Why Aren’t Lease Options Appealing to Realtors®?
When I first started doing lease options with Realtors® back in the early 1990s, it was a strong market in Detroit, but I wasn’t getting very many leads from Realtors®. This both puzzled and bothered me because I thought I had something great to offer them.
I went to my best friend, Debbie, who is a local Realtor® and said, “Deb, look what I’m offering these Realtors®. It’s a great thing for their sellers! Why aren’t they all coming to me with their deals?”
She looked at me and said, “Wendy, do you truly believe it’s a great deal for the Realtors® if they have to wait three to five years for their commission? They may not even be with the same real estate company when the house closes. This is a HOT market, they will probably sell their listings to someone else and get paid before then. They’re not motivated to work with you on these types of deals. Why should they wait for years for their commission when if they just wait for a couple more months possibly weeks on the MLS they’ll get their full commission now?”
I replied, “So what should I do?”
She said, “You’re creative. Think of something.”
I said, “You mean like pay their commission up front?”
She responded, “That would be a really good start.”
And that’s when I started paying their commissions up front and my ability to purchase completely turned around, especially in a seller’s market.
Addressing the Commission Issue
Realtors® are not greedy, but they do want to be paid for the services they are providing for their sellers.
- They are thinking about their sellers, and
- By contract they’re not entitled to their commission until the home closes. If closing is a number of years down the road, what’s the likelihood that the Realtor® wants to wait that long and what’s the likelihood that they’ll even be with the real estate company that they are currently with (the deal is with the real estate company, not with the RealtorÒ). In most states, if a Realtor® leaves one agency and goes to another, they may forfeit their commissions. This makes this strategy unappealing for Realtors®, primarily in a HOT market.
The Realtor’s job is to look out for their seller’s best interests, and many Realtors® don’t feel a lease option is a good solution for the sellers. If the Realtor® is simply dead set against it, just move on. However, there are lots of Realtors® out there, and there are many who are creative enough to want to work on finding innovative solutions for their clients. You just have to help them understand when to do that. If a seller is adamant and won’t do it, also move on. Only spend your time on the ones open to the idea.
The reason why most Realtors® don’t know about creative solutions and can’t help their sellers consider a lease option or a lease purchase is because most sellers can’t consider a lease option or purchase. Most sellers do need their cash out in order to buy the next home. I would estimate that only five to ten percent of sellers can consider a lease option because these sellers don’t need their equity out of their home to buy their next home. The sellers that can consider a lease option or lease purchase usually will do it for two to five years in a seller’s market and three to ten years in a buyer’s market. This is a “Wendy Patton estimation” based on my experience and my students experience around the country. The seller’s situation will determine the length of the lease option, the payments, price and other terms.
For those sellers where a lease option is a viable solution, the next hurdle is to insure that their Realtor® will benefit from the deal as well. We must keep the Realtor® in a win/win situation, and keep that positive rapport with the Realtor® for future deals.
In a seller’s market the letter would look like this:
Dear Sally, Date
Would you like to sell your listing at (address of property)?
Maybe we can help. We buy homes especially when your client can accept terms like a lease /purchase. As soon as your client says to you, “If my house doesn’t sell soon, I might have to rent or lease it,” this is a great indication that our services might help you sell the listing.
When your client sells their home to (Your Company Name)…
YOUR COMMISSION IS PAID UP FRONT and it would be a guaranteed closing for your seller. When would a client be able to accept a lease purchase? Here are some situations:
- They don’t need their cash out yet but would like to either have cash flow or their payment made or
- They have very little equity (i.e. financed near 100%).
We have many references from clients like yours and from other real estate agents, including Agent 1, Agent 2, Agent 3, etc. Please talk to them to find out how easy it is to sell a home to Your Company Name. Give us a call if this type of solution might work for your client.
In a buyer’s market I would use the words lease option and I would also say their commission is paid in full versus up front.
After I started to send out this type of letter the deals started to come in – especially when the commission was no longer a stumbling block issue for the Realtors®. They didn’t have to worry about waiting for years to be paid for the work they were doing then.
Now, in a weaker market or a buyer’s market, I don’t pay their entire commission upfront. I might only pay part of their commission up front. I might pay one to one and a half percent versus three percent in a seller’s market. They then would have to wait for a portion of their commission until closing. In a weaker market they realize that they might not get paid at all if their listings don’t sell. The other reason for the lower payment to the Realtor® is that I am getting less from my buyers in these markets. Remember, slower market for sellers = slower market for buyers less money for sellers = less money for buyers. Realtors® understand that when business is slow for them, it is slow for me.
Example: I offer $200,000 in a seller’s market and am paying three percent of the listing portion of the commission up front. This is $6,000. I would owe $194,000 when I pay off the seller when I exercise my option. If I don’t exercise my option, however, I would not get that money back.
Structuring the Deal for the Realtor
Understanding the current economy is essential for making the offer work effectively. For instance, know whether you are in a strong buyer’s market or seller’s market so that you can structure your offer appropriately.
This is the market where things are selling quickly, appreciating strongly, and sometimes multiple offers on the same house on the same day. This is also a time when the economy is good, things are happening, new construction, etc. When homes are selling quickly, Realtors® are getting paid quickly and in full – so in the beginning of a lease purchase, I offer to front their commission in full – Realtors® prefer a Lease Purchase in a strong seller’s market. Lease Purchase means you are guaranteeing you will buy that home, so don’t do it unless it’s a strong seller’s market, good appreciation, or you’re positive you want to buy that home.
A strong buyer’s market is the opposite: things are not selling, things are slow, unemployment is higher, homes are sitting and sometimes going from one Realtor® to another in an attempt to sell, and there’s little or no appreciation, even depreciation…the Realtors® are not getting their commissions. Now the Realtors® are much more willing to negotiate because they’re likely to lose their listing, and the sellers know that things are slow which is making them more anxious. This is a great lease option time.
During this time I only offer part of their commission up front, possibly part in twelve to eighteen months, and the rest at closing. When I say “I front it,” however, the fee is really coming out of the option fees that the tenant-buyer pays to me and not out of my own pocket. When I assist the Realtor® in getting paid, they are more likely to work with me. The rule of thumb is: weak market = weak offer, strong market = strong offer. Always be fair.
Sequence of Events When Working with a Realtor®
The Realtor® gets paid when I put someone in the home, therefore, when I get money from someone else.
The sequence of events is as follows:
Sometimes I say, “I’ll commit but not until…” and I give them a future date because I need time to find a tenant. Even if my tenant doesn’t move in by the start date, I am still responsible for paying the full commission on that date. It is stronger to a Realtor® and to the seller if you commit to starting on a certain date, regardless of whether or not you have a tenant. If there is no tenant-buyer, the commission will come out of your pocket – not exactly zero down for you the investor, but it is still a “low down” deal. If you have a tenant-buyer, the commission you need to pay will come out of the option fees of your tenant-buyer. You’ll have to decide what risk you can take and afford when the start date comes.
If a Realtor® is working with a non-Realtor® on a sale, the Realtor® will be glad to wait for half of the commission up front but they won’t wait for all of it on the back end. They’ll wait for a double dip, however. A Double Dip is when the Realtor® gets the portion from the seller AND the buyer. If you are not licensed, the Realtor® would get both sides of the deal. Additionally, I need to be very clear about the payment to Realtors®. It isn’t the Realtor® we (the investor) pay but the brokerage the Realtor® works for. The Realtor® gets their commission cut through the brokerage.
Structuring the Deals – The Details
Proposal – This is used to put together a mock-up offer to a Realtor® that they can then present to the homeowner or seller. It will put down the overall terms in writing without the specifics. This saves a lot of paperwork because you only fill out the other paperwork when you have an agreement on the proposal.
Here is an example of one of my proposals to a Realtor® or a Seller:
Your company name, LLC
123 XYZ Street
Innovative approaches to Leasing/Selling
“Your Company’s Name” has 2 programs to offer you…
Please review the following options that we can offer you as a Seller and consider which would serve you best!
Lease with an Option to Buy to Your Company Name #1
Your company name can pay you a monthly fee of $ 850.00 for a lease term of 3 years. We would then have the right to purchase your home within the 3 year term at a price of $126,000.00. $XX will be applied each month towards purchase price.
Lease with an Option to Buy to Your Company Name #2
Your company name can pay you a monthly fee of $ 900.00, for a lease term of 5 years. We would then have the right to purchase your home within the 5 year term at a price of $130,000.00. $XX will be applied each month towards purchase
In both of these options we would pay the rental amount whether or not the home is vacant or rented. You would still need to carry your homeowner’s insurance and pay your property taxes until the home is closed. We would be responsible for everything from the date this agreement starts, including all maintenance (minor and major, except the first 60 days) of course change this if you want something different – for example they pay anything above $500. We would like to have all the appliances left with the home. At closing, you will need to pay the seller’s title insurance, transfer fees/taxes (if any) and any other fees paid by a seller at closing. We also cover all utilities from our contract start date. We will start our rental payments to you when we find someone to place into your home; however, during this time frame you may also market your home for sale. If you sell it before we place someone, then this agreement can be voided by you.
Thank you for considering Your Company Name!
Your Company’s Name
Your Company’s Address
Your Phone number/fax/email etc.
Don’t be anxious on the proposals – make it low-pressure. When you’re first starting out, you‘ll want more deals to go through because there’s a great excitement in the newness of the game. You’ll be sitting on your proposals wanting a quick response. You’ll be thinking of ways to use the money you’re going to get on the backend if it all goes through perfectly. Although I do try to come up with creative solutions if I think there’s a profit to be made, I don’t sit on my proposals. It’s a bit like testing the doneness of spaghetti – you throw it against the wall, and if it sticks, it’s done. If your deals stick, they’re done. If they don’t stick, hopefully you’ve got others in you hip pocket that you’re working on anyhow. Don’t get too wrapped up in a deal happening, because a lot of them don’t happen. I probably get about 40% of the proposals I put out- which means that 60% come up empty.
With some of the Realtors® I know very well, I might even do a verbal. For example, I might say, “See if the seller will go for $1,200 per month, and if they do, then I’ll put together a proposal.” You’re just fishing a little bit to see if it’s even worth sticking around in that spot or moving to another. If the seller goes for it, you hammer out a proposal, and if not, there are plenty of other deals out there!
If it is meant to be, it will be.