Let me be clear, it does not take very much money to become extraordinarily successful as a real estate investor. In fact, it doesn’t need to take any of your money. You can use other people’s money to make just as much profit as any other prosperous investor. It can all be done by paying as much or more attention to the contract terms as you do to the purchase price!
When you seek control rather than ownership, you become a lot less concerned with the purchase price.
John D. Rockefeller’s business strategy is exactly the same strategy that you want to use when buying real estate with lease options!
Your Unique Position When Buying Real Estate with Lease Options
You want to be much more interested in the “terms” of the lease. You still need to be conscious of the price (but less so). More of your attention is on terms such as the initial cost of the lease option fee, how long you’ll have control, and your monthly cost (rent) to maintain control.
Because you are less concerned with the purchase price, you can profit nicely from houses costing very near the full retail value. This vastly opens you to the larger market that isn’t available to other investors that are all chasing a few highly discounted distressed sales.
When buying real estate with lease options, the meat is in the middle. You are that meat in the middle. The seller and the tenant-buyer are the bread and butter. Having bread, butter, and meat in the game makes it a win-win-win for all three.
Building rapport with the seller is key to making a deal.
Learn What the Seller Wants From the Deal
Here is a basic deal directly out of my files that any investor can easily put together. Of course, the numbers will vary depending on your specific location and situation, but the basic deal looks like this. I ran an advertisement looking for a home in a decent neighborhood. The advert read:
Company looking for 3 – 4 homes in the [name neighborhood] area for a long-term lease. Call 222-333-4444.
A homeowner answered the advert. Her Realtor® listing had expired without an offer for her asking price of $189,000. Several other sellers answered my advert but Linda was the most promising because she had an interest in selling as well as being open to a long-term lease. It only took a short conversation to determine that her definition of a “win” was completing the sale at nothing less than $185,000.
Look at all of the sale terms to put the deal in your “win” column.
Clearly, this was very close to the full market value of the house. That meant I had to look at other terms of the deal to put the deal in my “win” column. Most other investors would have instantly walked away because there wasn’t any meat on the bone for them. But when buying real estate with lease options you have much more flexibility to earn a handsome profit.
Letting Linda do most of the talking, I also learned that she had physical ailments preventing her from doing the upkeep and repairs on her own home. For her next home, she wanted a tenant/landlord relationship that required the landlord to maintain the property. She had found a home on a lake that she could get into for $1,000 cash – if she moved fast. That is all the cash she needed from the deal to lease the house she wanted to live in. Completely making her happy required that I assume all maintenance for the house I would lease from her.
Learn how much cash the seller really needs from the deal.
Next, I determined that it would cost me another $4,000 to replace the carpet and paint the interior of the house. This would attract a quality tenant-buyer with the near term ability to purchase the home. I would be in the home for $5,000 ($1,000 to the seller and $4,000 in repairs). Of course, Linda was incredibly pleased that I would immediately spruce up the house (happy seller). I would have control for about 2.7% percent of the $185,000 purchase price (win-win).
I needed to look at the rest of the scenario and possible terms for a successful lease option. But I knew that I was close! Annual appreciation was expected to be between 9% and 10%. That meant I could expect the value to increase by more than $17,000 in the first year (based on $189,000 full retail). That more than covered my initial $5,000 cost. Now, I knew I had at least a win/win deal but I needed to bring in a tenant-buyer to complete the win/win/win formula.
How Buying Real Estate on Lease Options Becomes Win-Win-Win.
Finalizing the Profitable Terms
After buying real estate on lease options, finding high-quality tenant-buyers is a breeze. The same day that I signed terms with Linda, I ran another advert looking for a tenant-buyer. Emma was one of the first people to respond to the ad. She was interested because the ad didn’t specify no pets and she needed a place with a yard that allowed her two dogs. Allowing pets is one of the keys to finding tenant-buyers willing to put down a big deposit. When they have enough for a deposit, you turn that into their nonrefundable option fee (instead of a refundable deposit).
Emma had $16,000 saved towards purchasing a home. But she still had a little work to do on her poor credit, which is why mortgage brokers weren’t yet ready to talk seriously with her. By me accepting the $16,000 as a purchase option fee, Emma was able to get into a home with her dogs and be on the road to purchasing a home by applying her $16,000 towards the down payment.
This created the final piece for the win/win/win formula.
As soon as the deal was in place, I walked away with $11,000 in my pocket. I did it by using other people’s money to structure the deal. Here’s how my numbers worked out:
Option fee to seller (Linda) -$1,000
Option fee from tenant-buyer (Emma) +$16,000
Left in my pocket +$11,000
I also shifted the maintenance requirements to Emma. Going forward, I had to pay Linda $1,100 a month in rent, but I was collecting $1,500 from Emma. That left $400 in my pocket each month until Emma exercised her purchase option.
Emma’s purchase option price was $206,000 with an escalation clause of 9% (appreciation) if she didn’t complete the purchase within 18 months. After accounting for my upfront costs, option fees, positive rent cash, selling price, and related transaction costs, I cleared $32,800 from the entire deal. All by controlling the property without owning it!
In the end, the seller got her full asking price (win), I made a very respectable profit (win), and the buyer owned a home with equity (win).
- Your Wealth Building Arsenal.
- Advanced strategies for Buying and Selling with Lease Options
- Investing In Real Estate with Lease Options.
- Add Personalized Coaching.
- Bring in Cooperative Lease Options.
- Expand to Get the Deed “Subject To.”
- Round it all out by Working with Realtors.
To Your Success,
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.