Lease Option – Rent to Own Strategies

Posted on

Here we have four strategies which are fantastic, especially if you currently own negatively geared property. These strategies are so easy to do yourself and here is an example of just how easy it is. There was a gentleman called Jeff. Now Jeff had bought three negatively geared properties from a seminar. These properties had been purchased off the plan and were located in a place called the Docklands in Melbourne. Jeff had become concerned because these properties were not worth what he had paid for them and as a result, he was losing $3,000 a month. We sat down, and went through some of the strategies which I am about to share with you, and he was able to turn these properties around from a $30,000 loss a year to a $70,000 a year profit. Wow.

The most common mistake

What 99% of people do when they go to sell a property quickly is that they discount the price. This is something which is not recommended. When you discount the price of your property, you’ll then find that your neighbour, who is also selling his house, discounts his price, then all the other people in your neighbourhood start discounting the prices on their properties and we end up with everyone fighting themselves down into a losing market.

The solution

Rather than dropping the price of your property, one way you can increase interest in your property is to make it easier for what buyers there are in the market place to buy your property. You can also look at what things you can do to make it more enticing to buy your property as against your neighbour’s property. One way you can do this, is through creating ‘honeymoon periods’ on interest rates.

If a person is ordinarily looking to purchase your property they will most likely be spending anywhere from 7 to 7.5% on interest rates. What if a buyer could purchase your property and only have to pay 5 or 6% interest? Perhaps even 4% for the first six months? This is the same as what the banks do. They create ‘honeymoon periods’ or ‘honeymoon rates’ which means that the person who comes to buy your property will find it easier to move into your property today than someone else’s because they are moving in at a discounted interest rate.

It works this way: The seller can list the property with a real estate agent if that’s what they want to do, and when the agent sells it, the seller makes a concession to the buyer’s lender at settlement for whatever the amount was that you gave away in interest. So if you marketed the property at a 4% or 5% interest rate, then when the buyer goes to the bank to get his loan, the bank then needs to be compensated for that loss of interest. Despite this, you will find that when you transfer that discount over at settlement, the amount you are required to pay to compensate this lower interest rate will be considerably less than the amount you would need to discount the property by in order to sell it.

The Perks

This is becoming a more popular method to move properties quickly, as a lot of people realize that if they can buy your property now for 4% interest, then maybe they can also continue the payments on their car. They may even decide that by going into your property now, although it is only a low interest rate for only a short period, it gives them time to pay some other debts off, or they can spend the money they would have saved on some new furniture. Whatever they decide, it makes it easier for people to move into your property and the price does not become the issue. You will also find that if you charge the maximum retail price for your property and give people a subsidized interest rate to get into it, buyers would rather purchase your property than buy the property next door, where the guy has dropped the price by 30, 40 or 50 thousand dollars because, although your neighbour has dropped the price, it does not affect the buyers monthly payments by a whole lot.

A little less now, can mean a whole lot later

Delayed gratification will always give you a lot more money than it will to the people who want all the cash now. I was discussing this process with one of my students, John. John had a couple of houses and just completed a development. He needed to sell one of his properties as he was concerned that he was in a falling or a static market. If John was prepared to take delayed gratification, then he could get the price he wanted for his property. This meant that if John was prepared to not have all of the money now, rather get some in a week, some in six months and some in a couple of years, then in this way he was giving the market place a lot more flexibility on the payment and in return they would be willing to pay him a lot more for his property. John would also find that he would have a lot more buyers come through the door. This is your second strategy to create positive cashflow in a negative market.

Here’s the example: You go to sell your property and you give your buyers the option of paying you 80% now and 20% later on. The reason why this strategy works so well is because of the way that finance works at the moment. Today, people have to come up with 20% or, as is the case in inner Sydney, 30% of the loan as a deposit. This is where you can step in and say to your buyer “How about you give me the 70% or 80% now and make payments to me of the other 30%. By doing this you are putting the market place in a position where they have to bring very, very little money to the table to buy your property, because the lender will lend them the 70% to purchase your property and the 30%, which is the difficult bit, usually the deposit, is the money which you are prepared to take later. You will charge them an interest on this 30%, but you do not need to receive it right now, and you protect yourself with a second mortgage situation.

Essentially you transfer title and the buyer will pay you the 70 or 80% now and you would then collect the other 20% as an income stream over a short period of time, or a long period of time and balloon the balance in a year or two years if there is anything else outstanding. Another thing you can do is you can assign or sell those mortgages to cash yourself out. By using these processes you can sell that property for top price because you are making it easier for buyers to get into your property and you are prepared to take the money over a period of months rather than having it all today.

These first two strategies require the transfer of the title of the property and this can be good when you want to sell it through a real estate agent because these are very common ways of completing real estate transactions as they include a standard sales contract with a standard seller and a standard buyer and the real estate agent can relate to these methods very easily. Another strategy where you don’t transfer the title of your property and keep control of the property but can move it very quickly is one which you might of herd of, where you are using vendor finance through an installment contract.

It’s all about terms

Installment contract is the new terminology for what was always known as the “terms” contract. A terms contract is where you have an agreement where you transfer possession of the property to the buyer and they take an equitable interest in the property. There is still and exchange of contract but you, the seller, are retaining legal title, and in the normal sense, you would transfer over legal title once the full debt has been paid to you. So you would have a contract that says, once you have made these payments, then the legal title will transfer. The buyer can finalise the transaction by either paying you a payment of what they owe you for the property, minus any previous payments they have made to you, or they can go on to sell the property to someone else and pay you out. In another instance they can re-finance and pay you out.

A lot of the stuff that we do at my company, ‘We buy houses’ is sell a lot of properties where we says “You know what? You can make payments to me for 25 years if you want but after 12 months, two years or so, I need you to re-finance somewhere else. In this way, at least you can show me that you can make payments for the first couple of years, so we can then take this to the banks and this will make it much easier for you to re-finance into the banking system”.

Everybody wins

You will find that out of all of the people that want to buy properties, only 80% of people will be able to purchase a property the traditional way, so by offering your property on terms you are opening up to 100% of the market. You are also not just helping out home owners but you are able to sell to investors who have multiple houses and cannot get further finance the traditional way. Rick finds that a lot of his buyers are now investors as once they have bought three, four or five houses, the lenders will not lend them any more money to invest. These investors can come to you and buy properties because you don’t have any restrictions on how many properties people own. Your benefit is that you can charge the full price for you property, as long as you make it easy for these people to get in.

Perfect Timing

The fourth strategy is a strategy that is becoming increasingly common this year. This strategy is the Lease Option which then turns into the back to back Lease Option or Sandwich Option. The reason why Rick hasn’t really introduced this strategy until this year is because of the timing in the market. The best market for this type of option is where you have too many sellers and not enough buyers. When you have too many sellers and no buyers, price no longer becomes the issue, it more falls to the flexibility of the seller and the terms as to which he is prepared to sell his property.

A Lease Option, or a Rent to Own, works in this way. The seller can turn around to a potential buyer and say “OK, you want to rent this property, but wouldn’t it be better for you if you could also buy the property?” You will find that the reason why most people rent is because they haven’t had the opportunity given to them to purchase a property, so if you give them the option, they can rent, and at the same time they can be buying the property. Now for you as the seller, people who are renting with the option to buy will pay considerably more every month than they will if they are just renting. Also if they are renting with the option to buy, you will get a better quality tenant that moves in, and you will also have a tenant that is more respectful of your property because at the end of the day, he hopes it will be his property. Giving your tenant the option to purchase the property will also massively reduce any vacancy you have and because it’s so easy to do, you don’t have to worry about having real estate people do this for you.

Now there is another side to this. This is where you have a tenant who is in your property doing a Rent to Own and they then turn around and do a Rent to Own transaction themselves on the same property. This is where the Sandwich Lease Option comes in. Right now in this market place where prices are continuing to fall, it’s a really good strategy that when you buy a property, you don’t go and put all of your money into it. What you do, is you get a lease from the seller, with the right to buy it down the road. You might be finding right now that there are a lot of desperate sellers who are very open to the idea that if you can look after the payments they are making on the property then they are happy for you to rent the property and look after the payments and know that down the road, you will eventually buy the property for them. You agree upfront what price you will buy the property for. Then you can turn around, where there is someone who is happy to rent the property from you and buy it from you, and they are also prepared to pay more than you are already paying to the seller and purchase it at the end of a given period.

Imagine you had a property which you were buying from a seller for $310,000 and you agree that you will pay $400.00 a week which will cover the seller’s debt service. The seller bought this as an investment property and then he lost his job so he had taken all of the financing out of his own home in order to buy this investment property and now he has no one living in it. As you could imagine, the seller was having all kinds of problems meeting the debt service. You could come to an agreement that you would look after the debt service and you would also look after all of the rates, insurance, tax and bits and pieces that run at another $52 a week. So you are taking care of this property at about $452 a week. You may be surprised how easy it is to find a family who is very happy to move in there on a rent to own for $505 a week, with the option to buy the house at the end for $322,000. You might be thinking now that there is not a lot of difference between the $310,00 which you are buying it for and the $322,000 you are selling it for, but there are a couple of things that you have in your favour. Firstly you pay no stamp duty to get into the property, there are very little legal expenses and you’ve written one cheque to the seller for $800.00 to put the deal in place. This one cheque of $800.00 has been your only investment to get into the house. So if you have only invested $800.00 and you have no bank loan, then you can be pretty happy with that. You also have $12,000 that you will receive at the end, along with $47.00 you are receiving in positive cashflow every week and you also have the right to do that for the next 4 years.

The fundamentals

There are a couple of rules you need to understand if you want to get out of negatively geared property. Firstly you have got to make it easy for someone else to get into it, and this is where most people get it wrong. They continue to drop the price of their property. Dropping the price of your property does not make it easier for me to get into your property if I cannot get a bank loan or I have no deposit. So this is where you need to get creative and make it easy to get people into your property.

The other strategy which we spoke about is carrying back the deposit for people in the way of an Installment Contract, because if someone wants to buy your $400,000 property and require a 30% deposit, that means they need to have $130,000 cash, plus stamp duty and all those bits and pieces, and most people don’t have that much money lying in their bank. So if they can get their loan for 70% and you are able to carry back, a second mortgage for that 30% then they can make payments to you for that amount, and you can negotiate with them how much interest they will pay you for the 30%. You’ll also find that you have a house that you can market as 100% bank rates.

100% bank rates

Another process you can use is to advertise your house for 100% bank rates. This means that what the buyer does not borrow from the bank, they are borrowing from you at the exact same bank rate that they are paying at the bank. So if the bank is lending 70% of the loan to them at 7.12% then the 30% they haven’t got, they can borrow from you at 7.12%. The great part for them is that there are no other houses in the whole suburb that they can walk into and have no money. And yes, if you were wondering, they do need to have good credit but you do not have to assess that, because the lender that lends them the first bit, the 70 or 80%, are going to assess their credit. If the bank is prepared to lend them the 70%, and the banks are a little more thorough with their credit checks than you can be happy to lend them the 30%. You will find this a very good way to move your properties on, and you can turn your negatively geared properties into positively geared payments.

If you want to leave the real estate people out of it, you have the two other strategies we spoke about, with one being the Rent to Own, where tenants are given the option to purchase the property they are renting. You will find with your Rent to Own properties, that the extra bit that the tenants are willing to pay you is usually the difference between you being negatively geared or positively geared. That’s an important point to remember. You might be wondering now why people would pay up to an extra 50% of the normal market rent. Well you can offer the tenant that an amount out of the rent which they pay, you will contribute X percent or X dollars towards the purchase price when they buy the property.

You will find that just so long as people know that it is not lost money and, if they decide to buy, then a percentage of the money that they pay every week will go towards the purchase price of the property, they are happy to pay a higher rent. You can usually have a rough idea of what they are paying you every week or every month on this Rent to Buy, above the standard rentals, and that is the bit which you can offer back to them if they decide that, later on down the road, they want to purchase the property.

The next process is for Installment Contracts or Wrap around Mortgages. This is where you create a payment stream where people pay you money to get in. It can be $10,000, $5,000, or even $1,000. Whatever money they can offer you as a deposit, and you might be surprised by the amount of cash that some people have lying around. The balance of what they don’t have, you get the solicitors put the paperwork system together so that they can make payments to you every month. You can even get all these payments collected by the real estate agents, so you don’t even do this part yourself. They make the payments on the underlying mortgage, they pay the water rates, the council rates, insurance. They pay absolutely everything and just send the positive cash flow to you when it is all done.

Qs and As

There are a lot of questions that come up about some of these strategies, how to put them together, and what they should consider. I would like to share a couple with you.

How much discount do I want?

You may often ask yourself, “How much discount do I want?” The answer is that you want what you can get. The other day, a house went at an auction for $250,000 where only one person bid; so that’s what the house went for. That house was pretty close to being worth $300,000. If it had of been an ordinary sale and someone had said “I’ll give it to you for $250,000”, wouldn’t you be happy to pay $250,000 and not get any discount. If it had been a $300,000 offer, you might try to get a $40,000 discount. So how much discount you go to get on your houses or home unit is dependent upon what is being offered to you and how close it is to the right price. If you sell a property and you want to get out tomorrow, you would significantly reduce the price of the house, just to get out, so there really is no negotiating room in the price. You just need to research your neighbourhood or a particular suburb you are looking to buy in, and there is no fine line. There is no “Take of 20 or 30%”, because if the seller has already taken off a whole bunch and you are trying to get another 10% it is not necessary if you already have the deal. A lesson you will learn as you complete more of these deals is not to push too hard when you already had the deal. Once you have your formula and you have your deal, stop pushing. If your formula has allowed you to get the profit you need, stop. Sometimes you can keep pushing for another $5 or $10 and the whole thing falls apart and you are lying in bed at One O’clock in the morning thinking “Gee there was $50,000 profit in there but I had to keep pushing for that last $5”.

How much money should I add to the price?

People often wonder how much money they should add to the selling price of one of their rent to own properties. “Should it be a percentage or how much extra should I charge?” The thing is that the market place will let you know. The market will determine what they are willing to pay you and how much you will get for the property. Here’s what we do know. If you make it easy for people to buy properties just like the government made it real easy when they introduced the $7,000 first home owners grant, it brings a whole heap of people into the market and opens it up to almost everyone. You want to do the same sort of thing. If you make it easy for people to get into your property, they will pay you more for it, than the traditional way. Whenever you sell properties this way you can be sure that you can get more for them. How much more? That’s hard to determine. If you wondered what the rule was, I would tell you that whatever the retail price of the property is, you can always go another 5%, well somewhere between 5% and 10% above the market value. It’s really just about putting your sign out the front and seeing how you go. The market place will let you know how much you can sell your property for. You don’t get to decide how much you want to sell your property for. The market place decides.

What do I negotiate?

People also ask what to negotiate when you purchase a property. If you go to buy a property and you can’t speak directly to the seller, you ask the agent, “Would the seller like to sell his house today? Or would he rather sell it in another six months?” “No he wants to sell it today” they say. “Well I’m here with my cheque book ready to buy a house today. Which one of your sellers would like to sell their house today?” In the old days agents didn’t like to bring the vendors in to see buyers and that was fine, but the market has changed now, and we are finding that vendors are so keen to get out of these properties because they more often than not have had they’re property for months, just sitting there unsold. You might also find that so much of the negotiations are not about the price, but the terms on which you buy it. Now with any vendor you could argue all day long to get a discount from $300,000 to $290,000 or $280,000, but if the vendors are going to go and live over seas for five years, then you can propose that they create you a 30 year mortgage and you can make the payments to them for five years and pay the balance at the end of that five year period. Now, if you are paying no interest and 100% of your payments are directly going towards the principal amount, then the amount you will save in interest is much, much more than if you were to get a $10,000 or even $30,000 discount. These are the type of things you couldn’t do in a hot market.

Rent to Owns are also very easy to negotiate these days. You can just go to the seller and say “Hey I don’t really have my finances in shape, how about you rent me the property for the next three years and I’ll give you the price you need at the end” Then you just need to work out the rent. Sometimes it’ll be equal to what the sellers payments are, sometimes it will be the standard market rent plus 20%, it doesn’t really matter what the amount is, because you are going to then put up a sign which says “Rent to Own”, where you will set up this transaction with someone else and collect a rent which is more than the rent you are paying to the seller. This transaction is all about controlling properties without owning them.

What ever happened to Jeff?

How did Jeff turn those properties around? Jeff ran some ads in the paper while he was in Sydney for his properties in Melbourne. So, Jeff ran some ads, people went to see his houses in Melbourne and he got a phone call the next day from someone who had a deposit but couldn’t qualify for a bank loan because they had had some issues with credit in the past. He was happy to pay the asking price for Jeff’s property as against having no property at all. And the best part? Jeff was able to do this all himself without having to fly back and forth to Melbourne to complete the deal. So if you have a negatively geared property, you don’t need to drop the price and cut your losses. You can use these strategies to turn your negatively geared properties into positively geared payments. You can get creative and at the same time open your property up to 100% of the market.



Source by Don C Christie

Leave a Reply

Your email address will not be published. Required fields are marked *