Subject 2 to Lease Option... My proposed strategy... Advice needed.

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Subject 2 to Lease Option... My proposed strategy... Advice needed.

John Casey
Involved In Real Estate · Las Vegas, NV · Member since 2009 · 10 posts · 1 vote

Ok... so I have this idea... Just want to bounce it off of the BP community. I will work my best to keep it short and simple...

I have been doorknocking for listings for awhile now, and am finding that it's very rewarding, now I just want to move that into the investing realm. My strategy would look something like this:

Step 1: I buy a property Sub2 with a grant, bargain & sale deed.

Step 2: After the owner vacates (part of my agreement when buying the property) I tie the property up with a lease option to some random cat that I find on craigslist.

Step 3: Rinse, & repeat on multiple properties (over the next 3 to 5 yrs) .

Step 4: Pay the properties' existing financing down with 100 % of the cashflows. Earned income from Real Estate to pay for my living expenses.

Possible step 5: Refinance the properties to 70% or so(once my credit is back where it should be).

My questions are:
1. Does this sound like a sustainable strategy?,
2. If so,... Any redflags?? or no-nos that Im overlooking?
3. Any advice before pulling the trigger?
4. Im also wondering how to purchase? Should I do it under an LLC, or do the land trust approach, or what??

I know this may seem like a newbie post... lol.. It is... I am pretty new to investing, when I say new, I mean Ive done one deal, but have sold real estate for others as a realtor since '04... I know I will make mistakes - that's ok.. I just want to control those mistakes as much as possble.. If that makes any sense.

Thanks guys beforehand for your time.

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Brian Gibbons
Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
13y

Hi John Casey

Bill Gulley was referring to "underwriting the buyer" as to credit and debt to earnings, as any mortg underwriter would do. To place a t/ber in that would fail without guidance to improve their FICO score is what many REIs do.

Credit Improvement entails a few things:

-Pulling Credit
-Disputing negative entries as per the Fair Credit Reporting Act
See http://www.ftc.gov/os/statutes/fcrajump.shtm
-Settling debt at 20 cents on the dollar
-Getting new positive accounts on the bureaus (there are 3 of them).
-Understanding Credit Utilisation Ratios
See http://www.mint.com/blog/goals/credit-utilization-02282011/

Tber coaching is THE time consuming part of lease options, you are coaching them to succeed. Many fail no matter what. More succeed with coaching.

I hope this aspect of Lease Options helps you.

Brian

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    John Casey can you go into #2 the cat you find and 3 a little more, it would have a bearing on the advice given. :)

    0Reply
  • John Casey
    OP
    Involved In Real Estate · Las Vegas, NV · Member since 2009 · 10 posts · 1 vote
    13y

    @Bill Gulley

    Step 2 Explained: Ok, so the person I find on craigslist or within my database would have the following characteristics:

    1. Bad to Marginal credit (I will pull their credit to look for unpaid utilities, and lease agreements, also to ensure that I wont be responsible for payment shock because they just left their foreclosed home, or short sale that they sat on for 3 years).
    2. Capital (Im thinking 5% of Sales price) for the option payment.
    3. Documented income by all parties on the lease.

    Step 3 Explained: First off, when analyzing a property, I will cap the amount of out of pocket expense to 10% of the ARV. This is so that I can recoup at minimum half of it from the option payment received by the lease option tenant. Then, I will either:

    a. Wait til the property yields enough profit to repeat the process on another property, or
    b. wait until my day job as a Realtor pays enough to do it again on another property.

    Thanks Bill.

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    13y

    Hi John Casey

    Bill Gulley was referring to "underwriting the buyer" as to credit and debt to earnings, as any mortg underwriter would do. To place a t/ber in that would fail without guidance to improve their FICO score is what many REIs do.

    Credit Improvement entails a few things:

    -Pulling Credit
    -Disputing negative entries as per the Fair Credit Reporting Act
    See http://www.ftc.gov/os/statutes/fcrajump.shtm
    -Settling debt at 20 cents on the dollar
    -Getting new positive accounts on the bureaus (there are 3 of them).
    -Understanding Credit Utilisation Ratios
    See http://www.mint.com/blog/goals/credit-utilization-02282011/

    Tber coaching is THE time consuming part of lease options, you are coaching them to succeed. Many fail no matter what. More succeed with coaching.

    I hope this aspect of Lease Options helps you.

    Brian

    1Reply
  • John Casey
    OP
    Involved In Real Estate · Las Vegas, NV · Member since 2009 · 10 posts · 1 vote
    13y

    So I should do the coaching? Is there a conflict of interest there, like lets say that they do exactly what I say, and then still cant get financing, I would be open to litigation, am I right???

    I personally dont want to run that risk.. Maybe just let them do it on their own...

    Please fill me in.. Thanks for your replies

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    If you are afraid of liability in giving good advice to make deals work, don't do the deals, yes, that's part of it if you accept anyone with credit issues.

    Lease-option, rent-to-own or any installment transaction are now subject to more prudent underwriting requirements, the days of getting a down, throwing someone in that won't qualify, taking the property back and repeating are over!

    Now that I understand you are a Realtor, held to a higher standard, I won't come in with guns blazing :)

    You need to take buyers to get them qualified, what you find out is what they must do to meet guidelines in 2 years or 3, the worse the credit is, the longer the contract needs to be to cure the issues.

    I'd think again if I were you, I wouldn't get in pig in the poke, I'd want near misses, those with slight issues, foreclosures are fine, depends on why they had a foreclosure or bankruptcy folks from 2 years ago. They can be ready to buy in 2 or 3 years.

    Before you dance to any song you need to know the song, some are longer than others, if you can't last to the last note you may really tic off your partner. In other words if you can't carry them to the end, don't dance with them, no matter how good looking they are.

    You could also fall under the SAFE Act as an installment sale, there is also the CFPB a new watchdog for buyers who get screwed over, even if they fail on thier part as they should be qualified to get involved. You'll have more liability issues with these new approaches than you ever would have from suggesting someone to payoff a car loan or credit cards, giving prudent advice.

    Again, since you're a Realtor, you'll be held to a higher standard and you have a little more to lose as well. L/Os are not that easy, learn the rules, then go for it! :)

    0Reply
  • John Casey
    OP
    Involved In Real Estate · Las Vegas, NV · Member since 2009 · 10 posts · 1 vote
    13y

    Thanks for your replies.. They are really appreciated.

    I will tell you, my goal in all of this is to have a win/win for all parties involved.

    From what you are saying, I took that I may actually reduce liability by coaching people through credit repair... Basically I would show my intentions in regards to actually wanting to sell the property to the L/O tenant one day vs just hoping that they fail, and that I can kick em out, keep their option money and do it again with someone else.

    I guess I will be doing some coaching after all. :)

    Thanks again Bill & Brian...

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    The key to doing successful L/Os is knowing financing. You need to underwrite the deal as to the ability to perfom in the future rather than qualifying buyers today, you need a crystal ball that can tell you the probability of the making it work. This also means understanding thier motivations beyond the days they are looking at properties, thie ability to understand the deal and thier ability as well as desire to follow instructions. You can lead a horse to water but you can't make him drink. :)

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    13y

    John Casey selling a property on terms, whether it is a Lease Option, Agreement for Deed, Wrap around Mortgage - AITD, etc, depends on many things.

    My advice is go to a title company and talk to the manager. Understand what Nevada will allow.

    A great page for docs
    http://www.fidelitytitle.net/default.aspx?pp=249686

    You should also seek advice if an agent from a SENIOR broker that has experience from the 80's in seller financing. Look for at least 35 years in the business. Hint - GREY- WHITE HAIR. lol

    I did my first lease option in 1983 when interest rates were really high, so Wraps - AITDs were common.

    And another alternative, is a contract for option to purchase, which I have written about on my blog here at BP.

    http://www.biggerpockets.com/blogs/3/blog_posts/26565-a-contract-for-option-is-better-than-a-lease-option

    You couple the CFO with a lease, and you avoid equitable interest (this is my opinion, ask others).

    Lastly, I do not want to do Credit Improvement personally, especially when negotiating a discount on charged off debt.

    I use one of the best Credit Improvement Companies (In TX). They are not a "disputing only" credit repair company. They negotiate charg offs at 20% on the dollar. They place new positive accounts to raise FICO scores. They hold the hand of the TBer. I do not want to do that.

    Welcome to the world of Seller Financing! Not exactly what Realtor does every day, is it?

    Brian

    0Reply
  • John Casey
    OP
    Involved In Real Estate · Las Vegas, NV · Member since 2009 · 10 posts · 1 vote
    13y

    Definitely not what we do.. It's right up my alley though.. I tend to be a very unorthodox Realtor as it is though, so this will be fun...

    In NV, to get around equitable interest, The CFO and the lease just need to be two completely separate forms, and they cant have any portion of the rent go toward a downpayment or pay down of sales price in any way.

    This is some real good info... Youve been a great help. Thanks a lot. and I will definitely keep you posted on how this approach works out for me...

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    John, I suggest you speak to an attorney about your ideas about avoiding giving an equitable interest simply by using seperate contracts. The granting of an option or the agreement to give an option, if any consideration is paid may well grant an equitable interest.

    IMO, it's a waste of time and simply a ploy in an attempt to do someting that tries to build some defense in your actions and intentions in granting any equitable interest to say you're not. It's as if the due on sale issues, being based on the granting of any equitable interest becomes the target of deal makers that they didn't grant any interest. That's alot like having cookie crums around your mouth and telling grandma you didn't get in the cookie jar.

    I suggest you deal with it, manage the risks as you certainly are granting an equitable interest any time you take money with any agreement to do anything in the future to pass title, the money paid creates the equitable interest.

    I suggest you have exit strategies to deal with any demand made by a lender. I have written about successfully getting lenders to allow instalment sales, besides that if push comes to shove, refinance it, get a real buyer to sell the property in a partnership or wholesale the entire arrangement, get the buyer to partner and buy....lots of solutions to play heads up ball instead of using convoluted agreements trying to get out of the responsibilities related to these deals.

    Unless you can take your deal to court for a judicial foreclosure and win, the granting of any equitable interest will be what the lender says it is, the opinion of any investor type or that of any guru is irrelevant, you're going to foreclosure, period! Then it's on you to get in front of a judge and again on you to convince the judge that while you have the intent of selling and taking money on an agreement to do so, that you really didn't violate the terms of the note. I know of deals that blew up because of these matters, but I've never seen a judge agree with the seller over the lender.

    So, if grandma sees cookie crums on your mouth, just admit it and ask for forgivness and what can be done to make her happy, if you play your cards right, she might give you another cookie with milk! :)

    Guess this is #9,999, later.... :)

    0Reply
  • Phillip Dwyer
    Real Estate Agent · Henderson, NV · Member since 2011 · 1k+ posts · 550 votes
    13y

    John Casey I think the subject-to purchase idea has some legs in our current market. Still, it seems the lease option stuff may be more hassle than just finding a "normal" tenant or end buyer.
    Bill Gulley Congrats on 10,000!

    1Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    13y

    @Bill Gulley!

    OMG! 9999 + 1 = 10,000 posts!

    Congrats to one of the most helpful posters of Bigger Pockets!

    You are sincerely appreciated!

    Brian

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