Lease option vs wholesaling
Trenton, NJ · Member since 2013 · 2 posts · 0 votes
Since I'm new to real estate investing should I start off with doing lease option or wholesaling?
Warren Counts Jr As stated above, some excellent ideas, but I keep coming back to recommend to all investors, think about the exit strategy before you buy. Wholesaling is a quick business for cash. Lease Option is staying in a deal for the long term. To me, 2 different exit strategies, so figure out how much time you have to devote to either and decide which best fits you and your lifestyle.
Just combine the two, what's that spell?!!!
Wholesaling Lease Options.
Get to learn to talk to sellers, don't need houses with any equity although preferred, and little risk...
That's a good idea Kyle, all he needs to know is how to value properties, how to contract, secure the deal and find properties his buyers would want, then assign and take your fee.
You might want to get some basic RE knowledge too, so you don't waste your time and money. Then move into estimating rehabs and repairs! Good luck! :)
Wholesaling is a great place to start. If you structure the contract right, you can reduce your risks. You'll get paid very nicely while you're learning how to negotiate, how to value properties, how to estimate repair costs, etc...
I don't know if it is still there but I added my book, Real Estate Profits on Steroids to this site for FREE - it is a step-by-step guide to wholesaling.
Once you get your confidence built up, it will be a good time to diversify with Leases (not options) - just start with master leases. They will produce cash flow which adds up fast.
Jackie
Thxs Kyle Bill and Jackie for you info
Was there a recent lease-option conference or something I missed the past week? Maybe the mentors, coaches and gurus just come out in the Spring... LOL Brian Gibbons LOL
Stay away from putting buyer in a property until you can understand how they will get financing. Financing is the key to the doors in RE.
Build a good foundation for your business. Lots here to read. Good luck...again.
Bill Gulley I am here all the time, just call me, see my posted ph #! LOL
Now I believe all REIs should be transaction engineers. do not be a 1 trick pony, doing just 1 technique.
Re Buyers I fill out a 1003 Mortg app on all seller financing buyers, and get a mortgage broker to look at the 1003 BEFORE they move in. I disclose I am not a licensed mortgage professional and have the buyer sign off on pulling credit for mortgage origination purposes.
Credit Education - Learn increasing FICO scores and credit improvement through the www.ftc.gov site, learn about the Fair Credit Reporting Act, hook up with an ethical credit improvement specialist.
Mortgage Origination Look at debt to earnings ratios and other matters so you can understand how people get mortgages today.
The difference between Wholesaling and Lease Options is you do not care about the buyer's credit in Wholesaling, you do care about the buyer's credit in Lease Options, whether it is a Sandwich or an Assignment.
Re: Sellers,
I want a great pretty house in a great school district, that has room for 3 kids and lots of storage.
I want a fixed rate loan, not an ARM.
I would like some equity but will work with 0 to -5%.
I want PITI to be close to Market Rent, but will take a negative cash flow with the right house and the right high income tenant buyer. An example, PITI $2500 and market rent $2000, I would charge market rent of $2000 plus a monthly option payment of $500 to make up the difference.
Note I do mostly Assignments, not Sandwiches.
I love what @Bill Gulley said...
All you need to know is
-how to value properties,
-how to contract,
-secure the deal and
-find properties his buyers would want,
-then assign and take your fee.
Here are some Rules....
Rule 1. Find the best school districts, lowest crime, u can use www.NeighborhoodScout.com U need a good product in a great location for lease options, maybe not for wholesaling.
Rule 2. Learn how to value by talking to bank appraisers. Call one up. Sales prices are not bank appraisals. I like Trulia etc but do not trust them for bank values.
Rule 3. Use a letter of Intent. I placed my letter of Intent in the Files section. See http://www.biggerpockets.com/files/user/REISkills/file/letter-of-intent-lease-option-assignment
Rule 4. Find a local attorney that will draft a lease and an option and memorandum of lease option to cloud the title based on the Letter of Intent. You must have a LLC or Corp to protect yourself. Have the seller go see the attorney and sign the docs.
Rule 5. Market the Lease Purchase house. Get a good Assignment fee from the Tenant Buyer, and finance part of it if you need to. I like 3% to 5% or $5000 minimums, which ever is greater.
Rule 6. When you get the fee, have the money go to the lawyer or title company first, and have the lawyer or title company pay you.
Warren Counts Jr Best Wishes to you on your Wholesaling or Lease Option Business!
And @BillGulley, when u get 10,000 posts I am shipping a bottle of champagne to Missouri ! Lol
You might want to get some basic RE knowledge too, so you don't waste your time and money. Then move into estimating rehabs and repairs! Good luck! :)
Listen to Bill he's got a lot of wisdom and insight to how REI is done around here.
Warren Counts Jr As stated above, some excellent ideas, but I keep coming back to recommend to all investors, think about the exit strategy before you buy. Wholesaling is a quick business for cash. Lease Option is staying in a deal for the long term. To me, 2 different exit strategies, so figure out how much time you have to devote to either and decide which best fits you and your lifestyle.
Warren, there is a ton of reading to do, you don't need to do in a day, but you really do need some RE basics and know what is acceptable in you local area.
Just to clarify, Brian's Rules, are Brian's Rules, not rules as we speak of real estate rules per'se. But his first is the first "Rule" of RE, location, location, location. That's really what Brian is saying as the better (more popular, not necessiraly a better education) schools are in better areas. When you get in an area like James' there may be only one highschool.
I can get on the bandwagon for wholesale-options. Your buyers most often will be investors. This will be a tough market to negotiate with but you'll likely have quick decisions, quicker sales and best of all, repeat customers that will keep you out of trouble! You will also be learning from them as they will tell you, usually, what they will end up having in it after rehab.
Thanks James, free advice they say is worth what you pay for it, maybe everyone should send me $997.00 to make it more valuable, LOL... :)
Not to steer this the wrong way, but since Warren and myself are new and looking for ways to invest what are Master Leases that were mentioned by Jackie?
Here's my book about wholesaling
http://www.biggerpockets.com/files/user/CashFlowDepot/file/107-real-estate-profits-on-steroids-by-jackie-lange
Yes it's good to diversify and not be a one trick pony. But we all start somewhere and it's much better to FOCUS on one thing when you get started.
Once you get good at that one thing, then learn another technique. Once you get good at that technique, add another.
By focusing all your effort on one technique at a time when you're new you'll achieve success much faster than trying to do 2 to 3 things at the same time.
However... you need to always be looking for opportunities. If you find what appears to be a great opportunity but it does not fit in to one of the techniques you already know, then you need to reach out to people on this forum for guidance.
And... by starting with strategies that have the least amount or risks and require the least amount of up front capital, you are more likely to succeed.
Rehabbing houses takes a lot of money and time. If you don't have either, it is not a good place to start. If you don't have experience with the value of properties and estimating repairs, you can make a HUGE mistake that wipes out any chance of a profit. If you screw up, especially when you're new, you will probably give up. Not good!
That's why wholesaling is such a great way to get started. You don't buy the house, you don't need to borrow any money, you only need less than $100 for a option to control the property, you don't need to hire contractors or fix up the house. Instead, you get a contract, find a buyer, and usually get paid within 2 weeks.
A "Master Lease" is nothing more than a lease that allows sub-letting. In many states, sub-letting is allowed if the lease does not specifically restrict the practice. It can be done under agreements that can vary from having the first tenant being held responsible, as in the case of simply sub-letting, or the owner could agree to only hold the tenant in possession,which is not so likely. When these are tied to an option to buy, it becomes a sandwich, lease-option, or variations.
The arrangement is generally promoted by gurus or mentors/coaches as a product they may teach to investors. In reality these arrangements can get complicated, beyond the scope of what promoters may teach and market.
In some areas they may be seen as a means to circumvent license requirements to lease properties owned by others. Besides the possible legal issues if you are not experienced in qualifying the tenant in possession you can get into trouble. When an option is tied to a lease it can become a financing installment sale that is highly regultaed now.
While many promote these strategies, IMO, they are not really a place to start in RE. The longer these arrangements are made the harder they are in many cases to end with positive results. I could write for the rest of the day why these deals are no place to start. You can read much of it here, use the search feature to find past posts. :)
Bill Gulley I'll send you the check as long as I get $17,889.32 in bonuses :)
Hope all is well! Quick question, in your above post, you mention charging the T/B an assignment fee of $5K. Doesn't that go toward the Down payment or closing costs of the house when the option period is over? I guess I'm unclear on how one is paid on this type of deal. Thanks!
Hi @Brian Huber
Here is an example of a lease option assignment.
Say the house has a value of $100,000 and has little equity, say the Seller owes 95,000. You would lease-option the house for $100,000 from the Seller and then assign the deal for $5000.
The assignment fee is generally subtracted from the purchase price, not a deposit or down payment. It can be separate from the purchase price. You can have the purchase tied to a future appraisal. You can have a sale and purchase agreement to have a delayed closing in 12 months (lease purchase). And you could also have a lease and a ROFR, which is a right of first refusal.
Remember to have a RMLO look over the lease option tenant buyer to have a good chance to get a mortgage. Be fair about fair market rent and for market value.
@Brian Gibbons So if I'm lease optioning the house from the seller for $100K, am I finding a tenant buyer to lease option it to for $105K? So I'll have to wait until the lease option period (12-24 months) is over to collect that $5k?
No the option fee is a fee to take the property off the market, you can cash the check, the option fee is tax deferred as per IRS Section 1234.
I've generally heard that the option fee must be applied towards the down payment or closing costs. I guess it's not clicking based on the numbered presented above:-(
Skimmed again.
Why not look up legal requirements for option contracts, you know, like federal law under the UCC, you will find that for a valid option, that a specific sale price must be stated at the time the option is made, that price must be ascertainable in dollars at that time, you may not have an option contract that is dependent on any future event or condition. That means you can not have an option contract based on any future valuation, conditioned upon any future valuation.
Next issue, the value of any option is the difference between the strike price or sale price agreed on the day the option is made and the difference of the future value of the asset being purchased.
Giving someone the "right" to purchase at some future value is not an option of any kind, it has absolutely no value to it, it is no more than a right of first refusal at some future price and that value is nearly worthless, that's like asking....call me before you agree to sell that.
You can make a contract, a purchase contract set with an open sale price, but there is little consideration in giving such a contract which then means, if you take some non-refundable down payment, you better not spend it. Remember, contracts that are impossible to be performed by the parties are not valid contracts, if a future price comes in that the buyer can't afford, that becomes an unknown as to their ability to perform and you'll be making a refund if they press you.
Every deal you do, you should carry out based on the worse scenario, that way, what ever comes you won't get hooked. And I'm not talking about a bunch of creative disclosure junk either. It's crazy to do contracts that can't be enforced to the fullest extent of the laws and local customs and tie up properties. If in the heading of a contract you have "Option Contract" it better be a valid option contract, otherwise it appears that you were engaging in giving the perception of doing something that actually doesn't conform to the requirements of that type of contract. Some may call such dealings fraud! Your hope at that point is to avoid serious issues and claim ignorance and play the innocent dummy, you might get away with it but you won't be profiting from such ignorance. :)