Rent to Own

With the recent negative economic situation and its effect on the housing market, homeowners have been stuck trying to sell their homes, and have had to watch as their home value slipped and they had to keep making payments on their home. A rent to own agreement might be a way for a homeowner stuck with an unmovable home in the current depressed real estate market.

On the other side of the table, the economic situation has affected many potential buyers of homes as well; due to job losses, missed mortgage payments, heavy debt, and ultimately, bad credit, they have been unable to procure a mortgage for a new home. Couple this with the fact that banks hit a standstill where they were not making loans and it is a slow recovery for them as well. For people who are finding it hard to get a home loan in the current market a rent to own situation might be worth considering.

Rent to Own-Win Win

A solution for both homeowner and potential homeowner would be a “Rent to Own Home”, which is basically an arrangement whereas the homeowner allows a tenant  who is in reality a potential buyer for the home to rent their home, with an option to purchase that home at some preset future date  in at a priced agreed in advance in the rent to own contract agreement.

This would benefit the homeowner by having someone renting their home, making their monthly payments, taking care of the home and even potentially making repairs.

Rent to Own-FSBO

This works for you if you are selling your house on your own in a For Sale By Owner/ FSBO format, or if you are listed with a realtor, this opens up a whole new market for you – buyers who cannot qualify for a mortgage now, but perhaps they will be in 6-24 months down the road.

As a potential buyer of a home, a Rent to Own is an ideal situation, as it permits you to “try before you buy” to see if you like the home, the neighborhood, the schools, etc.

Rent to Own-Real Estate Attorney

As a caveat to both types of individuals described above, always check out the local rules/laws in your state, town, or municipality, as there are big differences depending on where you live. You’ll want to confer with a real estate agent and perhaps a real estate attorney as well.

For both Buyers and Sellers of Homes, Rent to Own may be your best option in any type of economy. Rent to Own could just be the solution to your problem.

Regardless of whether you are a homeowner who cannot sell a home because of negative equity or a buyer shut out of the housing market because of credit issues a rent to own purchase agreement might be an ideal short term solution to your problem.

Rent to Own Investing

Some ideas and strategies for real estate investors interested in the rent to own market. Rent to own is sometimes referred to as lease with option to purchase.

1. Use buyer’s purchase deposit or down payment.

If you are following my advice and methods for buying houses, then you’re occupying your houses with either Tenant/buyers or Buyers.

TENANT/BUYER: Rents the house and has the right to buy the house at a preset price. Most of my houses are occupied by tenant/buyers. They put at least 3% down, non-refundable purchase deposit on a sales contract. I prefer 5% down. If they don’t have 5%, I get a promissory note and have them pay extra money each month to build up to 5% as quickly as possible. If they have less than 3% then they may be able to get into one of my “sweat equity fixer upper” houses. Their down payment can be partial supplemented by doing required work to the house before they move in. This is work I would normally hire a contractor to perform so if I don’t have to write a check to fix up the house, the money saved is less cash I need from my tenant/buyer.

BUYER: Puts down 10-15% down and you close with owner financing, typically via a wrap. Or the buyer gets a new loan cashing you out completely, or perhaps you take part of your profit back in a second mortgage.

Every house I buy will be sold to a buyer or occupied by a tenant/buyer. Since I cannot predict which it will be, I get into deals where it does not matter to me either way. Most buyers calling on my ads do not have 10% down or the ability to get a new loan now. It’s much easier finding 3-5% down, so why not buy houses where that will work for you?

Bottom Line: You should be collecting at least 3% down on every house you buy once it’s occupied. If you need cash to do a deal, you have 3% of your “resell” price to commit for cash to seller, holding costs, closing costs, minor repairs and maintenance.

2. Private money or hard money loans.

If you pay cash for a house you’ll never offer more than 70% of the after repaired value less the cost of any repairs. You can borrow 65-75% of the value of a house from a “collateral” lender. The lender will charge you 11% to 16% interest, and maybe 3 to 10 points. They should only be concerned with the value of the property that secures their first mortgage. Many private lenders will offer you interest only loans so all their investment is working for them, getting them a nice return. If you borrow $75,000 on a $100,000 house, 12% interest only payments are $750 a month. You should be able to get more than that each month from your buyer in rental income or from a wraparound mortgage payment. This formula does not work as well on expensive homes.

If the seller owes $50,000 on a $100,000 house, you can sometimes borrow another $25,000 on a second mortgage. Take over the first mortgage “subject to” which will have a better interest rate and no points. This saves you money and allows you to pay more for the house. You can give part or all of the $25,000 to you seller. If they have more equity coming to them, you can give them a 3rd mortgage on this house or a 2nd mortgage on one of your other properties.

3. Deferred down payments.

Take over an existing loan with good terms. Any equity still due to seller can be offered in the form of a deferred down payment. Basically, you will pay the seller the balance of their equity (if any) in a single lump sum payment when you resell or refinance the house down the road. Ideally, there will be no monthly payments or interest. If the seller insists on interest or monthly payments, get a lower price to make it worth wild. This is a “no money down” method. The cash you need for this type of deal comes from your buyer’s new loan, normally 6-36 months in the future.

4. Substitution of collateral.

I am buying a house on Thursday for $153,000. It is worth $165,000-$170,000. I’ll soon advertise it for $179,500 with “flexible owner financing” and enjoy a $26,500 equity spread.

The seller owes $18,000. He has agreed to take $63,000 in cash ($18,000 of which will pay off his lien) and $90,000 in second mortgages on several other properties I own. He wants 6% interest but doesn’t need monthly income. So his interest will accumulate for 5 years. 6% interest, no payments, 5-year balloon on $90,000.

This allows me to tap into equity tied up in my other properties at a low rate, and my seller is happy. He would have put his money in the bank at 1-3%. He is waiting for his mutual funds to come back up so he can get out of them. Good luck!

Here’s the kicker. I am borrowing $130,000 from a “hard money lender” at 10.99% and paying 8 points. I will net $120,000 in cash from that loan after costs. That means I collect $57,000 in cash on Thursday when I buy!

In my audio training course I reveal how to get a guaranteed 35% return on any extra cash you want to invest. That’s what I will do with this extra money.

A couple of weeks ago I collected an extra $24,000 in cash using this same type of method when my tenant/buyer closed on one of my houses.

5. Open an equity line of credit.

Raise cash by borrowing against equity you have in your personal residence or other investment properties. You can also pledge a number of second mortgages you hold as the collateral. Set it up as a line of credit. Use the money to do a deal and pay it back immediately when you sell or occupy the property. You only pay interest on that portion of the credit line you have tapped into.

Last month I setup a $100,000 credit line pledging $130,000 of equity I have acquired through taking back installment land contracts, all-inclusive deeds of trust and second mortgages.

Having this cash readily available allows me to make multiple offers to a seller:

A. All cash for lowest price. My offer price is 70% (maximum) of after repaired value less the estimated cost for repairs.

B. No cash for highest price. My offer is $30,000 less than my planned resell price. The seller gets their equity in the form of a deferred down payment. I take over existing debt “subject to.”

C. Some cash. My offer is somewhere between Offer A and B. The seller gets debt relief and some cash. The more cash, the lower the price.

Would you pay the seller 5% down if you could get an extra 10-15% off the price? You have that opportunity if you have established lines of credit to tap into. This could be a line of credit, a credit card or checking account overdraft protection. Be careful of having too much cash laying around in an operating account. You may be inclined to offer more cash on a deal than you need to, just because you have it.

6. Sell off a house or real estate note for cash.

I have been sitting on one house since February. Ouch! I bought it for $160,000 and I have $10,000 of my money tied up in it, which is unusual. It was on the market for $197,000. For one reason or another I just could not get it under contract. That’s a fair price and the home is in good shape.

I called a real estate agent I have used to buy listed “fixer upper bank owned houses.” I asked the agent to look at the house and tell me what he would market it for if I wanted to dump it fast. He recommended $179,500. I gave him the listing. Within a week I had a contract for $177,000. I decided to slash the price to get this house out of my hair and recapture the money I have into it. Plus I can focus on occupying my other, more marketable houses.

If you have cash or profits tied up in real estate or notes, one way to raise cash is to take some aggressive, proactive steps to liquidate some of those investments. Then put that money to work on better deals.

Written by Richard Roop

Increase Rent but Keep Tenant Happy

We’ve talked a lot about positive cash flow. By now you should know that $100 is the minimum you need to get out of any property to make it worth your while.

But it would even better if you could get $125, $150 or even $200 in positive cash flow out of each unit each month, wouldn’t it? And what if you could get that guaranteed in a multi-year lease, too?

Sound too good to be true? It’s not. I’ve done it hundreds of times, and so have many of the real estate investors I’ve trained. And you can, too.

It’s called a ‘lease option.’ You may have heard it referred to as ‘rent to own.’ Whatever you call it, it’s a great way to increase your cash flow without increasing your investment of time or money.

In the simplest terms, a lease option is an agreement between you and the tenant that the tenant will buy the home in three to five years. The tenant agrees to a multi-year lease. You agree to set aside a certain amount of rent each month toward their eventual purchase of the home. (Even better if you can offer to provide owner financing.) The tenant thinks you’re doing him a favor – and you’re putting more money in your pocket every month.

Here’s 5 Reasons Why Lease Options are a Smart Idea

Reason #1: You can charge 15 to 20 percent above market rent. Since you’re agreeing to set aside a certain amount each month toward the tenant’s eventual down payment, you need to bump the rent up. Say the market rent for your type of property is $800 a month. You can charge $950 and agree to set aside $150 each month toward the downpayment. Will people go for this? Absolutely. There are tons of people with plenty of ready cash flow and the desire to own, but no savings (or lousy credit). Most Americans are short-sighted and payment driven – they’ll look at whether or not they can afford the rent each month, not what the return will be long term.

Reason #2: You can get a three to five year lease. Dealing with vacancies can be a pain, and it impacts your monthly cash flow. With a regular rental, you can sometimes get a two year lease, but with a lease option you can get a three to five year commitment.

Reason #3: You can get more money up front. With a regular rental, you can ask for the first month’s rent and a security deposit. With a lease option, you can ask for several thousand dollars up front in earnest money – basically, money to show they’re serious.

Reason #4: You’ll get better tenants and fewer headaches. In the lease option agreement, stipulate that you’ll run comps and set the purchase price when they’re ready to buy. Tell them that if they pay their rent on time every month, you’ll discount the purchase price by 5% when the time comes. That’s pretty motivating for a lot of people. Also, lease option tenants will take better care of your property, since they’re planning to live there for awhile and think it’s going to be theirs soon. Many lease option agreements say that the tenant is responsible for all repairs under $500, which can save you from a lot of annoying maintenance calls. Again, that sense of ownership settles in even before the papers are signed – and that can make your job as property manager a lot easier.

Reason #5: You’re in great shape whether the deal ever happens or not. Here’s the little-known secret to lease options: four out of five lease option tenants walk away without ever buying the property. They take a new job, move to a new town, break up with their girlfriend, whatever – and when they do, you get to keep the earnest money, and the extra money you’ve been setting aside each month for their downpayment. Chances are the property is in great shape, and you can find another tenant – or another lease option tenant – quickly. You’ve lost absolutely nothing, and in fact, you’ve gained thousands of dollars – all for probably less effort than you would have put in to a regular lease deal. And if they do buy the property, you’ve still made a profit, on top of the cash flow the property generated for you over the term of the lease.

Lease options don’t work in every case, and you’ll want to make sure you’ve got an ironclad agreement that spells out all the details. But when done right, these deals can be a great addition to your real estate investment strategy.

Written by Russ Whitney