The Top 5 Mistakes Most Real Estate Investors Make with Lease Options
Article by Wendy
Using the Lease Option strategy can create the most profitable and safe investment in today’s real estate market!
Unfortunately most investors are not doing them correctly and are missing out on the hidden profits available to them when using lease options. Having the hunger to do a deal isn’t enough to do a deal correctly. There are two types of lease options I primarily use: sandwich lease options and cooperative lease options. If you want to know more about these strategies you can go to my website and read an article on both techniques: https://wendypatton.com/articles/cooperative-lease-options-vs-sandwich-lease-options
The Top 5 Mistakes
1. Letting Greed Lead
New investors just have to have that first deal. Sometimes we think because a seller said yes they would do an option, we think it must be a good deal. The problem is it must be a good deal for you also. When you do a sandwich lease option you will want to make sure there is enough profit in the deal for you to put yourself in the middle of the deal. I use a profitability worksheet that I created to show the profit for myself. It is very easy to use and helps me know for sure how to structure the offer and when to walk away. When you do a cooperative lease option you will want to make sure the deal is solid for both the seller and the buyer. What this means to me is to make sure a few things are researched first like: how much does the seller owe and how much is the home worth? You won’t want to put either party in a bad position down the road.
Perhaps this is one of the reasons why many investors and educators focus on sellers in financial difficulty. It’s easier and quicker to get a desperate seller to sign an option. Which option deals do you think are most likely to turn south, a seller in trouble, or a seller who is not in financial trouble?
2. Buying without Backup
With lease options you do not need money or credit, however, keeping a cushion for a rainy day is a very wise thing. Understand, if you are doing a sandwich lease option, you still need to pay the seller, even if the buyer can’t pay you. This can be fine if the spread is good enough each month, and you have money in reserve in case the tenant doesn’t pay you in time, or at all.
When you are doing a lease option without money and credit, such backup is the cement for a solid portfolio. If your properties are empty and you can’t cover vacancies or repairs, your wealth will quickly slip away. If you lack financial reserves make sure your deal is squeaky clean, and that it needs no subsidy to survive. Consider initially doing cooperative lease options to generate cash flow and a financial backing.
3. The Right Paperwork
Expect things to go well, but be prepared for the worst. This approach avoids future loss through court cases. I have been challenged in court a few times, but have yet to be defeated on my option deals. My lease option paperwork is watertight. Castles in the air will not make you wealthy, but good systems, solid procedures and quality paperwork will. Always have an attorney check out my paperwork, or any paperwork you use, for your state specific requirements. Each state has unique items that must be added to lease option contracts. To get great legal advice for a reasonable fee check out Pre-Paid Legal for as low as $25/month. Visit www.GotLegalPlans.com.
Having legal backing and an attorney on your side is critical to success. If you are serious about investing in real estate, then you will want to sign up right away for Pre-Paid Legal at the above link.
4. Speculating vs. Investing
People often say to me, “The market will go up again,” to which I reply, “Really, how do you know?” or “When exactly is it going to start rising again and at what rate?” Basing a future purchase price on an anticipated increase in value could well be a recipe for disaster when you are making your investment decisions. If you are the seller on a lease option that is an entirely different thing, but when you are buying you will want to make sure you are not planning that your profit be based on any appreciation. An experienced investor will use only today’s value. Wealth through lease options should be by design, not speculation.
Speculating is dangerous financially, but investing is wise.
5. Learning From Those With Little to Share — Lack of Coaching
It’s not the mountain ahead that will wear you out, it’s the pebble in your shoe. Be sure you are prepared for the journey, and equipped to enjoy it. Is it wise to seek advice from those who have not achieved success using lease options, or those who have never done a lease option, or those who have done very few of them? Of course not!
Make sure that you have the best guidance when doing lease option deals. Would you even consider being a pro-basketball player without a good coach? No, of course not. You don’t need to pay tens of thousands of dollars either, but you do want to get the right training so that you get into profit mode very quickly. Get a solid, experienced and successful coach.
Keep the aforementioned 5 mistakes in mind and you will be well on your way to success as a lease option investor.
Wendy Patton is the nations leading expert on lease options and creative seller financing strategies. To find out more visit her at www.WendyPatton.com.