How to Find a Tenant-Buyer with Bad Credit but that will Be Able to Purchase Later?

14 Replies

Hello everybody,

I was wondering if anybody had any thorough answers to this topic. I have decided that in the near future I would like to start doing lease options. I already have a home that I was planning to wholesale that I think would be the perfect property to do a sandwich lease option with.

So I understand that at the end of the lease period with my tenant-buyer that the goal is for them to purchase the house. But I've also read that unless the tenant-buyer has bad credit they're probably not going to want to lease option a home.

So my question is how do you find a tenant that has bad credit but that you know by the time the lease is up (12 - 18 months later) that they will have good enough credit to purchase the home?

Anyone who knows or who does this regularly that has an answer please let me know step-by-step how to do this, I haven't found a thorough enough answer to this question anywhere online or in the books that I have read. So it would be nice if this post could be the place people find the answer to this question in the future!

Thanks in advance! :)

It's been my experience that most people with bad credit will remain in that situation unless someone works with them to get their credit up.  Currently it takes a credit score of about 620-640 or higher to get a loan for a house.  There's lots of people out there in striking range (560 or 580 or so).  You won't have trouble finding them with a "rent-to-own" type of ad.  But they will just continue on with life at that 580 score unless you get them set up with a good loan person who will work with them and follow up with them.  That's been my experience anyway.

Thank you so much @Bryan L. for responding. I guess that makes sense. How do you find a loan person to work with? How do you know if they're effective?

@Vanessa Ugochukwu  - Ask some Realtors.  Every good Realtor knows who the good loan people are in town.

Thank you @Bryan L. and @Brian Gibbons I really appreciate the advice. I think that's a good idea just to reach out to some Realtors and see who their recommendations are. Thank you so much.

@Vanessa Ugochukwu  by now most people who recognize me on BP know I'm not a fan of the LO, because of questionable business practices.

In all fairness, if you want to help them qualify later down the road, you can use a service like "Williampaid.com" or "clearnow.com" (they have different fee structures) that will report rent payments to one of the credit bureaus and help your renter build their credit rating.  I found those on this cool site called BiggerPockets.com yesterday!

If you market to and screen for those with credit scores that are salvageable and partner with a reputable loan officer as suggested by @Bryan L.  you can team up to get them over the hump!  That sounds like a setup for success!

DISCLOSURE:  I have no affiliation with any of the websites/companies I mentioned above.

Alright, @Robert Leonard sounds good thank you for the advice and the site recommendations. 

But what questionable business practices are you referring to? I just want to make sure that I avoid doing things that are considered by reputable REIs and others in real estate to be shady.

@Vanessa Ugochukwu  the best I can do is to give you an actual example, not an unfounded accusation.  Yesterday, here on BP, an investor inquired about a bad investment they made where they owed 185k on a property that was worth 162k or something close to that.  You can see the entire discussion at this thread:

http://www.biggerpockets.com/forums/52/topics/135640-what-should-i-do-with-this-negative-cash-flow-rental?page=1

I gave a detailed case against the way I see it used on page two of that discussion.  I think its wrong to set people up for failure or to make an agreement that you hope is a failure for the other party for your own financial gain.  It's just that simple.

Thank you @Robert Leonard  for sharing the link with me to that thread. I completely agree with you, that is not something I would advise anyone to do and is not anything that I plan to do in the future. I want to make my money honestly not in a way in which I am taking advantage of people. Thank you for sharing this perspective on LOs. We should all be cognizant of what we're doing as investors so that way we are not giving ourselves and our fellow investors a bad name.

@Vanessa Ugochukwu We use FHA guidelines as our main criteria as to whether someone gets into the property.

What I mean, is almost all of our T/B's will go FHA. So I look FIRST at DTI.

43% max. I look at the scores, but mostly use those as a guide, as the scoring system is a joke. HOWEVER, I realize they need to be at a 640 for FHA. I also look to see if they are currently late on anything or when their last late payment was.

If they are currently late on anything, they don't get in. 

If they have a decent sized tax lien or judgment that are unresolved, they don't get in. 

If they have a CH 7 or FC in the last 2 years, they don't get in, as they will need 3 years from the CH 7 or FC for FHA. (We focus on 1 year lease options to get them in and financed ASAP)

Finding a loan officer isn't difficult. 

Contact local agents or go to a REI meeting.

Credit repair can help, but the biggest thing I see lately is people needing to reestablish credit and I recommend secured cards for this. 

@John Jackson Thank you so much for your post. It was all really helpful. I will read up about FHA now soon.

I already did some research on secured cards and they sound great. How do you get your T/Bs on the right track with a secured card?

@Vanessa Ugochukwu   you can have them either go to their bank or go to a site like credit.com and I suggest 2-3 secured cards. 

Lenders now really want to see 3-4 active trade lines. 

Also, I tell them DO NOT..NOT buy a car!!! 

Also, installment loans like buying furniture on credit really don't help much, as they are not revolving accounts. 

@John Jackson   Thank you so much for the insight. You have so much knowledge and I really appreciate you sharing it with me. 

This hopefully will not help only me but other people who have had the same questions.