BRRRLO during COVID yes or no?

Question

Hi everyone,

I'm an out of state investor from CA and am in the process of closing on 2 properties in Jacksonville, Fl. I read the article from @Shiloh Lundahl about BRRRLO and wanted to see what the opinions are here from the community. I see it as an interesting option for my properties and have just talked to an attorney who could help me structure these deals. One issue he brought up is that you can't do any evictions for these types of contracts as the judges won't allow that. So you have to go through a complicated process to get the buyer out if they will default.

Other things I'm not sure about are the tax consequences and hope that my CPA will shed some light on that. Additionally, I'm not sure about the process of actually finding someone. I feel like agents or property managers wouldn't want to help me with that as there is no "incentive" for them or it is harder to earn the commission.

Are there any investors out there that are currently applying this as a strategy for themselves that would be open to chatting with me or sharing their insights?

Thanks so much!

Irina

Shiloh Lundahl · Answer

@Irina Seals I don't know what some of the other posters are talking about with some of their concerns with the lease options.

We have about 45 lease options currently (that number does not include our mobile home parks, commercial property, multi-family properties, or a few that are just rentals).  The last one we placed was in April and we are getting another one signed this week.  But I have also been helping other people do this process in Arizona because that is where I have most of my team.  Over the past 6 month I have helped 5 different people do the BRRRLO strategy with 8 different properties.  Each of these properties on average cash flow about $300 and have increased their net worth by about 20k - 40k on each deal.

Jaysen Medhurst · Answer

I read the article, @Irina Seals. I see some potential pitfalls:

• Biggest is finding the sweet spot of tenants who pass your screening and have the extra $$$ to pay for the lease option, but don't have enough for a DP on low-DP mortgage of their own or good enough credit. Then you're having faith that in 3 or less years this tenant is going to repair their credit/financial situation enough to qualify for bank financing once the option is ready to execute. Now throw on all the craziness around COVID-19. That sounds like an incredibly thin slice of potential tenants.
• As is kind of acknowledged in the article, there is risk of vacancy, if the tenant decides not to exercise their option. 
• Not budgeting for any CapEx is irresponsible. A lot can happen in 3 years. Water heaters, appliances, roof leaks, who knows. This is eluded to, but not given near enough attention.

Maybe it's worth trying this with one of your new properties and doing the other as a regular BRRRR. Test the water, see how it feels.

Jack Bobeck · Answer

@Irina Seals One thing you can do to get around the whole foreclosure issue is to rent to someone that is looking to do the Lease option to buy, but use a company like Traditions or other Prop Mgmt group to run the background check for you and collect the 1st month of rent to VET the person for you. I would start with a rental first then give the people a 12 month option to buy. You can go longer if you wish.

You should have NO problem finding people interested, but the issue is cash down. I have successfully found people with cash, but also give them equity if they fix up the property over a 1 year period. So you can find someone that maybe does not have the immediate cash, but they can fix the property up and build equity and pay you within the first few months.

But the good news is that May 18 is approaching fast: In DUVAL: No rent nonpayment eviction lawsuits may be filed until May 18, 2020. Its going to take you some time to find the right person who has cash in their pocket that can make the deposit. But they are out there and banks are raising their requirements. Best of luck to you! - Jack

Irina C. · Answer

@Shiloh Lundahl @Ronald Rohde just sent a PM to you. Hope to connect next week.

Ronald Rohde · Answer

I help a lot of Florida investors get this done properly. Note that you'll have to pay recording fees and stamp taxes as a regular mortgage. You'll also retain liability for any injuries on the property since you're the record owner.

FL Bar #86224

Loren Oatman · Answer

What a great topic. I live in Upstate New York and I learned that lease options are doable.

Shiloh Lundahl · Answer

@Irina Seals I am honored that you read my article.  Let me see if I can answer some of your questions here and any other ones you can give me a call and we can discuss.

The first thing that you want to do is to find out the what the laws say in the state that where you want to do a lease option.  I have lease options in Arizona and North Carolina.  I was talking with @Brian Gibbons who is much more experience with lease options in different states and he had mentioned Georgia was a good one to do lease options in.  There are states where I wouldn't do a lease option such as Texas, California, New York, or any state that is heavily tenant friendly over landlord friendly.

Step 1 - talk with other investors in the state where you want to do the lease option that have done lease options in that state to get the feel for how they go in that state.  Then ask them for the attorney that created their docs.  Contact that attorney and buy the contracts.  Make sure the contracts are separate: Lease agreement, and separate option agreement.

Step 2 - Find a property where the numbers make good sense.  We like to do lease options where after we buy the property and fix what needs to be fixed (if anything), we can have our all in be 150k or less (75% of the ARV) and we can rent the property for about 1% of what we have into the property.  For example, Purchase price 80k, repairs 20k, ARV 140k, Rent $1100, and we will set the 3-year option price at $149,900.

Step 3 - Find an assistant who is a rock star.  Very honest, trustworthy, and capable.  Your business will likely depend on how good of a job this person does.  have them keep track of their hours and pay them hourly.  This person is going to manage all of the manage all of the subs doing the rehabs.  They will also be the property manager. Start to build a team of sub contractors, wholesalers, title agents (or lawyers depending on the state), and a realtor.  I partner with my realtor on most deals and it is nice in my opinion to have a great partner because it is good to have a second opinion on what to do with problems that come up with the properties.

Step 4 - complete the rehab as if you were to BRRRR the property.  But instead of finding a renter, find someone who would like to lease option the property by advertising it on the MLS with your realtor.  If they are not your partner bringing you a lot of these deals where you create an LLC and build wealth together, then just pay him or her a flat commission ($500 or so) to forward any calls that come in about the property to you.  Advertise the property as a rental, but then use wording in the listing such as the following: "LEASE WITH THE OPTION TO BUY ONLY. Not available for normal rent. Bad credit ok, Income qualification 3 times monthly rent. Lease option for $3900 down. Partially rehabbed fixer upper. New interior paint. Beautiful kitchen with newly remodeled kitchen cabinets and new kitchen sink. New carpet in bedrooms. New bathroom vanities. New plumbing including new water heater! Spacious backyard." (depending on what you have done with the property).

Step 5 - When someone calls either explain the lease option or make a video explaining the lease option and then send the link to people so they can watch it.  It will be easier than explaining the lease option 50 times a day.  Let them know after they have watched the video and they still want to do the lease option that they can call you and you will send them the application.

Step 6 - Look over the application, have your assistant call their previous land lords to see the type of tenants they were and verify their income with paystubs or bank statements.  Have your assistant fill out the lease agreement and the option agreement and take it to them and sign it with them.  Have your assistant explain really well the nuisance clause where they take care of all minor repairs which gives them a monthly discount of $100 off their rent that you have increase $100 more than the average rent.  So in other words the rent is advertised as $1100.  Then you explain when they show more interest that the rent is really $1200 but as long as they pay the rent on time and take care of the property that they will get a $100 discount so that it comes $1100 rather than $1200 a month.  Have your assistant, who is also a notary, notarize the signatures on the option for both the optionee and the optionor. The tenant then gets a copy of the lease and the option agreements as well.

Step 7 - The tenant/buyer gives a $3900 option fee (amount is up to the optionor and is explained before the perspective tenant/buyer has filled out the application).  The tenant moves in.  If there are problems with the property right after they move in, the owner should take care of those problems.  But after a month or more, the tenant starts to take care of all problems associated with the property unless it is a major problem that the owner should have take care of before they lease optioned the property.

Step 8 - You manage the properties with the help of your assistant (and partner if you have one).  If you get a lot of properties then it may justify having a separate phone for your assistant.  Otherwise, a google voice number should suffice.

That is about it.  Of course there are a lot more details that go into the process but that is basically it.

Irina C. · Answer

Thanks for your input @Jaysen Medhurst and @Jack Bobeck.

@Jack Bobeck so you are saying that I should first rent it in a traditional way and then see if those tenants want to switch to a lease to buy? You have a good thought to use property management firms to find the right person, I'm kind of worried to ask my property manager if he would do that for me but then just place the renter and not manage it. Not sure if he would do that but I could try. And also, is this really a big problem if the lease runs out and the renter can't or doesn't want to buy it? If you structure the deal correctly as mentioned in the article and make it clear that the option fee and the rent payments are not refundable, I can just have the renter move out and repeat what I did with a new LO? (in reality, the tenant might, of course, try to get the fee back and might start a legal process, but by being absolutely transparent upfront and structuring the deals accordingly, it not be the case)

@Jaysen Medhurst what exactly do you mean with vacancy issues? Don't I have an even higher vacancy risk with regular tenants? In regards to CapEx, I agree I wouldn't completely take them out from my numbers for sure. They will most likely be lower though as you deal with a tenant who is a potential buyer, so you can negotiate for them to take care of the property much better. I would not expect them to pay for a new roof but if something small happens I would expect them to deal with it instead of paying out of my own pocket.

BRRRLO during COVID yes or no?

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