20 VOTESOkay this is going to be a really long post .
If you’re experienced in lease options, subject to’s, wraparound mortgages, installment sales, etc, you might want to ignore this post.
Because credit is tight right now you should look at having a problem-solving real estate business.
I call it
“don’t be a one trick pony”
I know the OP talked about the business plan for real estate lease options, but I think that’s a mistake. You should be a problem solver for seller having a few tools.
So what I’m going to do is to discuss what I would do if I were training my brother or my sister to set up a “terms RE business” so that they can make some money quickly, by “looking for problems”.
Step one is Get licensed get licensed get licensed.
Florida, Ohio, Maryland, DC, New York, Massachusetts, California, etc., there’s more, but the states have pretty strict rules about flipping a lease option agreement. You’re brokering, no matter what the gurus tell you, you’re brokering.
Now if you want to do a subject to or wrap as a principal buyer, you can probably do that, but not a lot of them, because the real estate community will know what you are doing.
For folks that follow experts, even Ron LeGrand says
“Get Licensed doing lease options”.
So step one get licensed.
Step two, have a business plan that makes sense.
get a CPA that helps you set up your LLC or S Corp
Get an attorney that works in evictions and foreclosures.
Use agreements with one thought in mind:
what would a judge say if they saw this agreement?
Most real estate attorneys only work with agents.
If you’re not an agent a lot of attorneys will think that you’re a new seminar graduate, and you’ve had zero training. You are “full of dreams and rainbows.”
I’m not trying to plug my own horn here but what I do for my students is to talk to the attorney and make sure it’s a good fit for my student, meaning that
“they get subject to and
they get lease options and
they get wraparound mortgages and
they get land trusts and
they get joint venture agreements.”
Learn about all the best real estate agents in your area that have the most amount of listings,
why? Because they see the most number of people. The vast majority of agents are part-time, and they make very little money. The top 10% of agents generally write 90% of the listing business.
So to continue on with what I call “killer agents”, agents that have 20 listings already in the area you want to work, I want to be their friend
I want to know what’s important to them, and if I have a deal to pretty house with 80 to 85% loan-to-value, not a wholesaling deal, and sellers don’t want to do a terms deal, I will actually give that deal to the killer agent,
if they will do the same for me,
meaning a pretty house with 90 to 100% loan-to-value, for a terms deal.
Don’t get me wrong, many times you can do a deal with a ton equity like 50% equity, but most people will pay the costs to sell which is about 10% of value.
Costs to sell is the commission, closing costs, vacancy holding costs, etc.
Marketing plan, what are you going to do to get sellers to call you?
There are five basic boxes that I like to focus on for new people.
You new people have no deals, no track record, don’t know what they’re doing.
I know you’ve got to start somewhere.
Most people are broke.
I repeat that, most people are broke.
They DO NOT HAVE $300 a month for six months to get a deal.
That’s why wholesaling sucks. You need money and time for wholesaling.
So…. I think a smarter way to market sellers is to try to find some seller that has a problem.
Five basic boxes if you’re broke and you can’t pay a wonderful marketing coach like @Dev Horn, @Jerry Puckett, or @Michael Quarles, to get sent for you yellow letters, zip letters, postcards, etc., then you need “guerrilla marketing”.
Guerrilla marketing has to do with finding a problem and offering a solution.
My favorite problem is an expired listing. I’m assuming you are licensed but if you’re not licensed its still okay.
Expired’s mean that the agent’s failed to deliver a solution. The home seller wants to sell. Your job is sit down with the sellers and show them all their choices. I show my students how to present solutions to sellers, many of these solutions the sellers haven’t even thought of, and their agent has failed to show them the solutions.
Why is in the agent show them these solutions? There’s many reasons and I don’t have time to list them all here. Many agents are NOT trained to do any terms deals whatsoever. Many agents are told by their BOSSES brokers never to do a terms deal. Why, mainly because their E & O does not cover it. (ERRORS AND OMISSIONS)
Listed properties, if you’re licensed you can’t go after these. If you’re not licensed you go knock on their door and give them a free report. Be careful because real estate agents wil get pissed off if you’re interfering with their listing.
If you find a seller that’s not happy with their agent and they’re still listed, I would ask the seller to talk to their broker and see if they can’t work out a solution. It might involve getting the broker to release the listing and have the seller pay some kind of marketing fee. I don’t know. Everybody’s different.
Don’t try to do a deal without involving the agent if there’s a listing in place.
A good approach is that there is a listing in place, just tell the seller that you can help them but they may be liable for commission even if the agent does not help them with your solution. If they are not okay with that, then you might have a lawsuit waiting to happen.
Where else can you do that’s cheap marketing?
FSBOs want to sell without an agent. Period. They want speed. They don’t want to wait forever to get the house sold. So what can you do? Number one tip is try to help the seller learn about real estate marketing. And let them know you are a rent to own expert and show them the benefits of doing that.
In the past I have my students convince the FSBOseller to have two signs in the front yard with the FSBO, one is “for sale for cash call this number”, another is “rent to own, call this number, your number”. If you do this get licensed as you are acting as an agent.
Landlords want top rent and no hassles, no evictions no damage.
When I find the for rent by owner, not a property manager, I walk through the property and act like a tenant, I will ask the landlord…
“You have a nice place here and you wanted $1100 a month for the rent?
Well I’m going to ask a question, if it’s a no that’s fine, but here’s the question,
if I get you 1150 a month for the rent, and you would allow me say a lease of 24 months, then I would buy the property at the end of that lease at a fair price, and even pay the closing costs, would that kind of scenario even be interesting to you, or maybe not?”
A note to the reader, this is not bait and switch, youre just throwing out an idea
I always tell the landlord that I’m not moving in the property, and my job is to find the best person for the property on a rent to own.
Another side note, never lease more than one year the time, let the tenant buyer know there will be an extension if they pay the rent on time.
Another side note, in some states like North Carolina, I like to use a “contract for option to purchase” and a lease, or a ROFR (right of first refusal0 and a lease. It has to do with evicting a tenant buyer on a rent to own arrangement. Not fun.
Texas has unique penalties, so if you do it wrong it’s really expensive. @John Jackson, a former student of mine, is a Texas Expert in TX Lease Option Law. He knows more than most attorneys do in Texas about lease options. He’s a very nice guy and great TX REI coach.
OK get back to your planning….
Negotiating with the seller is a very important part of doing terms deals.
Wholesaling negotiating is like being a car salesman, there is no negotiating, it’s like hardball.
Terms deals whether they are lease option assignments, sandwiches, subject to, wraparound mortgages, installment sales on free and clear properties, etc. require a deft touch. I think it’s more like how financial planners work.
Financial planners are deft conversationalists, asking feeling questions about money and security.
As a financial planner in my 20s and 30s, dealing with millionaires and estate planning issues, which helps me deal with wealthy people and real estate.
With my REI students I make sure the students learn negotiating with NLP.
NLP has to do with neurolinguistic programming, which is subtle communication.
The five steps that I use as a framework with every seller are…
1. Building rapport, the critical skill, if you can’t build rapport please don’t try to do terms deals. If the seller does not like you he is not going to work with you.
Dale Carnegie wrote a book called “How to win friends and influence people” If you want to be an aggressive prick or sleazy salesman, I would insist you sell cars instead.
How to build rapport…
Talk about their family, talk about their job, talk about their hobbies, but stay away from religion and politics and sex. Smile a lot. Be really well dressed. This is about their house.
If you want to be in shorts and flip-flops, I feel sorry for you.
Second step… Do an “upfront agreement.”
I don’t like to come back.
I want a letter of intent signed before I leave the house.
I want to go to close on the first appointment.
That’s why I use an upfront agreement.
The upfront agreement basically says
“look if you’re not 100% happy with it the end of our appointment then you need to find another solution for your house problem.” That’s a little aggressive but that’s the point.
I use NLP to get that upfront agreement.
The third step is what I call the “Motivation discovery step”.
You need to find out how they feel about agents, property managers, selling it themselves FSBO, renting it out themselves for rent by owner, etc.
I use NLP to get all that information in person not on the phone but in person.
And building rapport along this third step is really important.
The four step, The Money Step, with no equity deals is never done.
It’s about pushing the price down and making them feel good about it.
The last step, the final step, is what I call the “What If” step.
This “what if” step is a wonderful way to discover if your idea is not be well received or to be well received.
Let’s say for numbers sake we have $100,000 house, PITI is $900, market rent is $1000 dollars a month,
they tried to sell it with an agent, been vacant for six months, credit is really important to them, they paid for it an empty house for six months, they don’t want to continue paying for an empty house, and they need a solution fairly soon.
Let’s also say that they owe $95,000 on the house, and they know they have to pay to get rid of it.
So my “what if” step in the scenario would be,
“Mr. Mrs. Smith, we got over a lot of different ideas today, and I got two solutions in mind.
You do remember that we talked about that “up front agreement” that if you like what we had to say, you would move forward but only if you’re hundred percent happy with the solutiin, right?”
“So here’s the first idea and you tell me if you absolutely hate it, because if you don’t like it then we’ll move on to the second idea,
….but what if I could somehow get a payment that approaches your PITI payment of $900 a month, for I don’t know let’s say 24 to 36 payments, and then
whatever your balance says that would be paid off in full, and you have no closing costs what so ever, they might be about 3% sellers concessions, but youd net about 97% of the value of the house.
I’m dont even know if you’d like that idea but if that payment could be made on time, and the person inside the house that is making the payment wants to buy it, would that be something we should even talk about or maybe not?”
But lets say the Sellers hate that idea, they want the property sold.
You now have to make a decision without you want to buy the property on terms and be responsible for all costs, including maintenance.
Subject to and wrap purchases are great way to avoid banks but there’s due on sale clauses to be reckoned with and understood. Simply put due on sale clause is a clause in a mortgage that allows the lender to foreclose if certain things are done. It doesn’t mean it’s going to happen. It does take some training in my opinion to do well in subject tos and wraparound mortgages when buying.
The “what if step” I use for subject to or wraparound mortgage offers is this,
“Oh I see, so you don’t want to do any kind of rental arrangement or lease purchase arrangement, I get it now…
Well, I have one more idea, and if this idea works then we’ll move forward, and if it’s not workable for you then all just pack up and get out your hair…
Mr and Mrs Smith, you want the property sold and you want somehow to be not responsible for a lot of the costs. There’s a way where I can buy the property today, the take seven days to close.
If I buy the property on owner financing, you will keep the mortgage in your name, generally for 3 to 5 years. To protect you, in case I don’t make the payment on the mortgage, I will sign over a warranty deed to be kept in escrow, with the stipulation as if I default, you get the deed without a foreclosure.
I will pay the following: principal and interest in the mortgage, insurance, taxes, and maintenance. At the end of the 3 to 5 years whatever the balance says I will pay off. Is this something you would even consider doing or maybe not? I understand if this does not work for you…”
Now a lot of people think the seller would never deed the property over to you, but it is all in how you talk to the seller.
The buyer side of this business has to do with your marketing, and helping people that have been turned down for mortgage. I like to sub this out to a property manager, that is used to getting one months rent as fee-for-service, and have them manage the marketing. It depends on your local market. My average fee for a tenant buyer is 3%. Why because this is the amount of money that people applying for an FHA loan, the cheapest down payment, they currently have the 3%.
A good marketing strategy and the buyer side is to start a Meetup group for people trying to get a mortgage. Have an RMLO talk to these people, and then you talk about rent to own. Or have your leasing agent talk about rent to own. Go to Meetup.com and do a search for rent own or lease purchase or lease to own. Model somebody else’s Meetup group. You can meet a library or restaurant, but you need to market this Meetup group and be willing to spend time talking to people about homeownership.
I strongly recommend you stay away from the tenant buyer side of the business because it takes a lot of time. Have a leasing agent do it.
Then I would be looking for private lenders and joint venture partners. You need to be able to raise $10,000-$100,000 quickly.
Many people don’t know that you can get private lenders to lend you money for many purposes. People in their 60s 70s need a good rate of return. They can use their IRAs to be a Private Lender.
TrustEtc.com is a custodian, who does real estate IRA work. They will talk to the retiree that have the money in their IRA, and help them understand the IRS regulations.
Regarding joint ventures, I would get out some letters and CPAs and doctors and ask them if they would consider an alternative investment like Joint Venture Partnering.
Everybody around you is a possible private lender or joint venture partner. You just need to get them some information.
well that’s my business plan, for 2015,
you need to hustle,
you need to talk to a lot of sellers,
you need to write a lot of letters of intent,
you need a good attorney,
you need a good RMLO,
you need to stay away from wholesaling only plans,
you need to believe in yourself,
biggerpockets.com is a great place to ask questions.
I’ll end this long post by saying,
If I asked you for three months to knock on doors of expired listings and give a free report, would you do that, are you tough enough to do that?
Do need immediate results, do you complain a lot, are you a whiner?
Rome wasn’t built in a day, the gurus paint a picture that this is REI business is easy, it’s not easy.
If you want a business that you starting from scratch with very little capital, then it takes time and energy to build it.
If you’re not license get licensed, or at least buy the books from Kaplan that RE agents need to study to get their license.
Don’t be a car salesman. Be a transaction engineer. Have 4 to 5 tools.
Happy New Year, 2015.
Make it 2 times as fun and 2 times as profitable as 2014.
Brian Gibbons Investor from Sherman Oaks, CAreplied over 2 years ago
20 VOTESOkay this is going to be a really long post .
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