and renting real estate. They consider themselves to be professionals and will be open to creative types of real estate transactions. When the house is vacant, they also have motivation to sell creatively.

Key to how to find rent to own properties is about knowing the other person’s motivation and offering a creative solution that works for both you and the seller. What’s important is that you have a thorough understanding of what you are offering and can explain it in a way that both the new and the experienced landlord easily understands.

There are Many Ways for How to Find Rent to Own Properties

Another method for how to find rent to own properties is by searching for houses in your location of interest and simply asking the seller if they are interested in participating in a rent to own agreement. Again, be sure to have a solid pitch ready to go. Also, take the time to get to know the seller on a friendly basis. You’re likely going to have a relationship with him or her for a year or two.

These are only a few of the ways of how to find rent to own properties. Others include well-worded advertisements in local classified thrift newspapers, bandit signs, and of course craigslist. The sandwich lease option is the most attractive investing method I know of. You first take control of the property for a couple of hundred dollars. You then put an option buyer in place that takes on most of the homeownership responsibilities until they make the purchase and take on full ownership. The Sandwich Lease Option lets you make a big profit for a small investment.

Besides showing how to find rent to own properties, I’d enjoy showing you all of the other insider techniques I’ve developed over the years. Everything from effectively explaining the benefits to sellers to creatively writing deals that close.

Remember, the best time to invest in real estate was 20 years ago. The second best time is now.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

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What did you think of this article? Please leave a comment below.

How to Find a Seller Now

There are always sellers in the marketplace. There might not always be a lot of sellers motivated to sell on a lease option agreement but there will always be more than you need if you know how to find them! Today, the broad market is slowly changing from a seller’s market to a buyer’s market. This means more opportunities for investors.

This is the right time to learn how to find a seller now. There are several ways to go about this and if you’re an experienced investor you probably already have resources in place. If you building your investment business, these tips help you stay on the right track.

The Basics of How to Find a Seller Now

For the most part, investors aren’t looking for traditional “retail” houses. Investors are looking for properties that soon-to-be homeowners aren’t normally interested in. Investors want distressed properties and discount properties. Still, different investment strategies target different properties within these subcategories. For instance, fix and flip investors mostly target distressed properties. Properties that can be bought cheap, repaired, and flipped for a big profit.

Lease option investors are looking for a different property type. Sandwich lease option investors are not going to own the property. They don’t want to invest a bunch of money in repairs. How to find a seller now for a lease option generally comes down to the equity the seller has in the house. You are looking for either one of these conditions:

  1. The seller does not need their cash out of the house.

– Or –

  1. The seller does not have any equity in the house.

The other two common conditions that usually go along with these are that the seller needs to leave the house or the house is already vacant. These don’t guarantee the person will be interested in a lease option but if these conditions don’t exist, the seller isn’t likely to consider a lease option. If you don’t have these conditions, save yourself a lot of time and effort by moving on to another prospect.

How to Find a Seller Now Means You Offer a Solution

How to find a seller now means that you need to be offering the seller a solution that she/he is looking for. Your offer is what I call “Good Debt Relief”. You must understand what you bring to the table so that you can fully explain it to the seller. She/he needs to understand what’s in it for them.

Good Debt Relief is pretty simple. The seller has an already vacant or soon to be vacant house that they have to make mortgage payments on. The house is not producing an income. The debt payment is a big rock they have to carry without relief. When you offer a lease option, you offer an income stream to pay that debt. That income stream is Good Debt Relief.

You might think that severely limits the number of sellers interested in a lease option. It does thin the crowd but that’s a good thing because this enables you to focus your energy and efforts to sellers that are much more likely to close the deal. And there are a lot more candidates out there than you might first realize.

Good Lease Option Seller Candidates

How to find a seller now has an abundant number of candidates. People or couples that own two or more houses but only live in one of them make great candidates and there are more than you might think. How many people in these situations do you think you can find?

  • Recently or are about to transfer to a job in another city.
  • Recently married with the bride and groom both previously owning a home.
  • Built or bought a new home without selling their previous home.
  • Inherited a home in another city or the person has no need for the inherited home.
  • Landlords that are burned out from dealing with calls about a plugged kitchen sink on Thanksgiving from tenants who never pay the rent on time.
  • Landlords that are ready to retire.
  • Vacation homes that are not used or the owner retired to it and has a vacant second home back in the city.
  • There are many others.

Do you see the common thread here about how to find a seller now? That thread is that these people own at least two homes but are living in only one. They probably don’t need the money because they can afford to pay two mortgage although they probably don’t want to pay two mortgages.

These make natural headlines for your marketing campaign to find qualified sellers. Especially in free classified ads where you can run multiple advertisements with different headlines. Most of these people won’t see themselves in classified ad headlines reading, “Lease Option Sellers Wanted” or “Looking for Seller Contracts”. However, they do see themselves in more targeted headlines like “Do You Want to Sell Your Second Home?” or “Do You Want to Sell Your Rental House?”, or “Stop Paying Two Mortgages”.

There are still many, many possibilities for how to find a seller now. Others worth considering include real estate brokers, estate lawyers, maybe even mortgage brokers who turned down a loan for a second home. Real estate brokers can easily be shown how to find a seller now. Your local MLS probably doesn’t indicate if a house is vacant but brokers usually know or can find out. You can also look at interior photos on MLS to see if the furniture has been moved out.

Do you want to know more ways of how to find a seller now? The entire second category of “The seller does not have any equity in the house” wasn’t even covered here. To learn more about how to find a seller or other real estate investing strategies please visit my website www.wendypatton.com or email info@wendypatton.com.

What you need to do is TAKE ACTION NOW!

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

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What did you think of this article? Please leave a comment below.

 

Tips for Managing Sandwich Lease Options

One part of sandwich lease option investing that doesn’t get much attention is managing the tenants and the property. A big part of the reason this doesn’t get much attention is because this investment strategy is mostly passive income. Meaning once you have the deal in place, there isn’t much ongoing work to generate the continuing income.

However, you are the professional in the middle of sandwich deals. You still have a responsibility to both the seller and the buyer. Fortunately, managing the seller is minimal to non-existent. As long as the seller is receiving his/her monthly check and the house isn’t being seriously harmed, almost all sellers happily sit back collecting a monthly rent check knowing they are likely to collect a big check when the house sells in a year or two.

Tenants Have Responsibility in Sandwich Lease Options

The little bit of management time that you do put in mostly involves the tenant/buyers. But keep in mind this is NOT about cleaning out rain gutters and fixing a broken water heater. The properly written sandwich lease option makes the tenant responsible for all major and minor maintenance as the future owner of the home.

In the real world, tenant/buyers can’t always make immediate and necessary repairs. Because I live in Michigan much of my investing is here also. When a furnace goes out during a Michigan winter, it’s crucial to get that fixed. Heat is necessary. When a tenant can’t make this happen, I might need to step in with a helping hand. But one of the big benefits of sandwich lease options is that my involvement and expenses are minimal. I can have a HVAC technician out to the house with a short phone call. As an investment professional, you have options to manage the cost of the repair. One option is the tenant pays as much as they can on the spot with the balance being charged to your account or the entire cost is charged to you but the tenant pays the bill with his/her next paycheck. However you work out the details, any amount that remains on your account is ultimately added to the sales price of the home paid by the tenant/buyer – as long as you write the original paperwork correctly.

Something I’m very careful about when it comes to tenant/buyers is not giving them my home address. All payments and correspondence is mailed to my office or a P.O. Box. The phone number I give them is only for a phone dedicated to my business. It doesn’t happen often but in case a deal goes sour and you have to evict the tenant, you don’t want a disgruntled, grudge-bearing tenant showing up on your doorstep. But you have a responsibility to keep open lines of communication.

Transitioning Between Seller and Tenant Occupying the Home

You are the meat in the middle of a sandwich lease option. One of your last steps putting the deal together is moving the seller out and the tenant/buyer in. Always have complete documentation of everything regarding a tenant moving in. Probably your most important thing will be to have a videotaped walk-through or check-in with the tenant. It’s really good when you show them on tape verbally acknowledging the condition of everything, whether good or bad. Hopefully not too much bad – but maybe they’ll point out something that you somehow overlooked. If so, fix it immediately.

Technically these are still tenants until they close on the purchase. It’s still important to keep the place habitable and treat them like a tenant. If you treat them like an owner, a judge might also treat them like an owner which could nullify the option. You do have the special maintenance and repair clause in the paperwork but when the tenant/buyer is first moving in:

  1. Always change the locks from the previous tenant – if you don’t change them and someone still has a key, you could open yourself to serious liability.
  2. Clean the carpets.
  3. Repair any paint problems.
  4. Make it habitable.

When you properly screen your tenant/buyers, you shouldn’t have much trouble once they have moved in. Still, this is a transition from them being tenants to becoming homeowners. During the first couple of months some may still treat you like a previous landlord. They give you sob stories about not having the rent. Most of us can’t afford to carry another family. My strong philosophy about this is, “If the tenant doesn’t pay their rent – you are paying it for them.”

Using the sandwich lease option, you have the best of all real estate investment strategies. As a temporary landlord, you receive positive monthly cash by collecting rent and you make the big flip profit when the buyer completes the purchase. You control the property but don’t own it. It all comes with very little hands on management or money out of your pocket.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

Rent to Own Properties for Today’s Changing Market

As an investor, you have an arsenal of options available when it comes to your real estate investing strategy. You will be wise to consider several before deciding which best fits your current and future needs. There are several variables that go into your decision:

  • Investment funds you have available or can raise?
  • How much you want to make in profits?
  • How much risk you want to take?
  • How fast you want to pocket your profits?
  • Other variables specific to your needs?

Rent to Own Properties Can Be the Best of All Worlds

Rent to own properties work well in all scenarios. Especially my favorite, the sandwich lease option. These are your opportunity to collect reliable monthly rent as a landlord without the hassle of making most of the repairs. Once the deal is in place it becomes a mostly passive income stream. Based on my decades of real estate investing experience, I’m firmly convinced that lease options are the least risky but highly profitable niche for investors.

You want buyers to treat rent to own properties almost as a purchase agreement. Although they are renting, the intention of purchasing is very real. Probable buyers should have an inspection done before signing the contract. Then the buyer needs to take the step of working with a mortgage professional to develop a plan enabling him/her to qualify for a mortgage before the option period expires. This creates the mindset of buying the home. The tenant/buyer takes better care of the home. Your contract specifies they make and pay for most repairs, which saves you the time and money that typical landlords anguish over. At the same time, you collect a higher than market rent with the full expectation of a big profit when the sale closes in a year or two. This is the best of both worlds. The third best world with rent to own properties is the house is appreciating in value all of the time – even if this particular purchase isn’t completed.

Rent to Own Properties is a Solid All Around Strategy

Real estate markets change. They go through a well-known cycle. There are hot market conditions, normal markets, and cool or cold markets. Market conditions don’t change overnight but there are leading indicators. We’ve enjoyed the current hot market since about 2012. This was a sellers’ and landlords’ market. Landlords enjoyed ever-increasing rents. Rent to own investors did also. Rehab flippers enjoyed ever-increasing sales prices. Rent to own investors did also. Today, rent to own properties will continue flourishing as the market moves from hot to normal and will continue prospering even when the market eventually cools off.

Something good for buyers (and rent to own investors) is that most of the foreclosures, short sales, job losses, and other credit alignments from past years are now deleted from credit reports. But that doesn’t make it clear sailing for many homebuyers. As the mortgage market changes, interest rates have been rising for at least a year. Just as important (as a result of past credit troubles) banks are now requiring people to have better credit and longer employment histories than in past years. Rent to own properties will continue thriving in this environment while other investment strategies begin struggling.

Why Rent to Own Properties Will Continue to Prosper

The buyer’s credit score and down payment will benefit in the evolving real estate market. Rent to own properties provide a built-in mechanism to help people rebuild their credit by making timely rental payments during the contract period. This increases the likelihood that they’ll be approved for a mortgage to buy the home a few years down the road. The lease option fee applies to the down payment. Even if that isn’t enough for the full down payment, the buyer now has time and incentive to save the remainder during the option period. At the same time, sandwich lease options continue being favored by investors…

You don’t own it, no one can sue you for it, no one can put a lien against it, this is low risk investing. Your expenses are minimal because the tenant-buyer pays for repairs and maintenance. You pay a small “option fee” for control rather than a hefty down payment. That makes it low cost. Exactly what you’re looking for is a low risk and low cost investment property.

Whom is lease option investing suited for? The short answer is any investor. Beginning investors that are cash poor find it particularly appealing. As does the experienced investor that has maxed out his/her ability to obtain new financing. Also, every investor in between. Real estate investing is about “controlling” as many properties as you can. It is NOT about “owning” as many properties as you can. This makes rent to own properties ideal.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

 

Cash Out or Reinvest When You’re Rich on Paper?

What a great question to consider! The number of variables going into this answer would easily fill a book. Just to narrow this down, lets’ define cashing out as selling your real estate holdings to use the cash for another purpose. Maybe it’s retirement and you want to move your money into a super secure investment like an insured savings account where the risk of losing money is almost zero but your money won’t keep up with inflation. Or maybe you just want to take all the money to go on a wild spending spree starting with a trip around the world.

First Step When Deciding to Cash Out or Reinvest

Hopefully, as a real estate investor, you find yourself in the enviable position of needing to decide whether to cash out or reinvest the appreciated value of your existing properties. Many investors that bought at the bottom of the market (around 2012) are now in the desirable position of controlling property that has significantly appreciated in value.

This means reviewing your portfolio to decide if holding is the right thing to do or if cashing out is the best option. A few important variables to consider include:

  • How much wealth you have and how much you want?
  • How diversified your portfolio is?
  • Are there better investing opportunities available?
  • Your current ROI?
  • Major life events such as retirement or funding a child’s college education?
  • Switching from active to passive income streams?
  • Many others based on your personal circumstances?

Here are basic possibilities that I think help most people make the decision whether to cash out or reinvest:

Cash out when the effort to own and manage properties becomes more painful than the joy of earning.

-OR-

Reinvest towards an income stream that provides the highest return with the least amount of work.

Real Estate Cycles

Real estate investing goes through cycles. There are times to buy (low point of the cycle), times to hold (middle), and times to sell (high). This isn’t complicated. All types of investing are about buying low and selling high. What is more complicated is deciding whether to cash out or reinvest your real estate holdings.

The ideal time to buy during the current cycle  was 6 or 7 years ago (low point). Since then, rents and property values have been steadily increasing. These are the years to hold and profit (mid point). I don’t have a crystal ball but based on many years of experience, now is the time to be considering selling at the high point. With that, comes the decision to cash out or reinvest your real estate holdings.

Reinvesting Options

You might want to diversify your investments outside of real estate into something like gold or the stock market. Those aren’t my forte so I’m not going there. What I do know is there are much better options than cashing out to finance that around the world trip and a life of luxury. Mainly because real estate investments are a chance to have your cake and eat it to! What I mean is you can sell a property, take some cash out for that trip, and reinvest most of it to continue a passive income stream enabling a life of more luxury.

Perfectly timing the real estate cycle is impossible. However, each phase of the cycle is long enough that you have ample time to take advantage of each phase. With this being the high point of the cycle, it may not be the exact time to sell but it is the right time to be considering what you will reinvest in during the inevitable low point. You should also be working on marketing materials for the properties you anticipate selling while we are still at the high point.

Regardless of the cycle phase, I’m always looking for sandwich lease option opportunities. These work fantastically in all phases and are particularly profitable during this high point because there are so many people that want to buy but are just a whisker away from qualifying for a loan. The sandwich lease is the perfect bridge between renting and homeownership.

Once we enter the low point, you’ll find me writing about and emphasizing how to invest in distressed properties that include foreclosures, REOs, short sales, and how to find individuals desperate to sell.

Cash Out or Reinvest Tax Considerations

If you cash out and pocket the money you are going to be hit with a huge tax bill unless you have a tax strategy. On the other hand, reinvesting in real estate offers the best tax deferred and possibly tax free strategy available with the 1031 Tax Exchange. Note: the tax free version requires an additional strategy involving trusts, annuities, or something similar. But deferring 100% of taxes is available to all real estate investors any time they sell.

Depending how long you’ve owned the properties, moving the money elsewhere will almost certainly result in long or short term capital gains taxes along with state and local taxes. When you reinvest in real estate, the 1031 section of the IRS tax code enables you to reinvest in a different (typically more valuable) property without paying the capital gains taxes or the depreciation recapture tax.

As you ponder whether to cash out or reinvest, it’s a good time to consider using a 1031 exchange to move into a more passive income property. One delivering reliably high income but that is low maintenance and less management.

The 1031 exchange does require that you make a “like-kind” investment. That doesn’t mean that you need to replace your existing eight single-family houses with different eight single-family houses. It only means that you have to replace your real estate investment with another real estate investment. To receive the full tax benefits, you do have to purchase a replacement property that is of equal or higher value. Instead of eight single-family houses, that could be a 60 unit apartment building with an onsite property manager.

What you need to do now is TAKE ACTION!

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

The Diversity and Phases of Commercial Property Investing

Brick and mortar retail is melting down. However, this doesn’t mean that commercial properties are crashing in general. Although online retail continues hammering away at brick and mortar, some retail malls are showing promise when repurposed into multiuse communities offering homes with convenient access to restaurants, entertainment, medical clinics, and even retail. Still, commercial properties include much more than retail stores.

The Diversity Commercial Real Estate Investing Offers

Commercial property investing offers a tremendous number of sectors and niche sectors. The major sectors are:

  • Office Buildings
  • Industrial (including manufacturing, warehouses, and specialty)
  • Retail/Restaurant
  • Multifamily
  • Land
  • Miscellaneous (hotels and medical are included but often considered as separate categories).

Commercial properties are incredibly diverse within each major category. For instance, office buildings include everything from a 100 story building in NYC to a small accounting office on Main Street USA. And although the commercial property investing cycle follows the macro economy, each category has individual cycles within the macro cycle. Notably, student housing, manufactured homes, and industrial properties have been the top performing commercial real-estate sectors over the past 12 months, according to Green Street Advisors. And counter to the single-family residential market, multifamily housing investing has slowed substantially during the same time.

Market and sector knowledge is critical to your success with commercial property investing. If you have personal knowledge about a particular commercial sector, stay with that sector. If you have no knowledge about a sector, gain the knowledge you need before investing. Even if you’re only the landlord, you don’t want to invest in a hotel if you don’t know anything about the hospitality industry. Same thing with the manufacturing sector. You don’t want to own an industrial strip if you don’t know the best use of the property to maximize cash flow.

Commercial Real Estate Valuation

Commercial property investing differs in many ways from residential investing. Property income, expenses, and values are calculated differently and success requires speaking the language of commercial real estate fluently. Along with sector knowledge, you need to learn new profit and loss formulas before investing commercially. In residential you may have only bought properties for 75% of after repair market value or rentals that cash flowed 15% above expenses. In commercial real estate, you need to understand cap rates, net operating income, and loan to value ratios. These are not difficult but you need to fully understand what each means and how they affect your profitability before moving into commercial property.

Residential property valuations are heavily dependent on an appraisal comparing similar houses in the neighborhood. Commercial values are much more dependent upon the amount cash each generates. There are other valuation methods. For one, the Income Capitalization method is based primarily on the amount of income an investor expects to receive from a particular property. An example is a building purchased for $1 million, and expected to yield 8 percent based on local market research. That $80,000 per year in expected income could be increased by improving inefficiencies and/or by passing along some costs to the tenant, like electric or water usage. Something that commercial property investors look for are rents that can easily be increased because they are below market.

Expected future income capitalization is reflected in the present value. Value is linked to rental income via the property’s cap rate. The equation for the property value is:

Current Value = Net Operating Income / Cap Rate

The cap rate is calculated from market sales of comparable properties in the same neighborhood. The cap rate can be adjusted to account for unique features of the property, such as high-quality tenants or an unattractive/outdated façade.

The advantage of the income approach for commercial property investing is that it accommodates recent sales activity of comparable properties and is adjusted for unique factors. Its disadvantage is that it doesn’t account for vacancies, which might lead to an overstated net operating income (NOI) and value.

Commercial Real Estate Phases

Not every element is present during every cycle phase but these are the signals you are looking for. Also, specific sectors can go through these phases separate from the macro cycle (such as retail and multifamily are today).

A better term than phases is probably the circle of commercial real estate phases because each phase consistently follows the other. For instance, recovery begins after recession and precedes expansion.

Recovery. This is broadly defined as declining vacancy rates following recession without new construction occurring. Typically, a recession occurs when new construction exceeds the demand created during expansion. Recovery occurs when excess inventory from the previous expansion is finally absorbed (e.g. vacancy rates drop). The latter part of the recovery phase is a mostly balanced market.

Expansion. When demand during the recovery phase exceeds available inventory, the market begins expanding with new construction. This is typically noted with rapid rent increases. Of course, rent growth means more income which rises the value of existing (ready to occupy) properties. During the early to mid-expansion phase is a good time for commercial real estate investors to sell for the highest profit. As long as demand grows faster than supply, vacancy rates continue to fall and the expansion continues.

Hyper supply. At some point, supply catches up with demand. The first indication is when the pace of rent increases slows. This is near the point of equilibrium, and marks the end of the expansion phase. When the supply of new construction exceeds demand, vacancies begin to rise and rents begin to fall. If new construction slows enough a severe downturn is avoided. However, because new construction takes a long time to become occupant ready, new construction already in the pipeline often leads to hyper supply.

Recession. When the oversupply becomes massive, it leads to a recession. It’s noted by increasing vacancies that cause rents to be lowered. Losses can occur from lower rents and rising interest rates if balloon payments come due. This is not the time to sell. Recession is a buyers’ market because the next phase in the circle of commercial property investing is recovery.

If you want to further discuss commercial property investing as a wealth building strategy, please click here.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

Seasoned Funds and Paper Trails – Financing Dos and Don’ts

An unexpected $75,000 inheritance from a relative drops into your bank account 3 days before you’re going to close a real estate deal. You think it’s a great thing. But it’s not. In the mortgage-lending world this sends up red flags that will likely delay the final loan approval by at least two more months. In a sellers’ market this can be a disaster if you’re up against a hard deadline to close and the seller has a backup offer waiting in the wings. It’s situations like this that make it imperative that you understand seasoned funds and paper trails.

The reason your real estate deal is delayed is because the mortgage officer is going to need to see the paper trail validating where the funds came from and any strings attached. A lender’s first assumption is the $75,000 is a new loan that you just took out. A new loan throws all of your financial information into question. A new credit report must be run but will probably be delayed 60 days to give time for the possible new loan to appear on it. A loan changes your debt-to-loan ratio that the underwriter calculated when preapproving the loan. The lender may also need to reverify all of your other assets.

Having a big chunk of money unexpectedly appear in your account means obtaining notarized paperwork, certified bank statements, and a myriad of paperwork from people you may or may not know. Even an inheritance involves estate attorneys. It could require the cooperation of an elderly relative with dementia that needs to have everything blessed by a guardian. Documenting seasoned funds and paper trails can become a nightmare if you don’t do it correctly from the beginning.

30, 60, Even 90 Days of Seasoned Funds and Paper Trails

Experienced investors will know most of this information but might pick a new tip or two. New investors want to begin mapping out a standard process to follow for their first and future deals requiring documented funds. First time buyers may find much of this a shock and hopefully aren’t looking for a quick fix if they neglected creating seasoned funds and paper trails from the beginning.

This mostly involves funding the down payment and closing costs. However, in more complex deals it includes reserves and other contingency funds. The place to begin is by setting up a bank account exclusively to gather and distribute the funds for this deal. It makes it easier for the lender to follow the money. The lender strongly wants this account to have signature authority limited to the names that will be listed on the property title or deed. They don’t want a 16-year-old teenager to have ATM access to your down payment. Nor do they want a business partner not related to the purchase to transfer $10s of thousands to an offshore Caribbean account. They want you to be solely accountable for the funds.

Large cash deposits (or a stream of small deposits) are not seasoned funds with paper trails and will always raise a red flag. Cash could be from a temporary part time job you take that pays you under the table or illicit street drug sales. The point is, these cannot be verified as coming for a legitimate source. Or maybe the funds came from selling an asset such as a boat or motorcycle. If so, make sure your lender is expecting the sale because it affects the asset column of your financial statement. And don’t do it in cash. Create a paper trail with copies of certified checks, a bill of sale, and a copy of the title transfer. This includes all significant fund transfers including from your business account, the sale of other real estate, financial gifts (with notarized gift letter), and loans. A good rule of thumb is not taking out ANY new loans for 90 days before closing a real estate purchase. Not from a relative, no new credit cards, not even for a new TV.

Acceptable Sources of Less Seasoned Funds and Paper Trails

For the most part, all funds that have been in your account and available to you for 60 to 90 days will be assumed to have come from a legitimate source and to be your money. However, many people do have acceptable funds appear inside the 60 to 90 day window that don’t need to be seasoned. These typically include:

  • Regular payroll deductions going into your savings account. The last few deposits don’t need seasoning when the lender can see a long pattern of regular deposits.
  • Retirement funds when you can show these came from an account in your name. Often you don’t want to season these funds because IRS rules allow first time buyers to use these funds, penalty free, when the funds are used to purchase a home within 120 days of making the withdrawal.
  • Gifted funds when you can show a proper paper trail. It’s not your paper trail the lender wants to see. It’s the paper trail for the account the gifted funds came from. The lender wants to be sure that the gifter didn’t take out a loan in your behalf that they are expecting you to repay. The lender wants to see the funds were seasoned in the gifter’s account.

You may not like it but your lender is going to dig deep into your finances. Your best approach is providing clearly documented funds and paper trails from the beginning. Not being straightforward from the start causes delays while the lender looks even deeper into your down payment and closing funds.

What you need to do now is TAKE ACTION!

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

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Disclosures and Tenant Agreements (And Mistakes to Avoid)

When it comes to disclosures and tenant agreements, the assumption is that the landlord knows much more about the property and he or she is more astute about business contracts. Many renters don’t think of a rental agreement as a business contract that but that is exactly what it is.

Being a landlord is a great and profitable profession. Today’s rental market continues growing as more people choose renting over buying. There are many ways you can become a landlord. By far, my preferred method is the sandwich lease option because it enables you to transfer the most responsibility to the tenant-buyer. Still, as a landlord, you have responsibility for complete and accurate disclosures and tenant agreements.

Disclosure and Tenant Agreement Basics

Landlords and property managers are required to follow their federal, state, and local laws about informing tenants of policies, facts, and rules regarding the property. Real estate investing is always about location, location, location. Rental properties are no exception. It’s imperative that you comply with these laws at the federal, state, county, and municipal levels. This includes providing government pamphlets such as the EPA’s “Protect Your Family From Lead In Your Home” (properties constructed before 1978).

There is a distinction between disclosures and agreements although in some states the disclosures can be part of the agreement document. Still, you often must have the tenant initial clauses in the agreement acknowledging the disclosures. Common disclosures include:

  • Security deposit details such as where it is held, if and how much is nonrefundable, and the conditions that make it nonrefundable.
  • Tenant rights regarding condition of the rental at move in and move out. Including the tenants’ right to be present when the landlord inspects the property at either the time of move in or move out.
  • Existence or nonexistence of safety features such as smoke detectors and/or carbon dioxide detectors.
  • Existence of any outstanding code violations.
  • Existence of shared utilities with other tenants such as shared electricity for halls and outside lighting or a shared hot water boiler.
  • Disclosure of health hazards including lead paint, mold, or radon.
  • Any flooding history the rental unit might have.
  • Disclosure of a statewide sexual offender database.
  • Any previous presence of a drug lab such as a meth lab that could leave hazardous chemicals behind.
  • Notify the tenant before performing pest control.
  • Any tobacco, smoking, or pet policy.

This is not a comprehensive list of everything that landlords must disclose and/or include in tenant agreements. Rather, it is only an indication of what your disclosure and tenant agreements need to contain.

Important Aspects of the Tenant Agreement

Most, if not all, states have landlord/tenant laws requiring a signed lease for residential properties. The point is informing tenants what they are getting into. Disclosures and tenant agreements are intended to protect tenants from unscrupulous landlords and to establish conditions for when landlords can have unwanted tenants evicted. Your rental agreements should spell out:

  • All adults living at the property. This includes married couples, those living together, children, and roommates. Have all adults sign the agreement making them individually responsible for paying rent, not causing damage, and for all terms of the agreement and rules. The agreement should also state only these people and their listed children can live there. You may also want to specify how many and how often guests are allowed.
  • State if the rental is month to month or for a set length of lease. Among other things, this can determine how much notice must be given before increasing the rent or to vacate.
  • Clearly state the amount of the monthly rent. When it is due and any late charges that apply. Also, specify whom the rent is paid to (you or a property manager) and where it is paid (mailing address). Include acceptable forms of payment (personal check, money order, cash).
  • Explain any security deposit. Comply with all local laws. Include the dollar amount, the purpose, when, and under what conditions it will be refunded, along with any non-refundable portions (pets, cleaning, damage, etc.). Some local laws require you disclose where the deposit is held and how any accumulated interest will be distributed.
  • To protect your interest in the deposit, clearly set out your and the tenant’s responsibilities for repairs and maintenance. Their requirement to keep the place clean and sanitary. Limits on any alterations and repairs the tenant can make (painting, wall hangings, etc.). And where to report needed repairs.
  • Your legal right to access the rental. Notice to be given and emergency conditions for entry. Some locations require 24 to 72 hour notice unless there is an emergency. Know your local requirements.
  • No illegal activities – no drug dealing, stolen property, prostitution, etc.
  • Any other restrictions such as no business activity. You may want to include a separate signed copy of rules about noise limits, no repairing vehicles, etc.

Mistakes to Avoid in Disclosures and Tenant Agreements

These prohibited disclosure and tenant agreement concerns become second nature for most experienced landlords but you should be on guard about these when getting started.

  • Avoid discriminating questions. You must fully comply with the federal Fair Housing Act. This means no questions based on race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women, and people securing custody of children under the age of 18), and disability. Don’t put anything of this nature in writing or ask verbally. You may have additional local laws.
  • It is illegal to include provisions in a rental agreement to waive the rights listed above.
  • In some states, landlords are legally responsible to keep tenants safe from dangerous conditions on a property or safe from criminal activity. You may be sued if you are aware of these conditions and fail to take corrective action.
  • Almost every state has an “implied warranty of habitability” regardless if it is part of disclosures and tenant agreements. The most basic of which requires providing heating, plumbing, clean water, a structurally safe roof and flooring, and electricity.
  • You must comply with state and local eviction rules.
  • Know and comply with how you can and cannot apply a security deposit. A landlord who fails to provide an itemized statement or return the unused portion of the security deposit may end up owing the tenant punitive damages.
  • Know your local laws regarding what you can and cannot do with abandoned property that a tenant leaves behind.
  • Know the laws requiring insurance on your rental property.

Rentals earn money with only a minor investment of time and energy. Disclosures and tenant agreements are generally created one time and are easy to comply with after that. Still, you need to periodically review these for legal changes.

Somewhat Odd State Required Disclosures

Although these may seem a little humorous, these are actual state and local laws that must be complied with.

  • In Nevada, landlords must provide information regarding the right of the tenant to engage in the display of the flag of the United States.
  • In California, landlords must disclose knowledge of any former military ordnance locations in the neighborhood.
  • In California, landlords must disclose when he/she has applied for a demolition permit.
  • In Maine, landlords must provide a residential energy efficiency disclosure statement.
  • In New Jersey, landlords must notify tenants twice a year that they can request child protection window guards.
  • In Texas, landlords must make a copy of the landlord’s tenant selection criteria available if requested. This goes beyond the federal Fair Housing Act.

Absolutely don’t take these as all-inclusive of state and local requirements. The point is for you to be aware of the need to understand all local requirements for disclosures and tenant agreements.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

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