BiggerPockets

Has anyone has any success putting tenants into lease option programs with buyers who could not get traditional financing?

My question will help an investor client of mine interested in purchasing 18 builder closeout units in a project and would like to lease/option them.

He was willing to give 80% of their rent toward the equity, and price the property at current appraised value, with 8% increase per year for the 3 year term.

With the mortgage mess, this may help sideline buyers get into a property.

Any thoughts on where to find these hard to finance people?

Craig,
That's a very high rent credit. Great for the tenant, but the more equity they have the stronger their claim that the deal is a sale and mortgage and not a lease and option.

I looking into trying this myself. You might check out Andy Heller and Scott Frank's book on this topic. It does seem like this is a good process given the lending difficulties.

Jon

In my experience, most lease option buyers (and land contract buyers for that matter) don't end up buying the property. The same character flaws that caused them to have bad credit will cause them to not be able to improve their credit and buy the property. In addition, while you are waiting for that small percentage of people with bad credit but a big pile of cash to show up for the option premium and security deposit, you could be renting the property. Of course there are a few people with legitimate problems that will be able to close, but they are few and far between.

Good Luck,

Mike

I know a land contract is different but but basically the tenant pays the insurance and makes the mortgage payment, gets the deductions and benefits of home ownership. A real estate lawyer guaranteed there's no hitch if they were the walk off and abandon the deal in terms of ownership. Automatic reclamation of the property. Legal paperwork in order - Both parties signed. Filed at the courthouse.

Turned out tenant was a drunk but did manage to follow all rules for 2 years The first thing that happened is the bank notified us that the insurance had not been paid and they were invoking mandatory insurance which is expensive. Happened twice. Then he just stopped paying the rent and was nowhere to be found. Scramble, scramble. Out some months rent before he agreed to leave.

I took some time and money to get the place cleaned up for rental and later that next year, prepped for sale. FSBO'd the sale and voila before closing we were told he (the former land contract tenant) had to sign a quit claim paper prepared by the buyer's closing attorney to complete the deal. Luckily he was in AA by this time and still approachable and amenable to doing this. Of course, he could have just as well not been amenable and the sale would not have taken place -- despite what the lawyer and her papers said.

For that reason, I'm not sure lease options or land contracts are appealing anymore. There are just so many irresponsible people out there.

I guess we got bored with sub-prime and moved on.

Or sub-prime is the opening bell for seller financing.

John Corey

I've had success with people who couldn't get approved for conventional financing. With these people I've found that it's important to get a hefty down payment from them, 2-3 months worth of monthly payment as option consideration. There is a reason why they can't get approved, and this money is for your friend's protection. If they make every payment on time for a year or two, your investor friend can hold the note for a nice investment over time.

I do think that giving them 80% of the payments towards equity is too much, he should consider much less.

Tenants should be easy to find via newspaper ads with a prerecorded message to screen out interested people. Rent to own signs also work well for this too. This is all you really need to do.

Jeff

Good info!!!

I have been using a credit rehabilitation program some friends of mine showed me, and it has literally turned my business around. It utilizes different benefits from two companies, an identity theft program and a legal services program. The buyer pays a total of 29.95 a month for the membership benefits, and within 2 months to 1 year they are mortgage qualified. This allows for selling on contract for 1 year as they process through the program, and my friend Josh Bach here in Indianapolis closed 12 additional sales last year using this program, and has a pool of over 50 buyers in credit rehab right now.
The really cool thing about this membership based program is that it is available in all 50 states, and it pays a rather attractive commission structure for filling out new membership applications.
If you are really interested in hearing about something that works, and has a significant revenue stream in addition to closing more properties, then please get in touch, you will be happy with the result.

Hi Mike,

I have noticed in a few different posts that you seem to have a somewhat jaded view of option deals. Too bad, because if you know how to do it right you can get them rented up in 30 days or less, with a very large up-front option payment -- ALL DAY LONG!!!!

I hate to see you avoiding this tremendous tool -- it's just a matter of opening your mind and learning how to do it right!

I have noticed in a few different posts that you seem to have a somewhat jaded view of option deals. Too bad, because if you know how to do it right you can get them rented up in 30 days or less, with a very large up-front option payment -- ALL DAY LONG!!!!

My experience is that there are very few people with bad credit walking around with a " very large up-front option payment" and that they can't be found " ALL DAY LONG" . However, since you are claiming otherwise, tell us how! This is a forum where we share information, so let's hear it!

Mike