MichaelC

Hello, Summer. Good question, and one that I hear often from my students. Let me explain it here for all. The agreement you are using between yourself and the tenant/buyer should state clearly that rent credits earned and option consideration paid will be credited toward the agreed to purchase price. You should never say that these monies will be part of the tenant/buyers down payment. They might very well be, depending upon the policies of the lender being used. But, we don't know that and to make a promise you cannot keep is begging to be hauled into court. So, in the scenario you described, the $200,000 purchase price is simply reduced by the combined amounts of the option consideration and the rent credits earned. When they go and look for financing it is for a purchase price of $193,800. Whatever terms the tenant/buyers work out is between them and their chosen lender. One other thing......my experience has been that option consideration can more often than not be considered part of a buyer's down payment, while rent credits, more often than not, won't be. Every lender has their own policy regarding this. Still, in the interest of avoiding problems, we state that all monies are a credit toward the purchase price. Hope this helps.

Emailing homeowners is a good supplement to an aggressive telephone calling campaign, and an aggressive marketing campaign. As a primary source of finding deals, my experience has been similar to Andrew's.

Joseph, I'm not sure what you're saying, so correct me if I misunderstood you. For starters, what agent are you referring to when you say "Isn't option money a consideration for the agent involved...."? Of course, option consideration is always nonrefundable. However, I cannot imagine I would ever be able to collect a dime if I were to tell a prospective tenant/buyer that it is not credited toward the purchase price. How would you explain and justify this in such a way as to have someone agree to give you $2,500 or $5,000 and receive nothing in return?

I agree. 88,000 is not so small a town where there wouldn't be enough activity and opportunity to have terrific success. As always, it comes down to persistent effort. Are we willing to do what it takes for as long as it takes to be successful? Or, are we going to succumb to the instant gratification mentality that is so pervasive in our society these days? It should be your goal to initiate a minimum of twenty five homeowner contacts today. Pick up the phone and call FSBO's and FRBO's. When that is done, your next goal is to further your marketing plans. Ask yourself what you've done so far to let the homeowners in your community know what you do and where you can be found. Then, tomorrow, you do the same. Followed by more of this the next day, and the next, and the next. Without enough homeowner contacts your chances of finding a deal are slim to none.

Frustrated and confused over what, specifically?

Steve, generally speaking, you are better off setting the lease length for one year. There are exceptions, of course, but one year is definitely advantageous for us. If the tenant/buyers exercise their option, that's fine. You receive your back end profit and move on. If they don't, now you have several options available, all favorable to you. For example, have they been good tenants? In other words, timely payments and good property maintenance? If so, and if they want to, renew the lease for another six months to a year. But, you might want to collect additional option money. My rule of thumb is half of what I originally received. If the market conditions allow, perhaps you can raise the rent or the purchase price. Don't forget, though, that all rent credits should cease after that first year. You want these folks to have incentive to buy, and additional rent credits will begin to seriously erode your back end numbers. Of course, if all this is moot because they decided against purchasing, begin the process anew with another tenant/buyer. Not a bad situation to have control over. As for your specific deal, yes, set the price at the high end of the FMV. You know the old expression: I give terms, you give price. It certainly applies with lease purchasing, Steve. As I already noted I would set it for one year. And I would give a very generous rent credit, too. I know there are some investors who would argue this point. But, I want the house filled quickly so I can move on to my next deals. Making payments on vacant properties is not what we are in business for. I never worry about rent credits eroding my back end profit. If the option isn't exercised, the rent credits are a moot point anyway. The numbers that matter to me are the option money I'm receiving and the cash flow every month. That's real money, in my hands now. Back end profit may never materialize and I view it as a bonus if and when it does. Just my philosophy.........

Hello, Steve, and welcome to The Naked Investor. We're delighted to receive another new member. You are obviously an experienced investor with much to offer. I hope to see you around here often. Lease Purchasing, done correctly is smart real estate. Yes, it is true that a well conceived lease purchase deal can provide you with less hands on management, no tenants and toilets, no maintenance and repairs, no Realtor's commissions, no closing costs, and a number of other significant advantages. You will find that there is almost never a shortage of available and eager tenant/buyers for your properties. However, let me answer one question you posed about option money. First, you may not receive 4% or 5% down. In the real world there are a number of variables that will affect that number and determine the amount you receive. In any event, whatever you do receive is nonrefundable. And, it does apply as a credit toward the purchase price if the option to purchase is exercised. You are correct when you state that the majority of tenant/buyers do not exercise their option. Finally, as an experienced landlord, you will see that once you set up a lease purchase with tenant/buyers versus the "old school" way of doing business, you'll kick yourself for not having discovered this technique way sooner. I don't think you'll be going back to straight rentals soon, or try selling your house the traditional way by using a Realtor and paying exorbitant fees.

That, Samantha, was a moron. NOT a rare species, by the way. You're correct. You did nothing to deserve this. My advice is to always take a nonadversarial approach with homeowners. In fact, it has come to the point where I almost want the occasional jerk on the other end for comic relief. When I get a live one, I like to play dumb and ask really annoying questions. You will learn, in short order, not to let this type faze you even the slightest. Play with him for a minute or two, then forget about him and move on.

This forum was created at the suggestions of a number of our members who felt it would beneficial to all of us. Here is the place where we can kick around all matters of marketing tips and advice, questions and concerns. You can help us all by sharing your experiences, the positive and otherwise. Tell us what worked effectively, and what bombed. This is no small matter, folks. Most of you will agree that marketing is the key to your long term success in this business. So, if you have any thoughts on the subject, this is the place to discuss 'em.

OK, no surprises that he is an investor. As to whether or not you can strike a deal is dependent upon his reasons for wanting to sell. That's the big unknown at this point. Just how motivated is this individual? I don't think you need to "smooth talk" him. Call him and let him talk. Listen to what he has to say, his reasons for selling and/or leasing, the terms he wants, etc. Feel him out for what he has in mind when he advertises a "rent to own". Even though you are, Samantha, don't show yourself to be the motivated buyer. Once you have the info above, tell him you'll get back to him because you need to "run the numbers", or "speak with your partner". This will enable you to get off the phone, slow down, and think clearly. Then, get back here and we'll proceed. One other thing.......when dealing with another experienced investor who is advertising a rent to own or a lease purchase, it doesn't necessarily mean they are anxious to unload a property. He may be doing so because he knows it means a tenant/buyer may come along and put nonrefundable option money in his pocket, handle all maintenance and repairs, pay a premium price, etc. In other words, he wants a tenant/buyer in his rent to own for the same reasons we do, too.

Yes, it's possible this could be a motivated seller. Of course, the only way to know for sure is to call and find out. It's also a possibility this is an experienced landlord and investor. If so, you probably won't get anywhere with him/her. I have found over the years that when speaking with other investors, nothing much is accomplished. Let's face it.........we don't go into this business to help other investors make money. It may happen that way on occasion, but that is not our usual intent. Bottom line, Samantha, is to call and get the scoop, then proceed from there.

Samantha, first of all, do not arrive at any conclusions, at all, based on four phone calls! I cannot stress this enough!! Don't mind the quick "No!". You're off the phone in thirty seconds and you're on you way to the next call. The seller who wouldn't let you finish is no gentleman, by the way. Don't take your phone calls personally, and don't view them as rejections. These are simply homeowners who don't have a need at this time for your services. No big deal, Samantha. The moment you begin personalizing these phone calls, you're doomed. Think of each completed phone call as one person out of the way as you progress towards your next deal. A land contract is an agreement wherein the buyer makes payments in a manner similar to a mortgage. The buyer has "equitable title." However, the seller holds legal title to the property until the contract is paid off. The buyer has equitable title and, for all intents and purposes, is the owner of the property. Also known as a "contract for deed" or "contract of sale". As you already know, a lease purchase is simply a lease agreement with an option to buy within a certain timeframe. Title does not change hands until the option to buy is exercised. One more thing, Samantha. You won't be needing luck to succeed. Your success will be determined by your effort. It's true that on occasion luck may enter the equation and bestow some riches upon you, or bad luck may take some away. For the most part, though, your work ethic and refusal to fail will be the biggest factors in your long term success in this business, or any other, for that matter. Don't be alarmed if it takes you one hundred phone calls and two months to find a seller who wants to speak with you. It will be well worth it when you receive that first check. More important, it will be well worth it when you see that this stuff really does work when you work. Stick with it, Samantha, let us help, and you'll do fine.

Far be it from me to understand anything IRS. They do make telephone assistance available. Info can be found here. My understanding is if your LLC is set up as a single member entity you do not need an EIN. Of course, verify this first with either IRS or with the Georgia Secy of State.

Hello, Allen, and welcome to The Naked Investor. It sounds as if you're already on the right track for marketing this property. Newspaper advertising and a yard sign have always been my primary sources of marketing any property. I was never too successful with the referral sources you named. Assuming the terms you are asking are in line with the local market, and your ads reflect some of the "buzz words" we use, you should find that tenant/buyers are quick to respond. Let us know how it is working.

Summer, in the interest of protecting yourself, your Agreement with the tenant/buyer should state that any alterations made to the premises require written permission from the landlord.

Mr. Saint, setting up an LLC is usually a very simple procedure. It varies from state to state. Go to the Georgia Secretary of State website for information.

Samantha, I don't know that it is illegal to say you are in business if you're not. I'm not even sure what that means. If you turn a real estate deal, regardless of what you call yourself, you are in business. As long as you didn't break any laws in doing so, you are not in any danger of being busted. That said, a creative and memorable name for your new company is only a plus. It's also a very personal matter. What do you think will be a name that is reflective of you and your new endeavor?

Good morning, Samantha. I see your struggling breaking out of the comfort zone you have created for yourself. This is a very common trait among novices. Rest assured this means you are normal . You say you think you are experiencing the ol' familiar paralysis of analysis. I don't know that is it, as much as a simple fear of the unknown. That unknown being what happens when you speak with homeowners. I can best reply to this concern based on my personal experiences, and the experiences of many of the students I have worked with. This fear you have is in the heart of each and every new investor. You are not unique in this regard. Every new investor who has gone on to become a successful one overcame their fear by picking up the telephone. You dial and introduce yourself. You explain quickly and directly what you are looking for. If the homeowner says, "No, thank you.", wish 'em luck and move on. The next few go the same way. Suddenly, one says they have been unsuccessful trying to sell, and were just about to put their house on the market for rent. They hadn't thought about a lease purchase and they aren't sure what a lease purchase is. What are you going to do at this point? You already said you know the basics. You'll be surprised how much more you know than you think, and how satisfactory you're answers will be to the homeowner. Now, let's go further and say the homeowner wants more info. Slow things down, Samantha, and tell them you will be happy to email them some additional information about what you do and how you do it. You can always tell the homeowner that you will consult with your "partner" and get back to them, should a question come up that you are not certain of the answer. A "partner" is a great thing to have to slow things down when you need some time to think. After you say this, email me and I'll be happy to help you. I want you to have a success story to tell. But, it starts with you picking up the phone and making those calls. You can't get a deal if you don't make an offer. You can't make an offer if you don't find a motivated seller. And you can't find a motivated seller if you don't talk to a lot homeowners.

Jim, I want to chime in with my quick two cents here. Then, I hope some of the newer investors on the board will add their voice. I don't have specifics about percentages and ratios and that sort of thing. I do want to say, however, that one of the big reasons I find novices become discouraged and then quit, is because they waste much time speaking with homeowners who are not motivated to any degree and not interested in what you are offering. When this happens, wish 'em luck and move on. That phone call shouldn't take but ninety seconds or so. Take a nonadversarial approach to this business, speak with people who want to speak with you, and you'll find yourself being more productive and your business more profitable.........not to mention a hell of a lot more enjoyable.

Danny, the motivation to succeed at this must come from you. It can't come from anyone here. I don't think you're lacking motivation but, rather, you are fearful. Afraid of the unknown. This is fairly common among newcomers to our business. In fact, any new venture of importance we face can make us fearful. Option8's advice was good. There isn't much that can go wrong when speaking to homeowners. If they aren't interested in what you have to offer and say, it doesn't matter how well you say it. You'll get nowhere and be off the phone in sixty seconds. This is good, by the way. I don't mind hearing, "No", early on in the process. On the other hand, should you have the good fortune of speaking with a homeowner who has a problem and sees you as the solution, they will do most of the speaking anyway. The bottom line, Danny, is unless you get over your apprehension of making those calls you are stopping yourself from succeeding. Believe me when I tell you that after perhaps a dozen phone calls your comfort level will increase dramatically. It only gets easier as you gain experience.

Hi, Jim. Hey, this forum is all about sharing and questioning. I want a diversity of backgrounds and opinions here. So, no, there is no need to "put you back in line". I, too, have heard that large rent credits may give a tenant/buyer the chance to claim some sort of equitable interest in the property. My way of doing business is based on my experiences. That is, not once have I ever had rent credits used against me. You see the Agreements we use, Jim. You'll note that it is noted clearly, and more than once, that rent credits are not refundable if the option to purchase is not exercised. From a personal standpoint I am quite comfortable with those Agreements and the way I run my business. Now, having said that, I am not saying anyone else should emulate me. You need to do what is best for you and what is within your comfort zone. Speak to other local lease purchase investors. Go to a local REIA or two. Speak with a local real estate attorney or two. Then, when you have thoroughly informed yourself, run your business the way you have determined is the best and safest way.

Let me chime in here with my experiences. First, I always give a generous rent credit. To me, that means I start with 50%. Why? Because I want my phone to ring. I have done numerous deals with 75% and even 100% rent credits. It doesn't matter to me that this eats into my potential back end profit. If the tenant/buyer doesn't exercise their option that back end profit is not going to materialize anyway. My approach has always been to get the deal done fast, and move on to the next three. I do not want to lose sleep worrying about making payments on a vacant property. That is not why we are in business. I want to have my phone ringing and tenant/buyers drooling over the idea of $15,000 in rent credits earned. Where else will they find such terms? Option money is real. It is in my hands today. Cash flow is real. It is in my hands every month. Back end profits are not. They may become a reality. But, more than likely, they won't. With that in mind, if I have a $20,000 purchase price spread between what I agreed to pay the homeowner and what the tenant/buyer agreed to pay me, I am not opposed to giving it all back in the form of rent credits. Again, $5,000 option consideration and $150 monthly cash flow is reality. Potential back end profit is just that: potential. If the option is exercised and there is, say, $3,000 left on the table for me, I view it as a bonus. Just my take on the matter.

To further what Jim said, yes, much of the expense involved in running your business is a legitimate tax write off. I won't dare try and get into details here because everyone's situation is different. Suffice it to say that when filing time comes you need to hire a competent individual who can work your return to the bone to max out your deductions.

Jim, I can't recommend any company specifically for your area, obviously. However, you can probably start with a Yellow Pages search for title companies or escrow companies. You may also want to ask a few local Realtors who they recommend. Then, call around and explain what you need, and listen to who can offer you the services you need at a reasonable price.

Your Lease Agreement with the tenant/buyers is for a fixed time period. If the option to purchase is not exercised for any reason, it is a straightforward lease agreement then. As such, when that agreed to time period is over, they are required to vacate the premises. If for some reason they don't honor that, it becomes a simple eviction procedure, just like any other standard lease agreement would be handled.