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Dan (SoCAl)

Best approach to L/O in ultra-hot market?

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Greetings all. I am getting my feet wet with Michael's L/O methods and have been trying hard to wrap my mind around all the good ideas on this board. I'm working hard to crack my first deal. I have been cold-calling homeowners for the last three weeks (FRBOs) so I could convince myself I CAN talk RE without anyone exploding :D

 

I am getting some good interest and one main objection: Homeowners want to set the price at the time the T/Bs exercise their option. 2BR/2Bath condos are appreciating at $100,000 per year here. Any halfway decent residential property will have contracts for *more* than asking price within 30 hours of coming on the market. I talked to one gal who has a vacant Townhome that is costing her $3200 per month. No problem. It's appreciating at around $9,000 per month.

 

Of course the bubble will burst (or at least flatten out). In the meantime, I *think* I need to adjust my sandwich-lease approach to.....what??? CAs? Pure Options? Can I even work this program in such a market? Help!

 

Dan

 

 

 

 

Dan, you've asked a question I hear on a thrice weekly basis. And this thread has generated a lot of feedback because of the CA example numbers versus selling with a Realtor. So, I decided to pin this thread for a while.

Edited by MichaelC

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Greetings, Dan, and welcome to The Naked Investor.

I'm working hard to crack my first deal. I have been cold-calling homeowners for the last three weeks (FRBOs) so I could convince myself I CAN talk RE without anyone exploding  :D
Good for you! You're off to a good start, then. Making those calls, (and by the way, they really aren't cold calls, are they? I mean, you're calling someone who paid to place an ad to have folks just like us call 'em), can be intimidating at first. However, doing so pays great dividends for your education in this business. The bottom line, though, is no one has exploded yet, right Dan? So, apparently you're doing fine while gaining valuable experience, and confidence, speaking with homeowners.
I am getting some good interest and one main objection: Homeowners want to set the price at the time the T/Bs exercise their option.
Not surprising, but no can do. The price needs to be set upfront. Leaving a key term such as the purchase price will probably render a contract invalid. I believe the legal dudes call that an illusory contract. Or so I've been told. No, we can't leave key terms blank.
I talked to one gal who has a vacant Townhome that is costing her $3200 per month. No problem. It's appreciating at around $9,000 per month.
Yeah, but that money is still flowing out of her pocket each month in the meantime! And that's gotta hurt! She needs debt relief and you can help provide her with just that.
I *think* I need to adjust my sandwich-lease approach to.....what??? CAs? Pure Options? Can I even work this program in such a market?
Ah, yes, the million dollar question that I am asked thrice weekly: "Will this work in my area? It's a seller's market where I live."

The real estate market in this great country of ours has been a seller's market going on five years now in most parts of the country. Here in south Florida, for example, we are entering out fifth year of record sales and record appreciation. Properties are averaging an approximate twenty percent appreciation rate per year. Does this mean that all real estate investors have withered up and moved to East St. Louis? No. Because accompanying this boom we also have record foreclosure and bankruptcy rates. A strong real estate market doesn't mean that every seller in it is strong, also. (Look at the woman with the vacant townhome, as an example.) Clearly, there are homeowners in a world of hurt. Your first objective as an investor is to find these folks. How? Well, you know that already: market like your life depends on it. Let 'em all know who you are, what you do, and how to find you. That's the first part of my answer to your question.

The next thing that needs to be said you have already alluded to. Shift your strategy. A sandwich lease is a great fit when the homeowner is in trouble and motivated to do something about it. You find yourself with a sweet discount and sizeable spread in terms to make the sandwich lease an appropriate approach. But, if that isn't happening, using several other lease purchase techniques we all know and embrace here, change hats and go with a Cooperative Assignment. Give the homeowner everything they want, including that appreciation they desire! A condo worth $350K today is appreciating at 25%? Then build that into the price and put the deal together. If the market will bear it, you'll find your tenant/buyer in no time because of the terms you are giving to them: no bank qualifying, one year's time to get their financing in place, rent credits, etc. It's a true win/win for all involved, and you pocket the option consideration for putting it all together. You're now free to move on and do it again!

You can also try controlling a property using a Pure Option. Make offers for whatever price you can negotiate, and lock up the deal for $5. Now, turn around and market that property. In a hot market like you describe, it shouldn't be a problem to find an interested buyer. Then, just assign that option agreement over for a few grand. The homeowner gets their property sold at their price. The buyer gets the property they want. And you collect an assignment fee.

One more thing to remember: real estate markets are always cyclical. They rise, then level off, then fall. Then, they do it again. Don't know when the cycle will begin changing in your area, but it will. Hone your skills now in a seller's market, and when it does begin to slow down, you'll be in prime position to take advantage of it. You'll have more properties thrown your way than you'll be able to handle. In the meantime, though, you need to deal with your market realities as they are now. Put forth the effort, market, adjust your strategies to match market conditions, gain experience and continue your education.

Whew! OK, Preacher Mike is off his soapbox now. Time for me to hitch my wagon and slink into the next town to sell my snake oil potion and lard based body rub lotions.

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Michael, Thank You for your detailed response!

 

Okay, I'm convinced a strategy change is needed, but I fear I've taken a wrong turn somewhere and am lost. Maybe I'm overthinking -- or I'm not thinking at all! Something's jammed up.

 

It sounds like the Cooperative Assignment is exactly the same as a sandwich lease, except instead of negotiating a price discount I will agree to pay full price plus appreciation. So far so good. Then I find the T/Bs, collect the option money and beat a hasty exit.

 

But then the seller has to manage the T/Bs for 12 months and apply the rent credits which -- I *think* -- are now coming out of his pocket rather then the less visible spread I create when working a sandwich lease. Please correct me if I'm wrong, but this feels like an unnecessarily complicated version of a straight FSBO for the homeowner. Why would they do it? What are the benefits?

 

Would a typical deal look like this?

 

400,000 Fair Market Value Today

500,000 Selling Price in 12 Months (Adding $100,000 for 25% Appreciation)

515,000 Price to T/B (includes 3% -- $15,000 -- for Option/Assignment????)

 

Rent credits in this scenario would be $14,400 based on a 50% credit over 12 months, reducing the seller's price to $485,600. While that's still $15,600 more in his pocket than if he used a Realtor, it seems like a pretty thin advantage and a tough sell. Unless, like you suggest in your manual, I split the Assignment fee with him. That would cut his rent credit deficit in half.

 

What am I not seeing here? Or is this exactly right?

 

Dan

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It sounds like the Cooperative Assignment is exactly the same as a sandwich lease, except instead of negotiating a price discount I will agree to pay full price plus appreciation. So far so good. Then I find the T/Bs, collect the option money and beat a hasty exit.
You're a fast learner, Dan. So far, so good.
But then the seller has to manage the T/Bs for 12 months and apply the rent credits which -- I *think* -- are now coming out of his pocket rather then the less visible spread I create when working a sandwich lease. Please correct me if I'm wrong, but this feels like an unnecessarily complicated version of a straight FSBO for the homeowner. Why would they do it? What are the benefits?
"Manage" may be too strong a word but, yes, the homeowner is the landlord with a tenant/buyer in his property. As for the rent credits, yes, I guess that technically they do come out of the owner's pocket. But, in reality they don't because they have been built into the end price. Instead, they are a great marketing device and behavior modification tool for tenant/buyers. The benefits to the homeowner are numerous: t/b versus tenant; a higher selling price without

Realtor commissions or closing costs; and no maintenance or repair responsibilities for the homeowner.

Let's look at the numbers: the property sells today for $400K. Deduct approximately eight percent for Realtor fees and closing costs, and the net to the seller is $368K

Now, lease purchase this same property for, say, $476K (19% appreciation). The rent is $2,400 per month, and you are giving a 50% rent credit. As you noted this equals $14,400. That leaves a net of $461,600. Now, let us further say you collected and kept $10K option consideration. The net to the seller is now $451,600. My math puts the homeowner up by $83,600. I'd say that would get his attention! Play with the numbers any way you'd like, but the difference will always be substantial based on the scenario you have laid out for us, Dan, about your local market conditions. Even if he opts to sell the property himself, your CA deal puts him way ahead again! And we haven't even factored in the tax advantages yet, which may be substantial.

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Michael, you're brilliant! Same numbers with a different emphasis equals a much better presentation to homeowners.

 

Using the same example, when I am presenting this opportunity to T/Bs, they will have $24,400 (about 5%) in the deal when their lease expires. This is a price reduction, certainly. Is there anything I can do to help insure that this money is credited as a down payment when they line up their financing, or is that something that depends on the moods and market conditions of the mortgage broker(s) involved.

 

Thanks a ton. You have really helped me.

 

Dan

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Michael, you're brilliant!
And you thought I was just another pretty face. :lol:
Is there anything I can do to help insure that this money is credited as a down payment when they line up their financing, or is that something that depends on the moods and market conditions of the mortgage broker(s) involved.
You hit the nail on the head. Whether or not the rent credits will apply toward the down payment is between lender and borrower. The best thing any t/b can do is to shop the marketplace for a qualified and competent money man, and to start their financing search early.

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Dan of So/Cal.....I admire Your determination. I am also challenged with

the San Diego market realities.....would welcome to swap notes if You like

My land line is 619 644 9020.

 

Many thanks

 

greg :angry:

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Let's look at the numbers: the property sells today for $400K. Deduct approximately eight percent for Realtor fees and closing costs, and the net to the seller is $368K

Now, lease purchase this same property for, say, $476K (19% appreciation). The rent is $2,400 per month, and you are giving a 50% rent credit. As you noted this equals $14,400. That leaves a net of $461,600. Now, let us further say you collected and kept $10K option consideration. The net to the seller is now $451,600. My math puts the homeowner up by $83,600. I'd say that would get his attention! Play with the numbers any way you'd like, but the difference will always be substantial based on the scenario you have laid out for us, Dan, about your local market conditions. Even if he opts to sell the property himself, your CA deal puts him way ahead again! And we haven't even factored in the tax advantages yet, which may be substantial.

 

Michael, you happen to write this down on a pad and show 'em, yes? All the benefits of doing this deal with you, as opposed to selling themselves or through a Realtor.

I plan to when I'm in front of one, myself.

 

Ok...if so....do you, personally ever bring that option consideration you're going to get, to the seller(s) attention?

I know Adam splits his with the sellers (not sure if he still does) and Pete says he never brings it up. To each his/her own, I guess.

 

Just wondering what angle to approach this.

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Michael, you happen to write this down on a pad and show 'em, yes? All the benefits of doing this deal with you, as opposed to selling themselves or through a Realtor.

I plan to when I'm in front of one, myself.

Sure. Visuals are a very effective and compelling closing tool. Show a homeowner, in print, black on white, how you can net them $80K more, and the deal is your's, my friend.
Ok...if so....do you, personally ever bring that option consideration you're going to get, to the seller(s) attention?

I know Adam splits his with the sellers (not sure if he still does) and Pete says he never brings it up. To each his/her own, I guess.

 

Just wondering what angle to approach this.

I don't bring it up. But, that's because the sellers always do. I am always asked where I "come into the deal", or something similar. My stock reply:

"Mr. Homeowner, nothing ever comes out of your pocket. Even though I am working for you, the tenant/buyer pays my fee. They will be required to put down some money upfront, called option money. That amount varies, but I expect it to be in the $____ to $_____ range. Now, if they don't end up exercising their option to purchase your property, I retain that money as my fee and my services to you cost you absolutely nothing. If they do buy your house, than that option money is applied to the purchase price."

Straightforward and presented in a very favorable way, I think. Works for me. You may be asked an additional question or two. But, I emphasize the net dollars to the seller at closing. Even factoring in our take, we are always way ahead of anything else that they can choose from.

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Hi all-My name is Cris and I live here in Sunny San Diego, CA as well. I had a heck of a time with all this stuff until Michael helped me figure it all out! I have been in Michaels mentorship program for the past few months and just a short time ago I landed my first deal. A week later, I landed my second deal and I have an appointment with two homeowners, one tomorrow and one Sunday to possibly line up to more-that would make four in a month if I get these two this weekend! B) I agree, this is a different market than most. However, persistance is definitely the key. I have also noticed that mixing things up when it comes to marketing is the key to success. I have done a bit of everything-I put signs out, I post flyers, I run ads, I put magnets on my car, I hand out business cards, etc. I struggled at first and had the same feelings and ran across the same issues as I am seeing from you fellow San Diegans. However, Michael C. always has the perfect answer for all those objections or Questions. HIs book has helped me a lot too. I still use that as a reference tool on a daily basis. For you folks here in So CAl, feel free to call me (760-738-4569) -by NO means am I an expert, just a gal on a mission who has memorized everything I have learned from Michael and repeats it upon command. :) I have made this my mission-to make lease purchase transactions a successful aspect of my real estate business and I think anybody who puts a little hard work and determination into this can come out on top!

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