Is seller finance lease option what I thought?

Question

Anyone willing to help me understand a method?

Seller finance/lease option with motivated or foreclosure?

Somehow the owner is paying you to buy/flip their house with no cash from your pocket????

Heard briefly, but didn't contact.

Been bugging me.

Is he full of it?

Jonathan Taylor Smith · Answer

Seller financing and lease-options are just different methods of "creative financing"; but are not always available and/or may not work in every case.

I've done 3 lease-option deals to date, and 2 of the 3 were persons who had just gotten married and the new spouse already owned a house where they were going to live going forward. Further, they were upside down on the mortgage and/or HOA; and the property was in need of ~$10K+ of rehab to be rental ready. Thus, they could not rent the property out (since they did not have the money to do the rehab) nor did they want to be a landlord. And they could not sell for enough to cover their mortgage and/or HOA shortfall, since the property would not sell for enough to cover their debt in the current condition (especially after Realtor fees).

This created a scenario where a lease-option worked well for all, as it allowed me to lease the property for an amount low enough to then sub-lease for a nice monthly profit after handling the needed rehab on behalf of the owner out of my pocket - with my ultimate purchase price already locked in for up to 2 years down the road. I then used 12 to 18-month ZERO Interest credit cards to fund the rehab and quickly got the property rented for nearly twice my monthly expense to cover the mortgage and HOA payments. And I used that profit to pay off the credit cards before the ZERO interest periods ended.

Later when I closed out the purchases prior to the end of the 2 year lease-option periods, the sellers were no longer upside down on the mortgage or HOA and actually got a nice check at closing - because I had changed a bad situation into one that generated enough income to solve everyone's problem. It was a win / win / win for the seller, me (I got a FREE property) and the eventual tenant who got a great place to live that may have otherwise become a foreclosure - thus also becoming a win for the lender and community / city, as I made it a Section 8 rental.

But I was only able to pull this off because I had a track record... It was not my first deal. In fact, I had the seller meet me at one of my other units that was vacant at the time so they could see what I was going to do to their property. This and other aspects of my presentation built trust, because everyone they asked about doing a lease-option cautioned them against it. So while not impossible, it will be greatly more difficult to get seller financing or a lease-option deal if it is your first, since you have no track record to point to as to why the person should trust you'll perform as you say.

The same goes for private lenders... I only started getting those after I had done several deals with my own money. Likewise, seller financing becomes more available after you've got a track record of prior successful deals... It all gets so much easier as you go along.

Maurice W. Evans · Answer

Mister Smith

Thanks for the great info AND example.

So to summarize am I to understand

I personally lease with option to buy from the owner at about the cost of their monthly note and then I go and sublease it out to rent at market value?

In such a case, outside rehab expenses (if needed) I need no down payment, cash or credit if they trust me to buy the house at the agreed price in two years or so?

Correct?

Are the tenants renters or are they trying to lease option/rent to own?

If they want to buy, but don't, how do I buy the property?

Realistically what's the cash flow on this and what's the risk?

Thanks for emphasizing how this works best for those who can show they are doing rei.

Maybe newbies can partner with established investors?