Two of the best and easiest methods that allow you to invest in real estate without using any of your
own cash or credit is with Lease Options (A.K.A "Rent to Own") and "Sandwich" Lease Options.
These two methods are not only my favorites but they are also great ways for beginner wholesale
real estate investors to get started as well. The reason these are the best ways to get started is because
when you do them correctly and the way we do them, they don't require risking any of your own
cash or credit.
In addition, when you follow our instructions step by step, you will not:
- Have to ever drive around the city and look for vacant properties
- Wait months and months to get approval from banks for your deals
- Waste time with "tire kickers" who are not really interested in working with you in the first place
- Insult and offend your sellers with low ball offers
- Deal with rejection on a daily basis, avoiding frustration with people who do not respect you
- Plus, much much more.
What Is a Lease Option Anyhow?
- It's a way for a buyer with bad credit, a small down payment and/or not enough time on their job to gain the benefits of controlling a property having yet qualified to buy it.
- Allows a portion of the monthly rents to be applied towards the future purchase of the property, if the buyer (tenant buyer) decides to exercise their option to buy the home.
- A lease with the "Option" to buy the home in the future or not to buy it.
- Buys time (1-3 yrs on average) for the buyer to fix their credit, save up for their full down payment and gain more time on their job in exchange for giving the seller a higher than market price.
- The wholesale investor does not need to have an expensive hard money loan, does not need to go through a bank's strict qualifying process, and since the Option rights are "personal property" and not "real property," the wholesale investor can even assign the Option rights without using a Title company.
Lease Option Assignment Deal Example:
With this example, we are going to lock up a property for $100,000. You will then turn around and
resell the purchase price at a higher amount of $103,000 for demonstration. Your "end" tenant buyer
is going to give you the $3,000 so that you will now be able to assign the Option rights over to them.
They will now have the option to buy or not to buy.
The seller is pleased because they will get their full asking price of $100,000 and did not have to pay
the Realtor commission of 6% and $6,000, plus they have a better tenant than they would compared
to renting the home.
This strategy will also work even if the seller has no equity in the property. Even if you are unable to
negotiate a lower purchase price, the buyer typically is willing to pay a premium for their home if:
- They don't have to deal with a bank
- They don't have to rent anymore
- A portion of their rent will go towards reducing the purchase price
- They will the feel and control of home ownership without qualifying from the start
If you are a Realtor by chance, this is a WONDEFUL strategy for you to implement when dealing
with FSBOs. Instead of representing the homeowners that want to sell their properties (For Sale By
Owner), you can instead act solely as a Principal in the transaction representing yourself, instead of
charging commissions, you can simply collect your profits from the Option Assignment fees.
Problem Solved!
What is a "Sandwich" Lease, You Ask?
- A Sandwich lease Option is very similar to a Lease Option, but instead it allows the wholesale real estate investor to stay in the mix of the transaction, allowing them to profit in more ways than one. When structuring the transaction in this manner as we do, you still avoid the usual risks and cash outlay.
- When using this exit strategy, an investor can earn profits upfront in the form of assignment fees (typically $3,000 - $25,000), during the lease term when reselling the rental price at a slightly higher amount or negotiating that the seller will receive a smaller amount, allowing the investor to keep the difference.
"Sandwich" Lease Option Deal Example:
Let's say for example that the seller wants to sell their property to you for $100,000 with rent at
$1,000 per month, and for a 3 year term. You then turn around and resell the pricing and terms to
your "end" tenant buyer and keep the difference. In this illustration, the easy way to structure this
deal would be to resell your Option to buy this home for $103,000 in year one (keeping the 3K
difference), resell the rent for $1,200 per month (keeping the $200 per month difference as your
passive cashflow), then for years 2 and 3, you might make the pricing as follows: $106,000 and
$109,000 respectively (you keep the additional 3K - 6K depending on when the "end" tenant buyer
buys.
This strategy works even if the seller has no equity, and even if you are unable to negotiate a lower
purchase price, because the buyer (from experience) is typically willing to pay a premium for their
home for the following reasons:
- They don't have to deal with a bank
- They don't have to rent anymore
- A portion of their rent will go towards reducing the purchase price
- They don't have to have a credit check
- They will have the feel and control of home ownership without qualifying from the start
Where Do You Find the "End" Tenant Buyers?
When the pricing is right for a property, finding a tenant buyer is very easy. In fact, if the property is
not selling, it means that the price is too high. Some sellers will argue this point with you naturally
because they feel their home is worth much more than an appraisal or Realtor is saying it's worth.
The truth is, when a property owner is getting a lot of interest on a property, even tons of showings,
but no offers - it is because of the price. The price is always the reason, assuming that all the
marketing was done correctly and all other basic variables are correctly in place.
Many Wholesale real estate investors know that they can advertise for buyers on free sites such as:
- Backpage
- Zillow
- Craigslist
- Trulia
- Plus more
But...most do not understand the power behind building lists of these buyers over the course of time,
allowing them to blast out a single message to all their buyers in a given area, price range, and other
criteria, and have the home sold quickly.
We have built such a list for our own business so we could sell properties quickly with our buyers list
when the property is priced correctly. Pricing properties correctly has allowed us to sell properties
within 6 days, start to finish, having the tenant buyer in place within 24 hrs. In fact, we purposely
create and "Auction" like effect that allows us to be picky about which buyer we want to go with
instead of haggling, begging, and pleading the buyer to buy.
It is my hope that you have enjoyed this blog post, causing you to take the next step in your
wholesaling real estate career by learning more about how to get more motivated sellers, more
closings without banks, and more profits while automating 90% of your work (even if your a
complete newbie) here.
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