Wholesaling lease options question

15 Replies

I'm trying to understand the process with wholesaling lease options.  I've seen that @BrianGibbons mentioned when finding a tenant buyer, he gets them set up with a credit repair program and a RMLO to work with them towards their loan.  

The part I'm concerned about is if you do all of this and you're completely out of the picture now since you've made your option fee, that most of these transactions do not end with the tenant buyer actually exercising their option to buy, what happens then?  

How did you actually help the seller?  It would seem that they get their home back, probably in not that great of shape, and they're stuck again.  

Is there something I'm missing or do you remain involved in order to help the TB get a loan to exercise their option?  

Keep in mind I'm not 100% sure of what you're refering to with the example from Brian Gibbons. He is an expert in this strategy so he will have some great ideas and a well thought out system.

Based on how you've phrased things the idea of wholesaling a lease option keeps you as a middle man. You simply sell the paperwork that is the lease option to an end buyer who is the one that fulfills the terms of the contract. 

My guess is that you're comment about most of these transactions not coming to fruition is false. Based on the credibility and experience of Gibbons I would assume that most do come to fruition and are executed. Its a matter of screening all your tenant buyers and making sure that who goes in is a good choice. My guess is there is a fall back option where if the option isn't exercised it falls back to the investor to fulfill the duties of the contract who can either fulfill the contract or make up a new lease option with a new tenant buyer. 

The investor is out of the picture and there is generally no obligation for the investor to fulfill the contract. 

@Steven J. , the Seller is helped because at the very least they get a tenant paying some of their monthly PITI and possibly get full-price for their home. Typically these are Sellers who have tried to sell their home and failed so they are in a sticky situation.

Originally posted by @Jenny Pennock :

I'm trying to understand the process with wholesaling lease options.  I've seen that @BrianGibbons mentioned when finding a tenant buyer, he gets them set up with a credit repair program and a RMLO to work with them towards their loan.  

The part I'm concerned about is if you do all of this and you're completely out of the picture now since you've made your option fee, that most of these transactions do not end with the tenant buyer actually exercising their option to buy, what happens then?  

How did you actually help the seller?  It would seem that they get their home back, probably in not that great of shape, and they're stuck again.  

Is there something I'm missing or do you remain involved in order to help the TB get a loan to exercise their option?  

First, welcome to BP, Penny!

You pretty well hit the nail on the head. Very few lease-option to purchase contracts actually close.  

Due mostly to inept investors dealing in options or those who expect a buyer optionee to fail so the can rinse and repeat. It's a good thing for the public these contracts have come under various new regulations to curb the predatory types.

Option contracts are under some new changes as well, not understanding these contracts can cause a taxation nightmare, mess over a seller and as you asked, the results can be harsh, especially on the operator who got a seller in a financial loss. 

If you're going to deal in options you better understand them a lot more than those that have used them in the past!

When dealing with unqualified home buyers you really need much more expertise than just real estate. There are credit aspects, financial aspects, social aspects and the ability to guide buyers through personal finance matters, employment issues and address life experiences to improve the circumstances. It can be a lot of work, ad it's really not collect a fee and walk away.

Some dealing in options only take potential buyers who can qualify or will qualify in short order, the less qualified the buyer the greater the risk for failure. Under the new laws, failure is not really an option!

I don't think Brian will care about me mentioning that he is a "student" of mine on my site, he's mentioned it before. At least I know he has been exposed to the broader concepts of real estate options. 

We can also say that rent to own is dead on arrival, don't even go there with rent credits with a homeowner.

Looks like you have it figured out Penny! Good luck :)      

Thank you @Steve Johnson @Robbie Reutzel and @Bill Gulley.  I appreciate your time.  

So it's seems based off of @Brian Gibbons ideas that finding a buyer who's well qualified to get a loan fast is the best plan.  And no rent credits.  And never expecting a lease option to fail, I don't want a transaction that I'm involved with to be shady or just wrong in dealing with peoples lives and homes.  

Originally posted by @Jenny Pennock :

I'm trying to understand the process with wholesaling lease options.  I've seen that @BrianGibbons mentioned when finding a tenant buyer, he gets them set up with a credit repair program and a RMLO to work with them towards their loan.  

The part I'm concerned about is if you do all of this and you're completely out of the picture now since you've made your option fee, that most of these transactions do not end with the tenant buyer actually exercising their option to buy, what happens then?  

How did you actually help the seller?  It would seem that they get their home back, probably in not that great of shape, and they're stuck again.  

Is there something I'm missing or do you remain involved in order to help the TB get a loan to exercise their option?  

 Hi Jenny,

I use www.upgrademycredit.com

www.notecollection.com

The "what ifs"

The seller could die, could get legally incapacitated, could disappear, could declare BK, etc

House could burn down

Tenant could default, fight you on improving credit, decreasing debt to DTI 43%, not allow inspections, bring seller to court as per the ATR rules of the Dodd Frank, etc

An RMLO prevents some of thes problems,  using a property trust solves others.

I encourage all REIs to be licensed and consider listing for a lease with option to buy or a ROFR

Thank you @Brian Gibbons .  I appreciate the "what if's" info as that makes sense.  

Can I ask why you recommend being licensed?  Is it because you could be "acting as a broker without a license to do so" when dealing with lease options so it's a CYA mechanism?  Since I am new, I thought it might be advantageous to not be licensed, but that was before I found the lease option idea.

@Jenny Pennock

If you do a lot of these Lo assignments you basically are brokering paper, assigning paper. If you are licensed you can act as a principal and most brokers don't care what you doing. But if you're not licensed, where 95% of all properties are sold through agents, some brokers may report you to the department real estate in your state for unlicensed activity. You can be completely innocent and just be charged by brokers that don't like what you're doing

Bottom line if you licensed you can grow a real estate investing company and act as both a principal and as an agent

@Brian Gibbons

Hi Brian, 

Please go into a little more detail.  

Specifically, if you're a real estate agent collecting a fee from a tenant buyer (TB) for assigning your lease option, how does that fee count toward the TB's down payment? In order for that to happen, the fee MUST be paid directly to the seller.

I agree that, as an agent, you can collect the fee and have it show up on the HUD-1 as a "realtor commission" but it's my understanding that the TB can't count it toward their down payment for the reason mentioned above.

Would you agree with that or am I missing something?

@Matt M.

say there is a $100k house

3% fee for assignment

You can list the home with a sales license as a lease with option listing, $3000 down as option fee 

OR use an option release as a principal buyer

I use an option release fee not an assignment fee

Say market rent is $1000 

So I'll lease for $1000 and have an option fee for $100

Then record my option

I want a buyer to step into my contract for an "option release fee" of $3000

I'll have my RMLO and credit improvement specialist look at credit and ability to repay of buyer

Then an option release fee is paid to title co or attorney or broker of $3000

Once $2000 of first and first and last months rent cut to landlord from buyer to closing agent and $3000 is paid to closing agent, then I cancel my lease and option and write a new lease and option between tenant and seller. Terms of new lease are 12 mo lease, possible extension, 12 mo option, 3000 option fee

If you just assign the lease option contract I have found the tenant has trouble getting underwritten for the mortgage.

One of the myths about real estate options is that an option gives you an equitable interest in the property, it does not! Your interest is in the option contract, this has been the findings of state and federal courts. 

An option is an encumbrance to title during the term of the option contract. An owner could sell a property that has an option on it, subject to the option just like they can sell with a mortgage lien. Any buyer would then be obligated to sell if the option were exercised.

Any option has two parts, a "financial" side and a "real" side, the financial side is derived from the value of the real estate. The real side is the business or personal decision to buy the property.

Investors that sell options are selling a financial derivative of the property value and the right to purchase the property. If you had the intent and ability to buy under an option, and you're not in the business of taking options, you can usually slide by without any issues as to a license. 

If you don't have the intent to buy or the ability to buy then the option is not being taken under your personal account, moreover if you're in the business of dealing in options, selling a financial derivative of the property as well as the real side of the option, you need a license to sell the contract. Just as a broker selling options in pork bellies or wheat, they need a securities license.  

That is why regulators can and will nail an investor for dealing in options without a license.

As @Brian Gibbons  mentioned, agents view those in the business circumventing licensing laws, depending on you business approach regulators can too. 

You need a license to advertise a property, no option can give you the right to advertise or show a property and not be considered a listing agreement, such agreements may cause the option to be an installment sale as well. 

New laws/regulations now view real estate options by the intent of the optionee, the buyer, if there is an intent to purchase or to sell the option, it can then be determined to be an installment purchase, not an option. This causes tax ramifications for both parties, especially a seller.

The way we dealt in options a couple years ago, back to the beginning of taking an option has all changed, those ways have gone by with the unicorn. 

Anyone dealing in real estate must keep up with current rules, regulations and laws through an ongoing educational process. If you don't, well.... it can mean curtains for you and your business. 

Be keen in real estate in '16! :)

If a seller has a real estate agent, how do you structure the deal so everyone is satisfied? After reading the last comment, I'm basically not able to lease option a property if I am only in it to flip the contract? I've been trying to read up on this as much as possible. I'm currently working with someone on a lease option agreement so I can market their home. Now I may be breaking the law??

@Justin P.

Lease Option Assignments are close to brokering.

If you do it right, you can avoid the brokering aspect.

But I would get licensed in PA.

Once licensed, do this:

1. Enter into a lease and seperate option, and record the option.

2. Advertise the property on MLS and Craigslist and others. Use signs Lease To Own.

3. Get buyer to give you an option release fee to release your option.

4. Use a title company.

And get trained by @Josh Caldwell in Pitt.  There is no one better in PA.

Good luck!

@Brian Gibbons

@Bill Gulley

Hi Guys,

In the example above, the buyer's option release fee does not count towards his/hers down payment, correct? If so, why would any buyer use a middle man (you) instead of just going direct through the seller for a lease option? 

 By going direct, all of the buyer's $3,000 counts toward their downpayment, which is not the case if they pay you that $3,000 as an option release fee.  You've already mentioned at the top of this thread that you only want to work with qualified buyers (to ensure the buyer successfully exercises his/her option), so what's in it for the buyer to go through you?

Maybe I'm missing something, and if so, I'd certainly appreciate the clarification.

Matt 

  • You can do your own taxes
  • You can do your own divorce
  • You can sell your own house without an agent

I've been doing this since 1986, and 

when I get a motivated seller that needs a lease option, seller financing or cash solution, they dont care what I make.

If they are motivated.

Regarding the buyer, look on the MLS and you do not see many owner financed deals or lease 2 own deals in A B neighborhoods.

Many will pay 3% for a great neighborhood, good schools, low crime, and to get out of that crappy apartment.

AND making 3% in about 10 - 12 hours is a good payday!

@Matt M.