Finding and Qualifying a Tenant Buyer

Understanding how to screen tenant-buyers and select them is the key not only to being a good landlord, but also to the business of selling and using the lease option technique.

Finding and Working with Buyers – An Overview of Selling on Options

The weirdest thing about prospective tenant-buyers is that you can’t always tell who is going to exercise by how well things are going with their tenancy.  Some people do end up struggling to pay their rent and end up getting a mortgage on your home, and others pay perfectly and don’t end up buying.  You just never know.

I had perfect tenants in an eighteen month lease option and everything was going so smoothly I was sure that they were going to exercise the option.  Then on month seventeen, I received a call from the woman and she was crying, she said, “We have got a problem. I can’t pay my rent next month.”

She was sobbing.  She and her husband were getting a divorce and she couldn’t pay the rent.  She was very embarrassed and wanted a way to work things out in any way possible.  Thinking she wouldn’t be able to stay, I asked if it would be possible to start showing the house right away, and she said, “No problem.  By the way, I do have some jewelry. Would you take that in exchange for my rent?”

My ears picked up.  “Well, what kind?” I do like jewelry, but really I was thinking I might not ever get paid this rent, so perhaps I should consider this jewelry.

The wife said, “Diamonds and emeralds.”

I said, “Really? When can I see them?”

She replied, “Well, how about now?”

When I got to her home I found out it was her anniversary ring and wedding ring.  I said, “I can’t take those!”

She said, “Really, I want you to have them.  I can’t pay the rent.”

And I replied, “But what if you reconcile?”

She said, “We won’t” and I said, “You just don’t know. I really hope you will.”

Now that just tugs at your heart a bit so I said, “Tell you what, I’ll keep these for you.  I’m a free pawn shop. I’ll keep them a couple of years even, for FREE.  If you ever want them back, just pay that rent, no late fees, nothing.  Just take them.  I don’t want your rings.”

The wife responded, “Oh no, I’m not coming back for those.”  I said, “Well you never know.  You might work it out.  I want you to work it out.”

She said, “No, no, you don’t understand.  I’ve been divorced twice now.  From him.”

She never came back for the rings and I still have them.  Maybe one day I’ll have them reset for my daughter. You just never know what you’re going to end up with in this business.

Finding the Best Leads for Tenant Buyers

Finding good tenant-buyers is the key to making the deal successful. There are many ways to find a good buyer for your home. Here are some of the ways that I use to market my houses:

  • Advertise in the newspaper: Try a few different ads. If no response, make changes and try again.  Know whether you’re in a buyer’s or seller’s market. I have a friend who said in her ad “Free Pizza.”  So people would call her up and say, “What’s this about free pizza?” and she replies, “Every month you pay your rent on time you get a free pizza.”  It’s amazing what people will do for a free pizza.

How to Post a Successful Ad

Run an ad in the paper – “romance sells”- beautiful sunsets, bring your canoe – think of something short and catchy in the ad, things that might reflect a holiday or time of the year, or push on the credit issues, location, etc.  There are so many ways to reach buyers. Try different approaches to see what works for you.  If one ad doesn’t work, try another.  If that one paper doesn’t work, try another paper.

This is a very generic ad – basic. It should appeal to a broad range of potential buyers.

Advertisement #1

Rent with option to buy this 3 bdrm, 1 bath home in xyz town near xxx park. Large yard and view of lake. $1595/month and $5000 option fee gets you in.
Bad credit ok.  (111) 222-3333.

Advertisement #2

Bad credit, no credit, poor credit, we can help. We have homes in this area to help you get your credit re-established. Own a home soon! Small amount needed to get in.   (222)333-3333

Advertisement #2 will bring in the buyer with bad credit.  We are trying to find someone with poor credit.  Not a deadbeat, just someone that needs another chance.

Advertisement #3
Sunset views with a bottle of wine help you celebrate your new home. Low monthly payments required $1395. Small option fee gets you a new start.
Call today (333)444-5555

Advertisement #3 is the romantic type of ad. It is meant to draw in the romantics, young couples, etc. Each buyer responds to different ads, just like the sellers.

Run advertisement #4 at the end of the year or the beginning of a new year.  It is perfect to work on people’s New Year resolutions.

Advertisement #4

Buy your family a new home in 20XX! Start out fresh! Own a home now! 3bdrm, 2ba in xyx town with great schools.  $995 month and low amount required to get in. Call today. No bank qualifying

This ad contains my company website which is always good to put in an ad if you have one. Websites are one of the cheapest ways to advertise.  It is great to direct buyers to a website where you can put pictures of the home or list other homes. You can do virtual tours on your website, additional homes, multiple properties, many pictures, and other advertising, etc. I also will give them information on how lease options work on this website. I am a Realtor®, so I have to disclose this in my ads, and this will immediately disclose that I am a Realtor® when they see my ads.

Advertisement #5

Stop Renting!  Buy Now. We have several homes available with lease option terms.  Oakland and Macomb Counties. Start building your future today. Homes ranging from $995-1995. We can help YOU! (222)333-4444

Advertisement #6

Land Contract Wanted?   We have a home available on terms. Call for a unique way to buy a home.  3bdrm home in xyx town.  $1,295 month.  $3,000 gets you in.    (222)333-4444

This is a great ad for parts of the country where the words land contract are used for seller financing. If your part of the country does use the term land contract then substitute the words Seller Financing – no bank qualifying.  It attracts people that don’t feel they can get a mortgage.  They know they will need the seller to assist them in their financing.  We are not going to give them seller financing or a land contract, but we are pulling them in from those words. We will discuss with them later that we are doing a lease with an option to buy and then they can clean up their credit to get a mortgage during this time period.

  • Referrals from Realtors®: You can get Realtors® to refer buyers to you.

Realtors® usually only work with buyers that can get a mortgage today and can go purchase a home from them.  If they don’t have a “pre-approval” letter, then they basically throw the buyers name in the garbage. I created a letter called, A Piece of Garbage or $500.  The intention is to get Realtors® to give you the name and numbers of the people that come through their doors that they can’t help; the people that can’t buy a home traditionally through their office. If they refer them to me and they buy a home using a lease with an option from me, then I will give them that amount when they move into one of my homes.

You can further entice them by offering them more on the back end if they actually buy the home down the road. You decide how you want to run your business and what you want to offer, but Realtors® have leads on lots of these types of buyers. If you can’t find them yourself, or if you need more, then consider bellying up to bar and offering to pay more. Remember, these are the Realtors® I want to find my sellers from also.  Tie this all together now from Chapter 8 and 9, and see how powerful it can be to be working with Realtors®!  They can bring you sellers AND they can bring you buyers – think of the possibilities!

  • Websites are one of the best ways to show your prospects the details of how options work, but also the details of a particular home.

Websites can also be used to show all of your properties when you get others. It is the least expensive way to advertise your homes.  I am not a technical person, nor do I want to be one.  You can buy a website for a low yearly fee and hire a high school or college kid to get a website set up for you. They are not expensive; yet, they can provide the viewers with a lot of information on your homes and services that you can’t afford to print in a newspaper.  Most people have access to the internet and have an email account.

  • Signs: Placing signs in front of homes that say Lease to Own, Rent Option, or Lease or Buy, etc. Also, if you have a home that is on a busy street or on a corner lot, put in the lease with that tenant that you can always put a sign out front to draw in tenants for other homes you have. Signs in front of homes do bring in calls for that home or others.
  • Referrals: Offer your current tenant-buyers free rent or option credit if they refer a friend that lease options from you. I prefer the option credit, because it is not cash out of my pocket and it entices them to purchase the home. If they don’t purchase it costs me nothing; if they do it comes out of my pocket later.

 There are many other ways to find tenant buyers, but experiment with them and see what works best for you.

Types of Tenant Buyers and Their Credit Situations

There are many types of credit situations that people have. There are four types of credit to be discussed:

  • Good
  • Deadbeats
  • Bad with Reason
  • Unknown

When a person has perfect or good credit, they don’t need to consider a lease option.  This technique is not necessary in order to buy a home. People with good credit can work with a Realtor® and buy any home they can afford. They also could find a home for sale by owner and work directly with a mortgage broker to get a loan.  They have many choices. They don’t need you!

The opposite of good is bad. Deadbeats are those that have poor credit and no excuse for it.  They have the money but they just choose to ignore paying their bills at all or on time. They tend to be poor money managers or they are lazy and don’t want to work to pay minimal bills.   These are not the type of buyers we want in our home.  They have habits and lifestyle changes that need to be made and you will not be the one to make them happen. Deadbeats are deadbeats!   You don’t need them!

Then there are those people that have poor credit for a reason.  They are good people that had something bad happen to them.  Bad things happen to good people.  Bad credit can be caused from many different situations including: loss of job, divorce, medical problems with no medical insurance, disabilities, etc.  These bad things can cause problems to an individual’s credit.  They have hit the bottom financially and are on their way up again.  They have improved their situation, but not enough to go and buy a home yet.   These are the types of buyers you will want buying your lease option homes. Bankruptcies are at an all time high in our country.

When a person files bankruptcy they may not be able to get a mortgage for several years after the discharge.   People with collections or late pays on their credit report need time to heal these situations.  Of course now there are more people then ever that went through a foreclosure or short sale.  Many people won’t wait until they can get a mortgage.   In our country we tend to want things now.  We overspend.  Therefore, this might be why we are at an all time high for bankruptcy.  This situation makes the selling of lease options an opportunity for us real estate investors.  People want to buy now, but can’t.  They are willing to pay more for a home on an option, and have it now than to wait and save money.  It is the “we want it now” mentality.

There are two things many people ask themselves when buying a car; how much down and how much a month.  If those two things fit in the budget, then they buy the car. The price of the car being $28,000 vs. $26,000 was irrelevant. Homes are the same way. Therefore, the end price is not as important as the terms.  Lease Options give terms to people with less than perfect credit.

The people that fall into the unknown category need to be evaluated more carefully.  They have poor/bad credit but it is unknown as to whether or not they have improved their situation.  The credit is still bad, but there is a reason.  I would recommend you stay away from those people or have a lender evaluate them first.  If a lender can’t tell you if they are improving and will have a chance to get a mortgage, then I would recommend you stay away from them now.   I would further recommend they hold tight for a few months and re-evaluate their situation to see if it has improved or changed.  We want the people that had something bad happen to them, but they are on their way to repair and improvement.  They are on their way up again.

Qualifying the Good Buyer

You are not looking for a bum when you run their credit; you are looking for someone that had a blip in their credit and now they are on their way to financial stability.  When you look at someone’s credit, see if they are on their way up or not.  You can see what they have paid recently and what is still behind. This will show up on their credit report.  Learn to read credit reports and get set up on a system that works for you.  If you don’t know which system to use, talk to others in your real estate investors group.  They will know which companies provide which services in your area. You can also work with a mortgage broker to run credit and do the lease option approvals.

Your Standards

HUD (Housing and Urban Development) requires that landlords and employers have their standards in writing.  If you don’t have your standards in writing (and unfortunately few landlords do) then you are liable to end up in a pickle if someone accuses you of violating this rule. Your standards do not have to be complex but should be able to be produced if someone at a local or federal agency or anyone off the street requested a copy of them.

They might be something as simple as this:

            Qualifications for Tenant Selection for Majestic Realty, LLC – Lease Options

  • No Landlord Tenant Judgments Unpaid
  • Ability to Pay All Outstanding Judgments/Collections
  • Good Landlord Reference
  • Gross monthly income equal to 3 times monthly rental rate
  • If any Bankruptcy – Must be Discharged
  • Option Fee Available or Must be Negotiated/Financed

 Prefer they have spoken with a mortgage representative

On my lease option standards I don’t put a credit score, but I do state that if they have a bankruptcy it must be discharged. I also don’t put length of employment, but you can.  These are my standards for lease options.  My standards for my regular rentals are stricter.  You have to establish your standards and they need to be in writing.

Screening a Good Buyer

Screening a buyer is extremely important and yet some of us investors still go by instinct or illegal decisions.

“We liked them,” some investors will say to me.  We want to buy from sellers that “like” us, but we don’t sell that way. There are too many really good liars in the world and those of you that feel you can “read” people or rely on your gut feelings are set up for a rude awakening.  Many of my worst situations came from my own desire to believe in people.  We should all screen people as if we were blind and deaf. We would then screen them strictly on the facts and not our opinions or prejudices.    Things to look for:

  • Screen a tenant by reviewing their application Check it for accuracy and make sure they did not lie to you.  If someone lies to me, they are denied the occupancy.
  • Check their name – get a copy of their driver’s license.
  • Check their landlord history. The current landlord may want to get rid of them, but the previous landlord has nothing to hide. Call them both! Confirm it is the real landlord by one of two ways: check it on county records, or call the person and say a different amount of rent than on the rental application – example, “Hi, my name is Wendy. I am calling for a reference on your tenant named Joe Smith.  Can you tell me how long he has rented from you? How does he keep your home?  Has he been a good tenant? Would you rent to him again?  Also, I see he pays you $900 per month, right?”  Actually the application says $700 or something else.   If this is Joe’s friend, he will say, “Yes, that is right, $900 per month”, if it is the real landlord he will correct it, “No, Joe only pays $700, did he say he paid $900?”  Then I said, “Oh, no I see you are right.  It does say $700, I miss read it.  Thanks so much for your information.”
  • Check their employment – I use the same technique when I verify their income as I do their rental amount. When I contact the employer I say, “Joe put on his application that he is making $16.00 per hour, is this correct?” when he actually put $12.00 per hour. Trust me, if it is his employer and not his buddy they will correct you on this one! On occasion I will also ask for the most recent pay stubs to put in the file. This information is also handy to have in case you ever have to garnish wages. Make sure to verify hours they work and time on the job as well.
  • Check their banking information, you might need it later.

Know What Are Reasonable and Unreasonable Expectations

Many of my tenants have pets and most of them smoke.  For this reason I never say “no smoking” and “no pets” because I wouldn’t have many of my tenants.  Smoking and pets don’t make people bad prospective tenants.  However, here are some things on their application to look for that are potential smoking guns for bad tenants:

  1. Why did they move? When a prospective tenant says they had a “bad landlord” before, it puts up a red flag to me.  I know there are bad landlords out there, but the red flag it raises is that they are blaming someone for their problems.  So I look further to see if there are other instances of blaming.  If their business went into foreclosure are they blaming their accountant?  If they have tax liens are they blaming the IRS?  Be especially watchful for the blame game.
  2. How long have they both had their current jobs, and how long did they have their previous jobs? What is the salary they are currently making?  If they haven’t been employed very long in their current situation, call their current employer to get an employment verification.  Get the verification from an executive in the company or from the CPA/Accountant.  Do not get it from the receptionist!  Get the start date of employment as well as the current salary.

The Credit Report

Run a credit report and see what’s going on with their debts.  Some people may have medical issues that have caused them to have their current financial difficulties but credit scoring overlooks these. What is more important are repossessions, foreclosures, bad credit card debt, judgments from landlords etc.  If they have a string of bad debts, you could be the next bead on that string.

The credit reports I receive have bad debts shaded and good debts in white.  I would like to see a lot of white on the page.  Too much shading indicates a lot of current and potential future problems.

  1. Do they have frauds on their report?
  2. Do they have bankruptcies on their report? This is not necessarily a deal-breaker, as bankruptcies can happen to even the best people and can sometimes be out of their control.  However, the important question is, what are they doing to repair the bankruptcy?

Criminal Background Check

I don’t run criminal background checks, even when the tenant “looks” like what I would consider to be a criminal.  If you do one you must do them for all.

One of the first houses I ever bought was up for showing.  Two rough-looking guys on Harley Davidson motorcycles drove up right onto the lawn and wanted me to show it to them.  I was just twenty-one years old and feeling a little intimidated by these big, scary guys.  They ended up renting the house, however, and they paid their rent perfectly on time every month as well as leaving the house better than when they rented it. Looks simply don’t count. You must turn a blind eye and only focus on the qualifications on paper. In that spirit, you should also be thoroughly versed in the current fair housing laws.

What You Should Know About Fair Housing Laws

Fair Housing laws are an entire seminar in themselves.  Realtors® around the country have half- to full-day training sessions on this topic alone, because fair housing rights, when violated, can cost owners hundreds of thousands of dollars.  This is not an area where you want to mess up.  The bottom line is this: select a tenant on their application alone and nothing else. There are federally protected areas and there may be some state protected categories also.  Each state has their own protected areas, so check your state for the details. Your local real estate investors group can help point you in the right direction.

The way to be really safe is don’t judge anyone by the way they look or talk. This is why I say that we should be blind and deaf when selecting a tenant.  If we would just evaluate on the application process alone, then we would stay out of trouble.  Then the selection would be based truly on the facts not our gut feelings or our instincts.  Besides, many times our intuition is that someone is “good” and they later are “not so good”.   Stick with the law and you will be safe.

The federally protected categories include:

  • Religion
  • Race
  • Nationality
  • National Origin
  • Color
  • Sexual Preference
  • Marital Status
  • Age
  • Weight/Height
  • Familial status – while you can’t ask a potential tenant how many children they have, you can ask how many people total will be residing in the home. You don’t have to rent your two bedroom home to a family of nine.
  • Handicap

Be extremely careful with this area of federal law.  Even an inadvertent misstep may  haunt your career for a long time.

Rejecting a Rental Applicant

If you reject someone’s application, you have to tell them why you rejected them in writing, and there is no need to obscure your reasons.  Be honest and be kind.  Let them know that if they can clean up some of their credit difficulties, that you may be able to help them in the future.  If you feel inclined, you might even suggest they talk to a lender or financial counselor about how they can get their credit report into a more favorable position.

Buyer’s Objections

Although tenant buyers will rarely have any objections to want to rent from you, there are few that should be discussed.  You will need to know some ways to handle these objections and what you can say to your tenant-buyers.  Here are a few of the most common:

What happens to my option money if I don’t buy this home? It’s non refundable.  This house is going off the market during the option period, so there’s a fee for that.  We are providing a service and for this service there is a fee.  If you are not sure you want to buy this home, you should not put an option fee down on this home.  You should rent from someone else. We want to sell this home to someone that wants to buy it in the future. You do want to buy one day, don’t you?

What if I can’t get a mortgage? Then you would lose your right to buy this home. We do have the right to extend or give you another chance to buy this home, but at this point we are not guaranteeing anything.  If the market does go up, we also might increase the price of the home.  We are only fixing the price and terms during the time period we have signed here today.

But, you can talk to another lender if they are working with someone other than you recommended.   Sometimes you can get them approved with someone else.  It is usually a requirement of all lenders to pay off judgments, liens and collections before qualifying for a mortgage.

I don’t want the potential tenant to putz about making a decision, so I always say that I have other people looking and that my advertisement is running, so they need to decide what they’re going to do and how interested they really are. After all, they are the ones in trouble, not me.

There are times when you will find the buyer does not have the full amount to put down on the option fee.  Be creative on the option fees.  I’ve taken two mobile homes in trade for option fees.  I’m not in the mobile home business and I hate them, but it got the deal through!   You can also work on monthly payments with them.  You can take an extra $200 per month towards the option fee until it is paid in full, however, you should always get more upfront then what you would have received if you were getting a security deposit. Don’t ever do less than that.

Once you have your terms determined and your Good Tenant selected then you must get the paper work ready and signed.  Get them locked in and set for the move in date!