1. Short Sales Changed?
2. Not Assigned?
3. Tax Liabilities
Developing a Dream Team
How to Cherry Pick Great Deals from Your Desk
By Lou Castillo
Our most successful students sit in their desk chairs (just like Lou and I) and "cherry pick" the very best deals from the very best leads that called them. They didn't chase after deals, they don't call agents, they don't call on FSBO signs – they relax, in full control knowing that their phone will ring several times each week with a great deal – worth $10,000 to $25,000 to them.
How do we do it? Better yet, how do our new students do it? It's the secret "M" word that everyone says "oh yeah, I've heard of that", but rarely do investors do it well. The M word is:
Marketing. Marketing. And more Marketing.
There are 3 simple key components to making your phone, or your answering service's phone ring with great deals. Every week.Multi-prong approach. Diversify and have lots of small marketing techniques or campaigns going at once. For example, send out direct mail postcards, and do some bandit road signs, and do some doorknob flyers, a few small billboards, some Bankruptcy or pre-foreclosure leads and a newspaper ad. Do at least 2 or more of the above, so that when one technique slows down another is still bringing 'home the bacon'. Have a lead script & formulas, so you can make an 'rough offer' right over the phone. You'll need a short script of questions to ask your incoming caller/sellers to figure out the details of their house & life situation. You'll also need some cheat sheet so you can make a quick "guestimate" of repairs and plug it into a proven formula to generate an approximate or rough offer—right over the phone. If the seller says 'yes or maybe', then go visit the house to firm it up and get the contract! If she says 'no', then try to overcome any objections OR move on to the next lead call – no time wasted on your part anymore, chasing bad leads all over town!
Repeat. Repeat. Repeat. Continue to implement your Step #1 stuff – repeatedly. Do your direct mail, flyers, signs, again and again and again. In the same areas.. Research has shown that it takes the average consumer 5 impressions, or viewing of your marketing before they start to feel as if they know you and trust you. That's when they'll call you with a slam-dunk deal, already pre-disposed to doing business with YOU!
Implement those 3 steps above and we guarantee you you'll have hot leads flowing right into your phone and you can make offers right back over the phone, so that you can cherry pick BIG money makers while you sit at your desk. This is how we bought 400+ houses without running ourselves crazy, and still having time for our family, friends, relaxing, vacations, etc. You can too!
Telling You About
Nothing Down Real Estate
Nothing Down real estate has been around for about three decades now, so the natural assumption is that it is probably reaching the end of its life cycle. Not so. The reality is that Nothing Down is alive and well, and more profitable than ever before. The only difference is that our current economy and consumer dynamics have changed the rules.
Unfortunately, no one is telling you this.
Why? Well, for a couple of reasons, mostly. You see, with the exception of only a few, most Nothing Down courses were written by people who fall into one of the following two categories: “Old-Timey” gurus, who used to buy and sell real estate back when the Saturday Night Fever soundtrack was a best-selling 8-track tape; or more recently, “New-Age” gurus who claim that their single method is the best and only method you’ll ever need.
Of course, what worked when disco was king doesn’t work anymore, so the reason the old-timers won’t give you the latest scoop on Nothing Down is because they don’t know what it is. But that’s only the half of it. You’ve also got a bunch of new age gurus who know exactly what’s going on right now, but their agenda prohibits them from telling you about it. You see, their technique may have worked quickly and profitably even as recently as two or three years ago. But the ever-increasing challenges that have mounted since then are making it easier and more profitable to just sell courses about their favorite technique than to actually use their techniques in real life.
So what can you do about this if you want to find a good course on real life Nothing Down techniques? For one, you need to look at the author, and make your own determination as to whether they are spending more of their time as a real estate investor or as an information entrepreneur. Second, if the author is featuring 20 or more techniques, or claiming that their single method is the only one you’ll ever need, this should raise some red flags. The truth is that if you fully understand just 4 or 5 methods, you can easily modify them into dozens of unique applications. And if anyone is trying to convince you that you only need one technique because every motivated seller can be squeezed into the same box, then they are either displaying unhealthy levels of naivety, or just flat-out lying to you.
As someone who spends time every day in the trenches of Nothing Down real estate, I am ready, willing and well-qualified to share with you what I see as the 5 most important truths that no one else is telling you about Nothing Down! So here goes:
1. Lease-Options are not the best way to buy and sell real estate Nothing Down.
Of course, in 1996 I was singing the praises of Lease-Options, but things have changed since then… significantly. So much so, in fact, that Lease-Options have now become one of the more challenging and lower-profit Nothing Down techniques I use—thanks to new anti-flip policies by lenders, increased competition from other investors and our current economy. Lease-Options still work extremely well in some applications, but if you’re looking to take control of houses by Lease-Option, and then re-sell them all by Lease-Option, you’ve got some surprises coming that your Lease-Option guru forgot to tell you about. Things just aren’t the same as they were 4 or 5 years ago.
2. If you still want to do
“sandwich” Lease-Options, you’re better off using Lease-Purchase instead.
Even though a Lease-Purchase technically obligates you to buy, tweaking the language a little can make it effectively identical to a Lease-Option, but with one very distinct advantage... perception. Sellers prefer to hear the term “purchase” rather than “option” during negotiations, especially since most won’t know what an option is. On the flip side—when you’re the seller—a Lease-Purchase that legally obligates your tenant/buyer to perform will enhance their cooperation levels and reduce their likelihood of default.
3. Seller’s are not
lining up for term offers right now.
Interest rates are still pretty low right now, and because lenders have also created some wacko non-conforming loan programs to go along with these low rates, just about anybody can get a mortgage today. That means most sellers are not having too much trouble selling their homes these days, and therefore fewer of them will need your Lease-Purchase or Land Contract term solutions. You can still turn some of these deals, because there will always be some people who’ll fit the profile. But until interest rates start climbing again, you need to focus more of your efforts on other Nothing Down techniques.
4. You can overcome
today’s term deal challenges by combining two or more strategies on the same
New anti-flip crack-downs and lending policies that were instituted a few years back had begun making it tougher to collect back end Lease-Purchase profits. Until recently the best way around this was to simply get better at convincing sellers to sell me their properties on Land Contract instead of just giving me control of them by Lease-Purchase.
Buying by Land Contract allowed me to sell by Land Contract, which in turn permitted me to collect my profit up front in the form of a larger downpayment or assignment fee. This worked well for awhile, until the delayed 9-11 back-lashed economy caused even my best high-end Land Contract buyers to have trouble making payments sometimes. Being faced with the possibility of removing defaulted Land Contract buyers will make anyone long for the days of a simple eviction.
So, how can you combine Land Contract profitability and simple Lease-Option remedies? A great fix for this temporary dichotomy is to mix things up a little. By purchasing houses “subject to” or with recorded Land Contracts, and then selling them on Lease-Purchase, you would not only be solving your anti-flip and seasoning challenges, you would also be giving yourself faster and less expensive recourse choices in the event your buyer should happen to default. Then, as interest rates and economic conditions recycle again—and they always do—you can go right back to business as usual.
5. Your success in real estate has nothing to do with real estate techniques.
Most gurus won’t tell you this. Why? Well, they either don’t know it themselves, or they just don’t want to write a course about it because they know you won’t buy it. These days, there doesn’t seem to be any market appeal for anything except whatever happens to be the latest, slickest, glitziest, coolest, and most creative buzzword real estate technique at any given time.
After all—be honest—would you buy a course on marketing techniques, human psychology, business systems, business cycles, or the importance of a healthy self-esteem? Unless you’re a woman or a uniquely perceptive man, you’ve probably answered “No” with a capital “N”.
Unfortunately, these particular skills are far more important than any single real estate technique you can ever learn. You see, you’ll need effective marketing skills—driven heavily by a thorough understanding of the human psyche—to both buy and sell houses profitably, especially when you intend to utilize slick, glitzy, and cool creative methods. You’ll need to develop a business system so that you can consistently replicate profitable deals over and over again, and you’ll also have to understand and recognize market cycles so that you can shift your efforts and apply the most effective real estate techniques for each cycle.
But perhaps even more importantly, you’ll need to do all of this with a sufficient, well-balanced, self-esteem. This will allow you to accept the wealth that your mastery of the other skills will create, without subconsciously sabotaging yourself through guilt or other feelings of inadequacy. A well-balanced self-esteem will also help keep you from rising to a destructive level of self-aggrandizing, or perhaps trying to find some kind of validation or inner fulfillment through an empty pursuit of material possessions.
Now, of course, these previous issues are only what I believe to be the top five things that no one seems to be telling you about Nothing Down in today’s creative real estate market. There are more challenges, of course, but if you can get past these five, you’ll be miles ahead and much more profitable than many of your colleagues.
Nicholas Modarelli is a 20 year
veteran of Nothing Down techniques, and has been a full-time real estate
entrepreneur since 1995. To date,
he has been involved in well over 300 real creative estate transactions in six
When I began my career as a real estate investor in 1985, I stumbled across a little known area of real estate that had the potential to make us a ton of money. This was an area of the market that went unnoticed by most people. This was the area of abandoned properties.
How To Profit From Abandoned Properties You might pass these properties on a daily basis, but just never paid much attention to them. You could be passing up hundreds of thousands of dollars in profits! These are properties that the owner has walked away from for whatever reason. It could be a divorce situation, an illness, a death in the family, a job relocation, or any number of other reasons. Do we care why? Absolutely not! Don't waste your energy trying to figure out why sellers do what sellers do.
A $58,000 Profit Right Across The Street I remember a young lady in one of my 2 day classes. In the first day of class, we taught a whole day of unconventional ways to find profitable deals. One of those methods was how to find and profit from abandoned properties. The next day, the young lady came to class and told us an interesting story about an abandoned house right across the street from her house. She said that when she got home from the first day of class, she put her key in her front door to go inside. Suddenly, for no apparent reason, she stopped and immediately turned around. Across the street was an abandoned house. She had unconsciously seen the abandoned house every time she walked out of her front door, but until now she just never paid any attention to it. The windows were broken out, the grass was high, there was trash in the yard, and on and on.
After the class was over, the young lady stayed in touch with me. I had asked her to keep me informed as to the progress of her deal. It took her around three months, but in those 3 months she successfully purchased the property, fixed up the property, marketed the property, and made a profit of $58,000! By the way, she had no money, no credit, and no job, but she was still able to make this kind of profit.
Why Abandoned Properties? When you work with abandons, you have an excellent opportunity to use the best financing in the world is seller financing. There are several reasons why we prefer seller financing over conventional financing. Rarely will a seller ask to see your credit report. If you have credit problems, it usually will not become an issue. Many times the seller is completely open to many creative strategies that will help to eliminate their abandoned property problem. After all, what does the seller have to loose? His abandoned property is just sitting there not making any money.
The seller may have a mortgage to pay on it every month, because he wants to keep his credit clean. More than likely, he'd like to rent it or sell it but he feels that he'd have to spend a lot of money to fix the property up before he could market the property. In the meantime, another month goes by and another mortgage has to be paid. The taxes and insurance will also have to be paid. Money will still have to be spent on maintenance and upkeep. The repairs might become extensive, since the property is vacant and subject to vandalism. The neighbors are probably complaining about the eye sore. The Department of Building and Safety might have become involved. This can all add up to the seller having to spend a sizable chunk of cash every month, which can also represent a sizable headache for the seller. You guessed it. The seller is probably very motivated!
How Do We Find Abandoned Properties? Here's one of the easiest ways to find abandoned properties. The first thing to understand is that the more affluent the area is, the fewer the abandons you'll find. The less affluent the area, usually the more abandons you'll find. I encourage you to find an area somewhere in between the two extremes. If you keep your eyes open, you'll find properties that might have the windows broken out, they might be boarded up, you might see the grass and shrubs overgrown, you might see trash, handbills, newspapers and other signs that this property might be a good candidate for a profitable abandoned property.
Keep a pen and a pad of paper with you at all times. I teach my students to take different routes to and from their normal destinations and write down the addresses of any properties that might be abandon property prospects. This might require that you leave home a little earlier than usual, but it is certainly worth it if it brings you just one abandoned property deal.
Using A Little Known Government Program With An Abandoned Property Several years ago, I was taking my aunt to an appointment with a dialysis center when I came across an abandoned four unit building. This property showed all the classic signs of abandonment: boarded up windows, tall grass, trash, etc. I wrote the address down and called my title company as soon as I got a chance. I gave them the address, and they gave me the owner of the property and the mailing address. I wrote an offer and bought the property for $82,000. We fixed the property up using a little known government program called the Rental Rehab Program to maximize our profits. This program provided a 3 to 5% loan when the prevailing interest rates were 12% The program also allowed any qualifying tenants to drastically reduce the amount of their out of pocket monthly rent by going on the Section 8 Government Subsidy Program after the rehab was complete. The average wait for the Section 8 Program at the time was 6 to 8 years. This was truly a win-win deal for everyone involved. We kept the property for a number of years, putting a positive cash flow in our pockets every month. We eventually sold the property and made a lot of money.
The Best Financing In The World With the property needing as much work as it did, it would have been almost impossible to get a conventional bank loan to finance it and, at the time I was in no position to pay all cash. So, what is the solution? As I mentioned before, seller financing is the best financing in the world. The seller of the property financed the entire deal for us.
Here's the point: Abandoned properties are one of the best kept money-making secrets in our industry. They are very good candidates for many of the government loans and grants that can super charge your profits. Tap into this area of real estate and watch your profits soar.
Who Is Reggie Brooks? Reggie Brooks has achieved what many people consider to be impossible. He went from making $36,000 per year at the local telephone company, to making over $40,000 per month in his real estate business. Starting out with very little money, Reggie began his investment career in 1986. After taking a few real estate investment courses, he began investing in rental properties in Los Angeles. He quickly replaced his telephone company income of $3,000 per month with over $4,200 per month from a few well placed investments, becoming financially independent within his first year of investing.
Reggie is an international speaker/lecturer, an author, and an active investor specializing in a unique and very profitable niche in the marketplace called "ABANDONED PROPERTIES". Reggie teaches unconventional ways of finding distressed properties, strategically repairing those properties, and systematically selling them higher than the prevailing market. "It's very simple when you take the time to learn how." Over the years, Reggie has developed his Success Systems that consistently turn marginal $15,000 to $20,000 deals into $50,000 to $75,000 deals. Reggie teaches his Success Systems all over America. His students say that the combination of his insightful knowledge with a sheer joy for teaching makes the learning process pleasurable.
Reggie Brooks' Success Systems will teach you: How The Big Boys Are Finding Deals Right Now In This Market! How To Make Big Profits From Properties That Most Investors Consider Worthless! How To Stop Chasing Deals And Get Them Chasing You! The Right Way To Use The Internet - Find Deals From The Comfort Of Your Home! Hidden Cash Producing Secrets That Even So-Called Smart Investors Don't Know! How To Make Thousands Of Dollars In Just Weeks - No Kidding! And Much, Much More!
Reggie lives with his wife Ersoleen in Los Angeles, California and has earned the respect of the real estate investment community because of his many investment accomplishments. Of his many successful students Reggie is most proud of his two kids, Keith and Arlett. Through his mentoring they have both become successful, full time real estate investors.
How to make a seller your blue ribbon investor
By Greg Pinneo
I have been investing in Real Estate for 30 years and never lost money on any Real Estate transaction that I have ever done. I have never declared bankruptcy. I don't deliberately mislead my potential sellers, sellers or tenants and I don't prey on the less fortunate. I have never missed a closing date that I have committed my signature to and I never will. I don't say this to boast, I only mention it because we need to establish a foundation by which we set the stage for the greatest capital opportunity in Real Estate investing; involving the seller in the financing of your purchase. In order to follow this path you must understand one thing so fluently that it's second nature. That one thing - it's ALL about relationships.
I didn't grow up with a silver spoon. I didn't inherit a vast family fortune. I grew up in a very normal family and worked for everything I have made. I worked my way through high school in construction and college as a Real Estate agent and investor. I graduated with a communications degree. I am not a PhD. I am not an attorney. I don't have a CPA background. I have committed to this sport of Real Estate since the age of 17. So why then does an old carpenter live a life that most only dream about. The answer - I was mentored to think and see differently. I was shown a path less traveled. I was taught to treat people how you would like to be treated. Most people treat sellers as the opposition and never develop any lasting relationships. I can remember the names and lives of almost all, if not all of my sellers. This means I have to get face to face with the seller. Of the last 100 properties I have purchased, only two were listed. These were my two least favorite transactions in 30 years investing. When everyone else around you is doing something, do you join in or do you see an opportunity to differentiate yourself? I have no fear of competition but I want to stand out from the masses.
I believe the greatest opportunity of the here and now is customer service. The mere phrase "Customer Service" has become an oxymoron in the business world. How many times have you had a computer answer your call, ask you to input your account number, last four digits of your social security number and pass code then finally transfer you to a real person only to have that person then ask you for your account number, last four digits of your social security number and your password. I know that always makes me feel special. They haven't even asked my name yet just my binary identity. How many of you have had to ring up your own groceries or have tried to check yourself out of a large chain home improvement store?
Now think of those places that cater to your every whim and how that makes you feel. You know what I am talking about, those nice restaurants that even if you ordered a tuna melt would say, "Gosh, that sounds great, absolutely; do you want one or two pickles on the side?". We have a place in Seattle that only sells doors. When you walk in there is a team of people to handle any size order and any type of order. Name your material, name your size and name your quantity. They make them on site and can customize anything. Where do you think we do business, the home warehouse or The Door Store?
The point to all this is when you treat people like people magic happens. Relationships with your sellers will unlock endless options down the road. I have one student who bought his first home a couple years ago. It was a listed property but, using what we teach, he deliberately engaged the seller and put a face to an offer sheet. The seller took his offer even though she had two offers that were both $15,000 higher than his. Why would someone do this? Because the seller felt comfortable with him, the seller felt they were wronging him if they took someone else's offer just for the money. The seller wanted to pass the baton to someone they knew would respect what they had worked so hard to maintain. So why do so many people say that deals like this can't be found anymore? Perhaps they aren't in the right business.
I'm in the amazing business:
If you want to find great deals you need to get out of the problem business and get into the amazing business. The amazing business begins with you committing to building a relationship with everyone you meet. We are not going to just look for people with problems. In the amazing business we want to work with everyone. If you are just looking for people with problems you are showing up to your job site with a bunch of shovels. That's great but we're going to teach you how to show up with an earthmover. Will we find some people with problems, sure, but we're also going to find people that don't have problems that just want to move to the next stage in their life. We are going to build a relationship with all types of people. We're going to teach you how to laugh to yourself when people say there just aren't good deals out there anymore. Just smile and agree with them, tell them how right they are. Remember, we're not in the deal hunting business we're in the amazing business.
The Stage is Set:
Now that we have built a foundation by which we will conduct our business it's time to learn why it's important to you as an investor. Analysis paralysis is a problem that many seasoned and new investors struggle with each day. So often we see investors wholesale a great deal just because they fear the ability to come up with funds to close it. I can't tell you how many stories I've heard where people took $3,000 when they could have made $30,000. Wholesaling, while a great way to raise capital and make a living, is a tough way to develop real wealth. You're only as good as your next deal. Your goal in this game needs to be wealth building and passive income. The best way to accomplish passive wealth in Real Estate is to buy and hold. As your loan balance decreases and appreciation continues, real wealth is created. To really unlock the riches of leveraging appreciating assets, use of owner financing is crucial. Owner financing tees up the following possibilities and more:
- A customized deal with your conditions and your clauses
- Possibility to substitute the security
- No due on sale clause
- Negotiable interest rate and terms
- No pre-payment fees unless otherwise agreed on
- No points
- No set up fees
- Opportunity to renegotiate without additional fees
- Little to no qualifications
- Flexibility (Payment date, amortization schedule, balloon payments etc.)
- Ability to wrap another note around the original note
- Additional control
So many people are fearful of engaging the seller in any meaningful life conversations. In order for owner financing to work for you, you're going to need to understand the seller's situation. This means actively engaging the conversations, not about Real Estate, about their life. The longer you stay off the topic of Real Estate the more likely it is that your seller will provide you with the reasons why they should participate in the financing of your purchase. It is up to you to now fill in the colors of the paint by number picture they have just given you. What are some reasons why they might participate in the financing of the property?
âˆ‘ Higher interest than they would likely get in the bank
âˆ‘ Delay capital gains tax
âˆ‘ Medicare/Medicaid cash asset implications
âˆ‘ Monthly income
âˆ‘ Willable, transferable, sellable
âˆ‘ Know collateral
âˆ‘ Their relationship with you
âˆ‘ Setting up their estate, perhaps they don't want kids to receive huge lump of cash
âˆ‘ They are also investors and wouldn't dream of selling for all cash
âˆ‘ People want to help other people
âˆ‘ Don't like banks or the way they do business
âˆ‘ They have either bought or sold this way in the past and had a positive experience
This isn't theory. This is what I have done everyday of my 30 year investment life. Remember I'm in the amazing business. Here are 4 examples of owner financing and one example of a simple buy and flip that illustrates how making this about people seals the deal.
âˆ‘ 1st West: Single Family residence. Owner financed, former owner still lives on the property but doesn't pay rent. How does this work for me as an investor?
âˆ‘ Yale: Multiplex that the seller wanted interest income, deferral of capital gains and to set up a co-beneficiary should anything happen to them.
âˆ‘ Greenwood: Owner financed multi-plex. What's in it for the seller? Why would they carry the financing?
âˆ‘ Franklin: Multi-plex with dual owners, one wants all cash, one wants owner financing. How meeting face to face solves the equation for both of them.
âˆ‘ 4th West - A simple flipper, but it's all about being face to face with the seller.
Integrity That Gets Results:
I am committed to treating people with respect, honesty and integrity. I am committed to making every transaction a good one for the seller and for me. Why? It's because I know that when they share their experience with their friends, I get the next phone call. I also want to feel good about what I do and how I do it. I don't want to get up in the morning knowing that today I need to take advantage of someone's misfortune to put food on my table. Yes, I'll help solve peoples' problems but what I am looking for is great buildings in great locations with the right terms. Because of this system, I have never lost money on a Real Estate transaction in the 30 years.
Once I purchase the building, I treat my tenants with respect and dignity. My tenants in fact are like a farm team for my flips. I often call my tenants when I am selling a flip property or assigning a deal. Why? Again, it is because I have a relationship with them. I know that they would like to own a home and I know whether or not they are qualified buyers.
I am able to do this because I only buy investment property in classic wonderful areas. For many of my buildings there is a waiting list, even in Seattle where the job market is soft and home ownership is high. I find that romance in a good location is the largest factor in keeping the building full. You know it too, intuitively. You know it when you say to yourself; I can see myself living here. I could walk to the coffee shop in the morning and grab a latte and I could sit out on the deck in the summer and watch the boats go by, and so on. When it grabs you in the gut, don't you think that your potential tenants are drawn to the same location and the ambiance too? Of course they are. Isn't it a lot easier to keep that building full when it's in a romantic location? Of course it is. Yet, why do so many people buy in bad areas? Because they think they have to have a lot of money to buy in the good ones. If you master the art of owner financing you can buy the right building, in the right location where the terms work for you and for the seller and then money is no longer the issue.
Remember, Real Estate investing isn't easy. Anyone who tells you it is easy isn't showing the full picture. It takes hard work, persistence, professionalism and education. In order to do this for the long haul you are going to have to fall in love with what you do. There aren't many people who create wealth from the ground up that aren't passionate about their venture. In order to get passionate about what you do, it has to be romantic. If it's not romantic what's the point? You need to know why you want to be a Real Estate investor. More money is not why you're doing this. Why do you want more money? Is it to support your family? Is it to achieve freedom? Is it to get out of a job you hate? Is it to prove to yourself you can follow through on something? Is it because you want to pay for you children's education? Those are all very romantic reasons to be passionate about this sport.
Now that you have a sense of your why, come hear how to make Real Estate investing work for you. I commit to you that I will spend myself teaching you in the time we have together. I will teach you what I do and how you can do it too. I will spend myself making this the best Real Estate education you have ever received, bar none. I will show you how to get on the path to your dreams.
Thank you for taking the time to read this and I look forward to meeting you in Glen Ellyn at the CCIA Meeting.
Options vs. Subject To
When to consider each technique
An article by our speaker: Wendy Patton
By Wendy Patton
© 2004 by Wendy Patton
Acquiring investment real estate can be handled with many approaches. Two very popular zero down approaches are lease options and Subject To, also referred to as Getting the Deed.
A lease option is a technique which involves gaining control of a property, but not ownership just the right to possess a property now and purchase that property at some future date with terms you define today.
A Subject To is getting the deed to a property without getting a new mortgage. Instead, the seller signs over the deed to his or her home subject to the existing mortgage staying in place. The buyer in this case makes the mortgage payments on the old loan, but does not get a mortgage themselves to acquire this home.
Both of these techniques usually require little or no money down. In both of these techniques it is possible for the buyer to get money from the seller or the purchaser (or both!) in the beginning of the transaction. These techniques, when used properly, can provide for huge profits. They are both awesome strategies, and when used hand-in-hand by investors are almost an unbeatable pair!
This short article is not meant to give details of each technique, but rather to show when you should consider each. If you don't understand how to document and protect yourself in each kind of technique, then purchase a course on the technique, or do additional research.
Why Knowing Both Techniques Means More Great Deals For You!
Unfortunately there are many people that are teaching that you should only do the subject to only get the deed deals. They recommend never buying on an option. I can't tell you how many times I have heard, "If I don't get the deed, I don't do the deal". With 19 year's of experience (since 1985) doing both types of deals, I have to disagree with that statement. The more tools and techniques and ways you have to purchase property or to structure a deal, the more likely you will be able to work with a motivated seller to come to a potential solution. If you only buy Subject To, you'll walk away from a LOT of great deals in your real estate career, but you must know when each technique is appropriate to use.
Finding a motivated seller is the first step to any good real estate deal. There are many types of motivated sellers, but we tend to think of motivated sellers as the ones that are financially distressed. I like to look at motivation from a much wider range. Let me explain. I like to divide motivated sellers into two groups:
Sellers that have Sellers that have
Bad Debt VS. Good Debt
Get the Deed - NO Lease option! Lease Option or Deed!
Sellers that have Bad Debt are those in trouble. They might be behind on a mortgage, have lost their job, acquired an illness, going through a divorce, etc. In these situations, you need to get the deed either with a subject to or an outright purchase. Your main concern is that this type of seller will continue to have financial problems that could affect the title to your property if the deed is still in their name. For example, if this seller gets judgments from creditors, they can attach to any real estate the sellers own and they will have to be paid off before you could exercise your option to buy. That's why you want to get this type of seller off of the title.
Sellers that have Good Debt™ are those NOT â€œin trouble in the traditional sense, but they do have a reason motivating them to sell. Their problem is not financial desperation it's simply a change in their life. They might be transferring to a new location for a promotion, getting married (each owning their own home), building a new home, burned out landlords, etc.
Example #1: Here is an example when you MUST get the deed:
A seller calls you on the phone and says he is 2 months behind on payments. Do NOT option this home! This seller is in trouble financially and is not a good risk for an option. Anyone that is in a bad financial situation is not a good seller for an option. This is the type of seller that you must get off of the deed so that his financial situation will not affect the title to the property in the future.
Not every seller who is in financial trouble will tell you so, which is why you ALWAYS need to do research on the title before you get the deed or do an option. In this case, you will need to bring the seller's mortgage current. Before you do, you will want to make sure that he/she is the owner of the property and there are no other liens on the property unknown to you.
Example #2: Here is an example when you COULD get the deed:
A seller calls you who owes $135,000 on his home which is worth $135,000. Since he has no equity at all, this type of seller might very well be willing to give you the deed. And if there is high appreciation or a very low payment, you might be able to make a profit even though there's no equity.
On the other hand, if the seller's payment is too high or the market is slow, you might need to have the seller pay you to take the deed. Yes, there are sellers who will pay you to take the deed to their home. Think about it: if this seller sells conventionally, that is, through a Realtor, he would have to pay up to $10,000 in commission to sell his home. Plus, he'll have closing costs, transfer taxes, and will probably pay points or fees on behalf of his buyer. If he's willing to pay all this money to an agent to sell the property and wait 90-120 days to sell, too--why shouldn't he just pay you to take over his payments NOW?
If the seller didn't have the cash to give you, an option would be your best strategy. This way, the seller can pay you the $10,000 over time, or you could arrange for the seller to pay part of the monthly payment during the option period. This way, if he stops paying his portion of the payments, you have the choice of surrendering your option and simply giving the property back to him. When you have the deed, you can't do this.
Example #3: Here is an example where you SHOULD lease option or lease purchase:
A doctor has a new home built for himself. His old home is worth $200,000 and he owes $125,000. He has $75,000 of equity. He is not behind on payments, and he did not need the $75,000 cash out to buy the new home. His old home is sitting vacant and the realtor has not sold it yet. He qualified for both house payments at the bank and he can technically afford both, but who wants to make an extra house payment?
Although he is motivated to sell because he's coming out of pocket every month to own a vacant property, this type of seller is NOT going to simply give you the deed and let you take over the mortgage. No way is he going to give up all of his $75,000 in equity, and no way are you going to pay that much cash out of pocket.
When you lease/option this house, he gets most of his equity back although it won't happen until YOU sell the property. The deal might work like this: you option the property for $195,000, and make payments to the seller that equals his total mortgage payments. You SELL the property on an 18 month lease/option for $228,000 with payments to match his payments. You get cash flow + $33,000 in profit when your tenant/buyer buys the property; the seller gets his payments taken care of for a few years, then gets the bulk of his equity out. And in the meantime, he doesn't have to worry about management, vandals, frozen pipes, and all of the other things that owners of vacant houses have to deal with.
Example #4: Here is an example where you COULD lease option or lease purchase:
Seller just inherited a property worth $120,000 from their parents estate. It is owned free and clear and they donâ€™t want to be paid off. They don't need the cash, but they would love some cash flow on this asset. This seller is not going to give you the deed. Let's say you can lease option this property for $700 per month with $300 per month going to the purchase or the option credit. Your real payment in this case is only $400. You also could do seller financing on this property.
Letâ€™s examine a seller financing deal:
A seller financed deal means that the seller will finance a mortgage for the buyer and the buyer pays their mortgage payment and interest to the seller versus a bank. This is primarily done when the seller owns a home free and clear and they do not have a mortgage on it themselves. Let's say you negotiate a deal with the seller for a sales price of $110,000 â€“ if you want your payment to be $700, as in the above lease option example, let's see what that really means to a seller for a seller financed deal. First in a seller financing or mortgage your payment includes taxes and insurance (unless the buyer pays them themselves). This must be subtracted from the $700. Each part of the country fluctuates, so I will use an estimate of $250 per month for taxes and insurance. This leaves $450 for the seller. Now we must subtract our principal we negotiated above the $300 per month credit. This now leaves the seller with $150 per month. If this were to be all that is left this would essentially mean the seller is receiving 1.6-1.7% interest on their money. The interest rate has to be disclosed on the loan document or seller financed deal. A very low interest rate is much harder for a seller to accept then a lease option payment of $700 per month. It is the same thing to the seller, but it is spelled out differently. They don't do the subtraction themselves to calculate the real rate of return. When you do a seller financing deal, you must calculate and show the interest rate in writing.
Letâ€™s examine the pros and cons of Subject to vs. Lease Options â€“ primarily as compared to one another.
Subject to Pros:
Title is in your name â€“ Full ownership
Subject to Cons:
You own it and have ethical responsibility to the seller even if the market changes or you can't sell the home. You own it! No changing your mind on this one.
Subject to Pros:
Some sellers will pay you to take the deed.
Subject to Cons:
You will need to keep two insurance policies in place. One that goes to the lender with the old owner on it â€“ so it won't trigger the due on sale clause and one policy for you as the real owner. You must insure it based on the title or you will have no coverage. This increases your real monthly costs. You can also place it in a Land Trust to avoid most of the due on sale issues â€“ usually recommended.
Subject to Pros:
Easier to prove seasoning of title when you are the title holder. Easier to refinance.
Subject to Cons:
In some states mortgage brokers and realtors could be fined and/or subject to revocation of their license. It could be considered against their code of ethics to assist a person in violating a clause in a contract.
Subject to Pros:
If you are on the title you will have long term gains vs. short term if you hold the home for longer than 12 months. Sellers with lots of equity will be hesitant or completely against giving the deed.
Lease Option Pros:
You don't have to buy later if the market drops or there is something wrong with the home. You can get out!
Lease Option Cons:
Title is NOT in your name â€“ seller could screw it up â€“ must be careful to screen the seller. Only lease option from strong sellers, not those in trouble or headed for trouble. (unless you put the deed in a Land Trust)
Lease Option Pros:
More sellers will do an option vs. giving up a deed, especially on pretty homes.
Lease Option Cons:
You will have short term capital gains vs. long term if you are not on the title. This can be avoided if you finance it with the 12 months of payments (see the pros) and get on the title and hold it for 12 months before closing with your tenant buyer. This is a minimum of a 24 month solution.
Lease Option Pros:
After 12 months of payments there are many lenders that will treat a lease option as a refinance â€“ as if you were on the deed. It would be treated like a land contract or contract for deed refinance.
Lease Option Cons:
Some sellers might feel like an option™ is not closure on their home. Some sellers will feel better with a deed being transferred or a lease purchase (which is a guarantee vs. and option).
Lease Option Pros:
A way to get nicer homes. It is more likely the seller that is not behind has taken better care of their home. This type of seller is also more likely to consider a lease option vs. signing over the deed.
Lease Option Pros:
Seasoning of title will start when you file a memorandum of option or lien of interest. Most lenders will consider this adequate and similar to recording a deed. (with the exception of FHA)
Lease Option Pros:
Sellers with lots of equity are more likely to give you the right to buy the home than they are to give you the deed to their home.
Lease Option Cons:
Sellers with lots of equity usually want to close and get their equity out.
Warning: There are many factors to consider when making an offer with either of these techniques. What is the current market condition for real estate in your area? Are homes appreciating, depreciating, or staying flat? What is the financial condition of the seller? Are they moving up or down financially in their new home? All of these items make a huge difference on how you will structure a deal. I always say “Strong market“ make a stronger offer. "Weak market “ make a weaker offer
Do your research, but if you keep your mind open to new ways of acquiring real estate, you will indeed make more money!!!!!