What's good argument to persuade seller on Lease Option

11 Replies

Can someone explain a really good logical argument you use to persuade sellers that a lease option is good to do. Also, the fact that I'm obtaining their property but will just go find another person to lease option. i.e. some sort of sandwich. I can't figure out why any seller would want to do this?? Why not just find someone to rent or lease option to. Why go two layers deep with me?

My wife asked that same question of me before I had done a lease option purchase, and I've now done 3 and she's still asking the same question... It is all situational. 

What I find is the best situation for a lease option is when the person has little to no equity or is upside down... the place needs a lot of repair work that they don't have money for... they have no desire to be a landlord... and they don't need to buy another house anytime soon so it's not problematic to leave the loan in their name for the duration of your lease option period.

Find that person in that situation and then your job is to let them know how the lease option solves their problems.

@Eileen Murray - Not necessarily... A Short Sale may be the way to go, but a Lease-Option can still work and could be way easier since it does not require bank approval. It really just depends on how far upside down they are. I plan to write case studies on my successful Lease-Option deals, but have not gotten around to it just yet. But one went much as follows...

- Homeowner owes $70,000 on a Townhouse worth $65,000 in its current condition, so they are $5K upside down and do not want (or are not able) to do any repairs or bring cash to closing. They also do not want to be a landlord. Plus, they just got married and spouse already owns a house where they will live, so they have no need to buy another house in the foreseeable future. They just want to be out from under the monthly payments (PITI + HOA) and responsibility for the property.

- Home needs about $8K of rehab and upgrades to be rent ready.

- I come along and offer to do a Lease-Option Purchase @ $67K, taking over the monthly payments, handling the rehab and paying for it myself. I also handle finding a tenant and manage all aspects of the property - so that they do not have to do or worry about ANYTHING. Plus, I give them a $1,000 Option Fee to put some cash in their hand.

- My payments (PITI + HOA) total $700/mo, but I rent the property for $1,200, so it has $500/mo in positive cashflow. I may not keep reserves from this amount during the initial Lease-Option period, as I have means to handle any issues out of pocket.

- So I'm $9K into the property, but at $500/mo cashflow it will take only 18 months to recoup my money (in a perfect world scenario where no other expenses occur and no reserves) - which is the exact length of my Lease-Option period with an option to extend for an additional 6 months if needed for another $1,000 Option Fee.

- Further, I use FREE-OPM... I put new Appliances on 18-month zero interest card promotion, and Flooring on 12-month zero interest card promotion - so about 1/2 of the rehab cost is FREE-OPM. Just set automatic payments to make sure the last payment is made before the promotion ends.

- Now after 18 months of principle pay-down made by me, the goal is that they are no longer upside down and will actually get some additional cash at closing (beyond the $1K received upfront). If not, I'll be the hero and increase the purchase price to cover their shortfall... After-all, I essentially have a FREE house! Also, they will sing my praises in testimonial that will make the next Lease-Option deal even easier.

- And you can structure things however you need to make it work. In one case my Option fee was only $100. In another it was $3K. Once the owner had to still pay a portion of their mortgage because the payment was too high to create cash-flow, and in the others I paid everything. Sometimes I get credited for the option fee at closing or not. Sometimes I get credited for the principle pay-down and others that benefit goes to the owner / seller... You can structure it all in whatever way is needed to make it a WIN / WIN (make sure everyone wins). There is also the third WIN for the Tenant who now has a great home to rent.

- Best of all, that same Townhouse appraised for $96K last year and may now be worth as much as $110K based upon nearby recent sale comps in an appreciating market - so I have both great equity and cash-flow from a property that I have no money in... How great to get a FREE property and help someone in the process, plus provide a great home to deserving tenant.

- And the seller has their credit intact (unlike with a Short Sale), plus they got cash upfront and at closing (unlike with a Short Sale). But it requires you to do everything you say you'll do, and therefore a lot of trust form the seller. You therefore need to be credible and trustworthy.

Here is another scenario that works well. Find an elderly landlord that is sick of managing rentals. Very often, they own the property free and clear. This gives them a major tax problem if they sell for cash. You can structure a lease with the right to sublease to the tenants. Make your lease amount low enough to get the desired cash flow that you want. Be sure to discuss who's responsible for paying the maintenance expenses with the owner. The owner keeps paying for and taking tax deductions for the Insurance, R E taxes, Maintenance, etc.  At the same time, you structure your option. If the seller has children or a spouse that will inherit the property when they die, the tax basis in the property will step up to the current value for the heirs. Design your option to be exercised after this happens.

These same owners are also a great source to ask for seller financing after they see how you manage the property for a couple of years.

Happy Investing

Derek Dombeck

@Derek Dombeck that's some great info.

To echo that, what we've found is once a seller see's that you're making payments and doing what you said you were going to do, they are much more likely to sell it to you with owner financing.  Alternatively if they have a loan you can buy it subject-to their existing financing.  

Lots of good info.  Hope that helps!

Chris Pre

@James McCray You've got some great advice here from Jonathan and Derek!

Another thing I've found is that truly motivated sellers don't need to be persuaded. I'll give you 3 examples of deals I've done:

Seller #1: Was an 'accidental' landlord, meaning, he didn't want to be one but kind of stumbled into it. He lost his job and couldn't afford his payments so he rented the house out and moved into a smaller place. I offered to take over his payments and his tenant, he was only too happy to not have to deal with it anymore.

Seller #2: Bought a new house and was trying to sell his current one himself. With 60 days to go before he would have to start making 2 mortgage payments, I offered to "lease with an option to purchase" it (I literally used those exact words) and he said yes. He didn't need me to explain what a lease option was.

Seller #3: Bought his first home with his girlfriend but found out she was cheating on him and broke up with her before moving in. Just after moving in he lost his job. Since he had put the minimum down payment he had no equity to pay an agent so he was trying to sell it himself before going into foreclosure. I offered to take over his payments and buy it for what he owed. He asked where to sign.

These are common scenarios that are playing out all around us every day. I find that our job as investors is more about getting in touch with the people who already know they need us, rather than trying to convince them that they need us.

@Doug Pretorius awesome break down of lease options. I want to do the same here in San Diego.  How do you go about getting tenants that want to lease?  Because if you are pitching to a would-be-seller - you have to deliver a tenant, and the tenant has to want that property too. 

Originally posted by @Carl Handy :

@Doug Pretorius awesome break down of lease options. I want to do the same here in San Diego.  How do you go about getting tenants that want to lease?  Because if you are pitching to a would-be-seller - you have to deliver a tenant, and the tenant has to want that property too. 

Hey Carl, a large bright sign in the yard that says: "RENT TO OWN" usually does the trick. I've also found tenants from online classified ads, holding an open house, and from my own website. I hear some people are successful posting in local real estate facebook groups, using facebook ads, calling mortgage brokers to see if they have any clients they couldn't qualify, even flyers or direct mail sent to nearby apartments.

Typically you will get a LOT of calls/emails, most of them won't qualify, but some will, in fact probably more than you have houses!

@Doug Pretorius alrighty then I need to find these fb real estate groups and ads.  I just spoke with a broker we happened to meet at a party, so I'll reach out to them as well.  I greatly appreciate the response and tips/advise. 

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