When you get into the lease option business, it’s important that you know how to screen tenant buyers. How well you screen them makes the difference whether you complete the sale to make a nice profit or end up having to evict them for nonpayment of the rent and have to start all over.
Learning how to screen tenant buyers has several things in common with screening straight up renters but there is a little more to it when you want them to buy the house in the end.
How to Screen Tenant Buyers Using a Professional
In my professional opinion, I think you need to personally know how to screen tenant buyers. The biggest reason is because lease option investing is relatively rare. While it is very successful, few investors ever use it. The result is there are few companies that know how to screen tenant buyers. Traditional landlords do use property management companies to screen tenants.
If you do decide to go this route, you can require the tenants to pay a refundable or non-refundable application fee. That way, there’s no money coming out of your pocket and you may even put $20 extra into your pocket (know the laws and regulations in your local area). However, these companies are screening credit reports and criminal backgrounds. They are not looking into your prospect’s ability to obtain a loan and complete the purchase in a year or so.
If you can find a property management company or a realtor that knows how to screen tenant buyers, you can probably pass the cost on to the applicant. Otherwise, you’re going to need to do the screening yourself.
How to Screen Tenant Buyers Yourself
You’re going to begin with the same process as you would if you were a traditional landlord. Screen credit reports, criminal history, employers, and personal references. However, with a lease option you need to go deeper. Don’t be surprised when you learn their credit score isn’t up to snuff. After all, the reason they want to buy with a lease option is because they have problems with their credit score. The question is how much risk you are willing to take?
The place to begin is with a mortgage broker. Knowing how to screen tenant buyers means you already know they won’t qualify for a mortgage. However, a mortgage broker can tell your prospect how far away he or she is from qualifying and what they need to do to qualify. The broker will often help the prospect get into a credit counseling program to improve their credit score.
Your role in screening tenant buyers is having a mortgage broker or lender on your team. You then refer the prospect to the mortgage broker and that broker understands lease options.
It’s your prospect that needs to work with the broker to disclose their full financial situation. What you want your prospect to do is get this information in a written report. You then want to have them provide a copy to you.
You use this report to decide if the prospect is a good candidate for a lease option. From the report, you should be able to determine a reasonable amount of time before they can qualify for a mortgage. Sometimes this is within a year or sometimes it might take two years. I would not accept anyone that is going to take more than two years to qualify.
One important aspect of knowing how to screen tenant buyers is using the information from the mortgage broker’s report to write very specific clauses into the option agreement. Specifically, what steps the buyer needs to take to qualify for a mortgage and when these steps need to be completed. If credit counseling is recommended, write that directly into the option agreement.
That’s how to screen for tenant buyers. However, always know your local laws and regulations.
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.
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