11. THE LEASE-OPTION STRATEGY

11.1. LEASE-2-PURCHASE RENTAL PROGRAM GETS BETTER TENANT FASTER FOR HIGHER RENTAL INCOME

The Key is Putting Renter-Buyer on Clear Path to Home Ownership

If I told you that, after 35 years as a landlord in Georgia, I have discovered a way to keep my rental houses rented to better tenants, for more money, and to have them take better care of my property, all the while reducing turnover and almost eliminating evictions and late rents, would you believe me?

My first guess is that you would say: This sounds too good to be true.

But the fact is this: today’s weak economy coupled with strict new underwriting guidelines for Fannie Mae and FHA home loans has created a great new opportunity for landlords and real estate investors in the Georgia marketplace.

I call it my LEASE-2-PURCHASE program, and it works like a dream come true. Here’s the plan:

1. You advertise your vacancy as a RENT TO OWN program. You are looking for tenants with a steady job and some kind of down payment, but bad credit is OK.

2. Because so many buyers have been squeezed out of the current market by strict new credit requirements, you’ll find plenty of folks interested. These will include bankruptcies, foreclosures, bad divorces, charged off credit card debt,repos and everything else that this recession is causing in record numbers.

3. Offer a 3 year LEASE-2-PURCHASE program where the renter can exercise an option to purchase as soon as he qualifies for a loan.

4. Get the tenant in to a loan officer to find out what he must realistically do in order to improve his credit score in three years. Almost any credit deficiency can be improved sufficiently in three years to create a score that can qualify for first-time home ownership. (After 2 years, any ownership is considered first-time). Get the tenant to commit to the program.

5. Set up a portion of each rent payment to go toward a purchase credit, and substitute a non-refundable option fee for a security deposit. The fee is also applied as a credit against the eventual purchase.

6. Help the tenant understand their financial challenges and the importance of meeting financial obligations on a timely basis.

At the conclusion of a three year lease, your tenant-buyer should be able to exercise his option to purchase, thus utilizing his option fee and rent credits as a down payment on the property. He gets a loan based on the fair market value of the house at that time, and closes.

In the meantime, you have had a dream tenant, one who takes care of his own repairs and maintenance, one who agrees to pay top dollar for your home, and one who is thankful for the opportunity to improve his credit and is proud to be building equity in a house each month instead of wasting all his money on rent.

I have tried variations of this program over the years, but the economic conditions were never right in the past. For example, ten years ago, it was so easy for anyone to get a mortgage with no money down, no job and poor credit, that it simply was not attractive for renters to enter into a LEASE-2-PURCHASE plan.

But today, Jupiter has aligned with Mars, and this recession has financially crippled tens of thousands of Americans. Many of these folks have access to some savings or family help for a down payment, and almost all of them want to own a home instead of rent. You are simply smart enough to offer a CLEAR PATH TO HOME OWNERSHIP during a time when no one else is doing this.

I have been using this program successfully for some time now, and the results are surprisingly good.

My renter-buyers are happier, they are building equity each month, and they usually take care of most repairs. My houses rent faster for more rent with more cash upfront, and I have less turnover and fewer hassles. When a house does sell to a tenant-buyer, I can either exchange into two cheaper replacement houses or pocket the after-tax profits and wait for my next killer deal.

The day may come again when anyone who walks into a loan office can walk out with a 100% mortgage, but I’m guessing we are years away from a return to the free-lending ways of the 90’s. In the meantime, my LEASE-2-PURCHASE seminar can teach you everything you need to know about RENT TO OWN in just three hours. 

I admit that I was the biggest skeptic of this program, but it fits many whose credit was terribly damaged in the recent recession and I strongly recommend it to you.

Don’t let tough competition keep your rental houses vacant. Learn my new LEASE-2-PURCHASE strategy and “liberate” tenants from dead-end leases. Trust me, they will thank you for it when they become happy homeowners.

11.2. BENEFITS of LEASE-2-PURCHASE:

1.  Rent Your Property FASTER.

Lease-Option your rental opportunity to the large audience of potential buyers who can’t qualify under current Fannie Mae or FHA guidelines.  And those restrictions are set to get worse in the next 24 months as lenders continue to overreact to the mortgage meltdown and recession.  Smart renters know they want to purchase, but are prevented from doing so. You can help them with a Lease-2-Purchase program.

2.  Rent for More Money Monthly.

In addition to rent, you will collect a monthly “option component” that goes in your pocket. Because you are offering a future credit against purchase price in exchange for this payment, you get the money now and it is repaid out of equity only if the option to buy the house is exercised and a purchase on your terms becomes a reality. And because you are receiving more income monthly, your cash flow looks that much better on paper.

3.  Rent for MORE CASH UPFRONT

The traditional rental security deposit is replaced with a larger “non-refundable option fee” that can be as much as you choose to collect, even ten or twenty thousand dollars. Sure, you can decide to require no more than a traditional security deposit, but most prospective buyers can come up with some cash if they see a great opportunity to buy instead of just renting. You can even adjust this requirement based on your desire to deal with these particular applicants.

4.  Rent to Renters Who Will TAKE GOOD CARE of your PROPERTY

Your tenant-buyers will take good care of your property because they plan to buy it. They have a vested interest in seeing the property in good condition.  In addition, the tenant becomes responsible for most repairs. Minor maintenance calls become a thing of the past, and you’ll find your tenant calling you asking if he can upgrade systems and cosmetics at his own expense. After all, he is simply acting like an owner!

5.  Rent Your Property to HAPPIER TENANTS

Your tenant-buyers will be more satisfied with their home as they build equity in your house month after month and as you help them achieve their goal of build their credit and obtain loan approval. And the truth is that this is a good deal for the tenant. Instead of throwing his money away on rent month after month, he is set on a realistic and achievable path to home ownership.

6.  Rent your Property for LONGER TERMS

Lease-Option your property for up to three years at a time as your potential buyers work to build their credit and qualify for loan approval. This helps you avoid annual vacancy periods and major turnover expenses. I dare you to figure up what it typically costs you every time a tenant moves out. At a minimum, you will lose one month rent plus carpet cleaning, painting and minor repairs. Instead, put that $2,000 in your own pocket.

7.  Rent Your Property to a Potential Buyer Who Will Pay TOP PRICE

Lease-Option your property to Prospects who are much more concerned about FINANCING than they are about PRICE. In addition, they typically take the house in “as-is” condition with no formal bank appraisal to gum up the deal. No 7% real estate commission, no 1% referral fees, no “post inspection” repair costs, no 3% closing costs. Simply give them a chance to buy when no one else will.

8.  Use EXCESS APPLICANTS as GUARANTEED TENANTS

As your Lease-Option program generates excess applicants, utilize them as guaranteed buyers for the next house you buy. You can even allow them to select their own neighborhood and make your down payment for you. That’s because you are bound to eventually run across applicants with bad credit but substantial cash available. Show them how to get on the road to ownership.

9.  Rent To Take Advantage of TAX FREE EXCHANGE RULES

If, after three years, the renter-buyer decides to exercise his option to purchase, you’ll have plenty of warning. This will allow you to utilize IRS Section 1031 Exchange rules to replace the property you are selling tax-free with one (or preferably two) low-priced replacement properties that you can use to grow your portfolio and repeat the process.

10.  Rent Your Properties to CREATE LONG TERM WEALTH

Create long term wealth as you choose between selling your property under a 1031 tax free exchange to grow your portfolio OR consider wrapping your existing mortgage and carrying the loan yourself. Even if the buyer can’t qualify for conventional financing, you can take the place of the bank. You’ll make money off the interest rate spread and build equity in the loan itself.

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