I am in the SF Bay area. given the current economic and real estate market situations, I want to know what the experienced guys are finding most rewarding these days. I want to learn how other guys are profitting, so hopefully I can apply/adapt it to my markets.
suggestions are highly welcome.
Real Estate Business in 60 Seconds or Less
Sandwich lease options. Same as the last 11 years.
Nothing really changes, the market goes up and it goes down, people lose their jobs, others start businesses, some marry, others divorce. Through it all they need to buy, sell and rent a roof to sleep under.
You can be as dumb as a brick and have the personality of a turnip, but if you talk to enough people, you will get a deal. Heck, I bet there is someone in your town right this minute who will deed you their house purely out of sympathy for the ‘new guy’!
OK maybe I’m being a little snide. Let me give you something that is absolutely guaranteed to work wherever you are…
Go to craigslist.org or fsbo.com or whatever and search for houses you like.
Call the number advertised and say this:
“Hi, I’m yanjim100, I see your house is for sale…would you consider renting it to me for a couple of years and letting me buy it later? You know, like a rent-to-own?”
Roughly 30 out of every 100 people you talk to will say yes. Get off the phone with the other 70 as fast as possible by politely saying: “Thankyouverymuchforyourtime.” and hang up (yes run the sentence together like it’s a single word).
To the 30 qualified folks say this:
“Awesome. How much rent do you need?”
About 10 or so of those 30 will give you a number you can work with. Get off the phone with the other 20 the same as the 70 above.
To the remaining 10 say this:
“I can come by tonight at 6 or tomorrow at 3 to take a look, which is better for you?”
And finally, once you’ve got your appointment scheduled, say this:
“Oh yeah, I almost forgot, I’ll send over this rent to own agreement I have for you to look over before we meet, what’s your email address?”
Don’t forgot to put your complete offer on the contract before you email it.
If you’re picky I can pretty much 100% guarantee you that you will end up with at least 1 signed lease option deal if you do the above. If you’re not picky you’ll probably end up with 3 or 4.
Now go buy some blank yellow coroplast from a local sign shop and a big fat black permanent marker from an office supply store and write in big letters on the coroplast:
RENT TO OWN
3br 2ba
$2000
555-1234
Stick a bunch of those signs up around the neighborhood where the house is located.
Record this on your voicemail:
Rent to own your dream home with no bank qualifying! 123 Moneytree St. Buckstown, US is a 3 bed 2 bath ranch with ceramic in the entrance and hardwood in the livingroom. New roof last year, furnace and AC in '09, kitchen reno’ed in '08. Freshly painted in neutral tones and ready to move in today. You can OWN this home with good credit, bad credit or no credit even if you just started a new job for only $15,000 down and $2,000 per month. Drive by 123 Moneytree St. and if you like the house and the area call me back for an appointment to view."
When you talk to the buyers say this:
“Have you driven by the house? Do you have the $15,000 in your bank right now? Are you comfortable with the $2,000 per month with your current income?”
If their answers to those questions aren’t an empathic “YES!” tell them to get back to you when they’ve done what they need to do.
To the remaining buyers say this:
“I can show you the house at 7 tonight or 4 tomorrow, which is better for you?”
When you have an appointment set say this:
“Please bring your checkbook for the $1,000 deposit to hold the home if you like it. And $50 in cash for each applicant. That would be you and your spouse or any co-signer.”
Run your applicants by a mortgage broker to see how much they lied…er…I mean, how long it will take them to get a mortgage. And pick the best one.
Call them back and say:
“Congraulations! The house is yours! I’ll need the remaining $14,000 in certified funds by Friday and the $2,000 for your first month’s rent by the 1st when we’ll meet at the house and you’ll get the keys to your new home.”
That’s it. Deal #1 done. Now just go back to step 1 and start all over.
BTW I just gave you a $10,000 5-day real estate seminar for free, I hope you make use of it, my fingers are sore from typing.
is L/O still good in california these days
Doug Pretorius, thx very much for generously sharing your successful experiences. I bookmarked it so I can come back and constantly reference it in the future.
your writing came with such fine details and it’s almost a near handbook. that’s exactly what I was looking for as a less experienced, newly set out beginner.
with the roadmap in hand, I do have a few questions (especially to california pros):
given california’s very tenant-friendly laws, how successful/unsuccessful has lease options been? say if a tenant-buyer moves in and defaults after 7 months, how hard is to evict him (comparing to evicting regular tenants)?
can the tenant claim equitable interest when he stops paying? I have read a horror story of an arizona L/O investor’s eviction case was thrown out from the eviction court because of tenant’s claim equitable interest. he had to foreclose, which took disastrously long.
are there still good amount of demand for doing L/O for both seller and tenant/buyers, in the current california economic climate, i.e., 10% unemployment and high foreclosure/underwater?
I really want to hear other pros’ successes and mistakes, so to help me learn and do the right things.
LO or Wraps
Hey ‘yanjim100’,
The LOs work in CA, and Doug gave you a great mini course. Thx Doug!
I’d add a few things that are specific to CA market, and especially to higher priced markets like SF…
In your area, you will find that people with even more than 20% in equity will have their monthly PITI (principal-interest-taxes-insurance) a lot higher than the current rent for their property. Due to that discrepancy, I’d apply Doug’s advice on “For Rent” houses, that is targeting tired landlords.
In some cases where I got a sizable option consideration (i.e. $25k), I was willing to go negative on my cash flow. For example, if you get 25k and you’re negative $500/mo. - it’s still very profitable if the option term is i.e. 2 y and then the buyer walks or refi’s.
Another alternative is to get the deed on a property where its motivated owner has a low interest rate loan, where you buy 20% below market. Then you can sell it on a Lease Option (with sizable down you may take some negative CF) or you can sell it on a Wrap (in CA it’s called AITD) where you get the down payment, and nice cash flow due to the increased interest rate on selling side; and big back-end when they refi.
As far as your questions - evicting the LO tenant is the same as evicting a regular tenant if you have good agreements (and always separate lease and option agreement). I’ve never had any problems neither in CA nor in AZ/NV.
Demand - yes there is always demand because many people have lost their houses in foreclosure or lost their credit other ways, but they have 3, 5, or sometimes 10% down; and recognize that now it’s the time to buy.
Good luck, and get it going… imagine where you’ll be 7y from now if you had 20 houses locked on Sandwich LO at below today market prices, or some with full ownership! So start now!
marko
p.s. The following is very true in this biz - the more you learn the more you earn! - so instead of bookmarking a post like Doug’s, I suggest copy/paste into a Word doc and assembling your own study binder!
Thanks to rent controls my market has consistently had low rents compared to prices, so traditional LOs are hard to cash flow unless you work with tired landlords like Marko suggested.
The way I decided to approach this problem is to treat LOs like a type of financing instead of a type of renting. So I base the buyers payment on prevailing mortgage rates instead of prevailing rent rates. By finding the good deals from the motivated sellers I’m able to provide competitive ‘alternative financing’ for my buyers. These payments are usually much more than the house would rent for.
To Doug Pretorius:
Your mini-course is quite precious, I love it so!
Excellent post, Doug! So many wanna be investors spend so much time overthinking and overanalyzing, taking too many courses and asking too many questions that don’t really matter… When all they need to do is start with a simple concept, and go out and start doing it! Then, learn more as they go; “get good, get better, be the best” (Brian Tracy)!
A - Don’t bookmark Doug’s post; print it out, and carry with you as you begin your journey…
Then, my answers to your questions:
1 & 2 - Same questions… Doing lease/option, can I evict? Answer: You use the best possible forms, and do what you can to try to make sure you will be able to evict. Also, you recognize the risk - that no matter how good your forms are, if you end up before a judge there is a chance he will say no eviction - you have to foreclose because they have an equitable interest. A few pointers: separate lease, and never mention the option in it; do option at a later date, rather than at the same time as the lease; both forms state that tenant/buyer must perform as agreed, and can be evicted according to state landlord/tenant statutes if they do not; keep option term short - I do one year terms, but will gladly renew if tenant/buyer pays on time, keeps place nice, etc.; also, I don’t even give an option - I give a contract for option, that states that if all terms of lease, and of contract for option, are met, that tenant/buyer will be given a option to buy in the last month of the contract (limit time to exercise).
3 - There will always be demand for l/o, and demand for rentals, as long as there are houses and people who need a place to live. The trick is, can you get out there, find motivated sellers, get contracts on their houses, fill them with decent tenant/buyers, and make money in between. There will always be investors that are able to do this, however, there will always be people who fail at it as well. IMHO, the difference between the two has more to do with common sense, persistence, and desire to get good at what you do than anything else. To borrow a favorite quote from a friend of mine, “It is simple. It isn’t easy, but it is simple!” Then, a Brian Tracy quote: “Get good, get better, be the best!”
4 - My question to you… Doug has given you a roadmap to success in lease/options. Are you going to bookmark his post, or are you going to start taking the necessary action to become successful doing lease/options?
Now you have heard from one more experienced investor…
Best wishes,
Chris in FL
I missed an important point on lease/option… Always state in contract for option that any funds paid toward the contract are nonrefundable, and that, in the event they do not purchase the home, all monies paid will be treated as rent.
Love that Doug, Haven’t thought of this one. Thanks.
[QUOTE=Doug Pretorius;882610]Sandwich lease options. Same as the last 11 years.
Nothing really changes, the market goes up and it goes down, people lose their jobs, others start businesses, some marry, others divorce. Through it all they need to buy, sell and rent a roof to sleep under.
You can be as dumb as a brick and have the personality of a turnip, but if you talk to enough people, you will get a deal. Heck, I bet there is someone in your town right this minute who will deed you their house purely out of sympathy for the ‘new guy’!
OK maybe I’m being a little snide. Let me give you something that is absolutely guaranteed to work wherever you are…
Go to craigslist.org or fsbo.com or whatever and search for houses you like.
Call the number advertised and say this:
“Hi, I’m yanjim100, I see your house is for sale…would you consider renting it to me for a couple of years and letting me buy it later? You know, like a rent-to-own?”
Roughly 30 out of every 100 people you talk to will say yes. Get off the phone with the other 70 as fast as possible by politely saying: “Thankyouverymuchforyourtime.” and hang up (yes run the sentence together like it’s a single word).
To the 30 qualified folks say this:
“Awesome. How much rent do you need?”
About 10 or so of those 30 will give you a number you can work with. Get off the phone with the other 20 the same as the 70 above.
To the remaining 10 say this:
“I can come by tonight at 6 or tomorrow at 3 to take a look, which is better for you?”
And finally, once you’ve got your appointment scheduled, say this:
“Oh yeah, I almost forgot, I’ll send over this rent to own agreement I have for you to look over before we meet, what’s your email address?”
Don’t forgot to put your complete offer on the contract before you email it.
If you’re picky I can pretty much 100% guarantee you that you will end up with at least 1 signed lease option deal if you do the above. If you’re not picky you’ll probably end up with 3 or 4.
Now go buy some blank yellow coroplast from a local sign shop and a big fat black permanent marker from an office supply store and write in big letters on the coroplast:
RENT TO OWN
3br 2ba
$2000
555-1234
Stick a bunch of those signs up around the neighborhood where the house is located.
Record this on your voicemail:
Rent to own your dream home with no bank qualifying! 123 Moneytree St. Buckstown, US is a 3 bed 2 bath ranch with ceramic in the entrance and hardwood in the livingroom. New roof last year, furnace and AC in '09, kitchen reno’ed in '08. Freshly painted in neutral tones and ready to move in today. You can OWN this home with good credit, bad credit or no credit even if you just started a new job for only $15,000 down and $2,000 per month. Drive by 123 Moneytree St. and if you like the house and the area call me back for an appointment to view."
When you talk to the buyers say this:
“Have you driven by the house? Do you have the $15,000 in your bank right now? Are you comfortable with the $2,000 per month with your current income?”
If their answers to those questions aren’t an empathic “YES!” tell them to get back to you when they’ve done what they need to do.
To the remaining buyers say this:
“I can show you the house at 7 tonight or 4 tomorrow, which is better for you?”
When you have an appointment set say this:
“Please bring your checkbook for the $1,000 deposit to hold the home if you like it. And $50 in cash for each applicant. That would be you and your spouse or any co-signer.”
Run your applicants by a mortgage broker to see how much they lied…er…I mean, how long it will take them to get a mortgage. And pick the best one.
Call them back and say:
“Congraulations! The house is yours! I’ll need the remaining $14,000 in certified funds by Friday and the $2,000 for your first month’s rent by the 1st when we’ll meet at the house and you’ll get the keys to your new home.”
That’s it. Deal #1 done. Now just go back to step 1 and start all over.
BTW I just gave you a $10,000 5-day real estate seminar for free, I hope you make use of it, my fingers are sore from typing.[/QUOTE]
Im focusing on buy and hold MultiFamily and small commercial properties using seller financing. I just closed a 3 unit in August with lots of deferred maintenance and am closing on a package of 3 nice duplexes in early December. Both deals are Land Contracts with very little money down and 5 year balloons. Should have the 3 unit with a local bank next summer after I do the exterior work! The 3 duplexes im planning on waiting 36 months min to talk to a bank. Both seller have expressed that would hold a small second if the bank loan is short when it comes time to refi.
Lots of deals out there in distressed commercial…Cant wait until I have some more cash and equity and can go after a piece of that!!
Thx for reply. these are valuable pointers. I haven’t taken any L/O course. all I have is a book by wendy patten, which I am reading as of now.
Do you guys have a good course (with good forms inside) you want to recommend on L/Os ? courses are expensive, so I hope to put money in the ones worth the money.
I definitely want to set out on doing deals. My experience on REI is mostly on managing my rental houses in the low income areas for the past 3 years. Because of my dedication and exhaustive effort in screening tenants, I have managed to do ok. but the rent/price still mediore (this is in CA bay area). the income helps, but doesn’t justify my effort.
I have been reading diligently on this website, trying to learn and figure out other viable strategies. most people I know of are either beaten up landlords or brokers who don’t have a clue on CRE. my main source of info has been this website and a few books I bought.
your pointers are valuable. I want to absorb as much as I can from other experienced investors, because the Pros know the do’s and don’ts. From my own experience in the rental business, mistakes are costly. I want to learn from other people’s successes and mistakes, so I can sharpen up my strategies (also thru doing), and make repetitions of the strategy, to be successful.
thanks to all of you who generously share your experiences and thoughts. you can’t overestimate how important these are to newbies like myself.
[QUOTE=Chris in FL;882620]A - Don’t bookmark Doug’s post; print it out, and carry with you as you begin your journey…
Then, my answers to your questions:
1 & 2 - Same questions… Doing lease/option, can I evict? Answer: You use the best possible forms, and do what you can to try to make sure you will be able to evict. Also, you recognize the risk - that no matter how good your forms are, if you end up before a judge there is a chance he will say no eviction - you have to foreclose because they have an equitable interest. A few pointers: separate lease, and never mention the option in it; do option at a later date, rather than at the same time as the lease; both forms state that tenant/buyer must perform as agreed, and can be evicted according to state landlord/tenant statutes if they do not; keep option term short - I do one year terms, but will gladly renew if tenant/buyer pays on time, keeps place nice, etc.; also, I don’t even give an option - I give a contract for option, that states that if all terms of lease, and of contract for option, are met, that tenant/buyer will be given a option to buy in the last month of the contract (limit time to exercise).
3 - There will always be demand for l/o, and demand for rentals, as long as there are houses and people who need a place to live. The trick is, can you get out there, find motivated sellers, get contracts on their houses, fill them with decent tenant/buyers, and make money in between. There will always be investors that are able to do this, however, there will always be people who fail at it as well. IMHO, the difference between the two has more to do with common sense, persistence, and desire to get good at what you do than anything else. To borrow a favorite quote from a friend of mine, “It is simple. It isn’t easy, but it is simple!” Then, a Brian Tracy quote: “Get good, get better, be the best!”
4 - My question to you… Doug has given you a roadmap to success in lease/options. Are you going to bookmark his post, or are you going to start taking the necessary action to become successful doing lease/options?
Now you have heard from one more experienced investor…
Best wishes,
Chris in FL[/QUOTE]
Lease Option Success Strategies
The host of this forum, Marko Rubel, has put together the most comprehensive course on lease options. And since it’s all downloadable, we’re kept the price low and you get instant access to all the materials. Details here:
http://www.creonline.com/catalog/c-284.html
JP
Doug,
Great post. One question I want to ask and see how would you approach it is “what happen if the seller default on the mortgage?” The perspective buyer pays you and you pay the seller, but the seller never pay the bank. Would setting up an escrow with title or sub-account be feasible. Thanks for the great post.
[QUOTE=tuantran02;882630]Doug,Great post. One question I want to ask and see how would you approach it is “what happen if the seller default on the mortgage?” The perspective buyer pays you and you pay the seller, but the seller never pay the bank. Would setting up an escrow with title or sub-account be feasible. Thanks for the great post.[/QUOTE]I only deal with financially stable sellers who are capable of carrying both mortgages. As a result I’ve never had a seller default.
But if you really want to you can pay the mortgage, taxes and insurance yourself. That’s what I did on my very first lease option because in that case the seller was NOT financially stable or responsible.
[QUOTE=tuantran02;882630]Doug,
Great post. One question I want to ask and see how would you approach it is “what happen if the seller default on the mortgage?” The perspective buyer pays you and you pay the seller, but the seller never pay the bank. Would setting up an escrow with title or sub-account be feasible. Thanks for the great post.[/QUOTE]
I pay PITI for the seller. In marketing I try to convince them as much as possible that they are able to move on with their lives just like if they sold the house conventionally.
If the seller balks and is concerned about ME making the payments I use:
problem with sellers
Hello “tuantran02”,
There are a few ways to protect yourself from a seller who wouldn’t make the payments…
You could make the payments to the bank yourself as Doug suggested, or you can hire a third party independent Note servicing company Sharyn suggested.
If the seller doesn’t want to do either, then at least get the loan # and a way to verify yourself if the payments were made.
> Make sure that your contract addresses what happens if that were to happen - for example you are allowed to make the payment yourself and the seller needs to credit you w $2 for every $1 you spent… etc.
Whenever I can get a seller to agree, I try to get a “performance mortgage/Dot” recorded – that way I could foreclose in case of a bigger problem, obviously assuming it would make financial sense at that time.
And lastly… your question is great but don’t get worried with too many “IF’s”… get one going and learn more as you go.
After your first one, it’s important to learn more because these type of deals have to be protected starting from ‘deed in escrow’; then “placing it in Land Trust”(to protect a long term option from liens against the seller)… and/or recording a performance mortgage, etc.
Good luck and start now!
Best,
Marko
Hi,
A real estate friend of mine said that you need to be a lawyer or a licensed real estate agent in order to do lease option in CA. Is this true?
When someone says something that I find hard to believe about REI, I try to remember to say “You know, you may be right about that. I want to understand more. Can you point me to where I can find the relevant law or code or rules about that? If not, can you tell me where heard that?” I think you’ll find that people mostly repeat what they heard from someone who heard it from someone who heard it from someone else. They rarely (if ever) actually know the real story and aren’t really interested in it. Let’s face it: it’s easier to repeat things as opposed to think about them. RE agents are some of the worst offenders in this area. Escrow agents come right after the agents.
I think it’s important to say they might be right…because they might! I don’t want to cut myself off from learning something I didn’t know. So, ask your RE friend where he learned that only lawyers and RE agents in can do lease options in CA. I’m guessing they didn’t learn it anywhere…
Doug,
Great post, thanks for the info. Have a question for you: With the current market and so many people having houses that are worth less than their mortgage balance, how do you set up a Sandwich Lease Option in this scenario?
Thanks,
boricua