Changing Perspectives: How To Buy & Sell Houses For More Profit
Let me ask you something. If you could sell your property for 30% to 70% more profit, would you? Of course you would. That’s an obvious answer. But do you? Probably not. In this post I’m going to be talking about the many tactics and strategies of lease options (shortened to “LOs”) and why they are so incredible if you know how to make it all work. I won’t go too heavy into the details about the inner workings of LOs themselves, because in the near future, I’ll be writing a very detailed post about just that (practically a training manual). For now, however, I will get detailed enough so that you see the power of seeing things “differently” than most other investors. And before you write off lease options for some reason, scroll down to the bottom to “Common Objections.” You may be surprised by the answers (hint: they’re not illegal, immoral, or too complicated).
What’s So Great About Lease Options?
The greatest thing about LOs is their flexibility. Because they rely on “terms,” meaning the terms of the deal that you put together, they are not quite as cookie cutter as other deals such as wholesale or fix n flip. This is great because you often have control of the property, meaning you can do as much as the contract (terms) allows. I don’t mean that in a conniving way, but that you can be as creative as you want to give the seller exactly what they need and to make the deal work for everyone involved.
Also, a quick note that for all of the examples I give, I’m using national average numbers; your market may be different, which is why I’m giving you the sheet to download yourself and put in your own numbers. I know the numbers are way different in, say, San Francisco or New York. But something to keep in mind is that if you live in those areas, this is a way to get into REI without investing your own capital, just saying...
Ok, so let’s get down to the nuts and bolts of it, how does this make more money? A picture is worth a thousand words. So in all these examples, I’ll show you a chart breaking it all out. First, you’ll see a breakout of the difference between selling a home through a Realtor and selling a home through LOs. As you can see below, because most of the fees and commissions are not required with a LO, the investor makes much more money.
The Smarter Flipper: You could (and many do) flip one house every 90 days and make a decent profit. Alternatively, you could flip fewer deals (less work) and make much more money (more vacations). The basics are, you do the flip as normal but cash out refi the flipped property and LO it. You get your hard money loan (HML) and rehab costs paid off, then immediately get some capital from the TB, which is 5% of the future home price of $242,000 (national average $200K house +10% appreciation per year), bringing you $12,100 upon the close (you can market it have someone move in upon the refi close). As you can see in the chart below, I used incredibly generous numbers with a HML of 100% LTV including rehab at 2 points and 12% meaning zero money of your own in the deal. You might get that with a private investor (if you’re lucky), but very, very rarely with HML. But I threw it in there just to show how much better lease optioning the house is, even with phenomenal loan terms through traditional flipping. You may not be able to do every flip like this if you need more capital on a recurring basis; so you may do a “regular” flip, get 35K (if nothing goes wrong), then flip to a lease option on the next, take 12K up front and go back and forth some until you start closing on the LOs 1-2 years down the road and getting those huge pay days and then can do a 1-2 flips per year, as each one starts paying out over $100K. You make it work for you and your needs--I’m just here to educate.
“The Smarter Flipper” Comparison
“Assign It Back” To The Seller: Another option we provide to sellers is to do the work of providing a qualified TB and assigning it back to the seller at no direct costs to the seller. We collect our fee from the TB (average 4%) which the seller deducts off the HUD-1 at the close. They were going to pay a Realtor 6% plus the buyer often asks for concessions and lower prices in most markets these days. I’m charging 4% and the TB is not asking for all the typical concessions and they are getting full market value of the house at the time it sells in the future. TIP: I also use this image to market to sellers why it’s better to use my company to provide them a qualified TB and assign the LO contract back to them instead of selling through a Realtor if they have the flexibility to do them (i.e. do not need to cash out now, but can wait).
Assign The Contract Back To The Seller
“But, I’m Just Getting Started…”
Maybe all this is confusing to you. You haven’t learned about LOs yet and are scared of trying them. Well what if you can just market for TBs with no marketing costs, pre-qualify them using someone else’s system, and have the Realtor do all the work and you still make a profit? Would that maybe interest you? Well, that’s the way I monetize what used to be “dead” leads.
“Turning Dead Leads Into Cash” Details: Like I’ve said, I require a 5% down payment (the option fee) for any lease options I do. But, many TBs don’t have that much to put down on a property. This used to frustrate me that I couldn’t help, but then along came Home Partners of America. You see, I can still help them by connecting them with a Realtor who works with Home Partners of America (HPA). As long as they qualify with HPA, they can do a lease option through HPA with only two months rent as the option fee, roughly 2%. This often helps the seller as well because HPA actually buys the house and lease options it to the TB. For sellers that cannot wait on their payday, this is a great option for them, if their home qualifies. HPA is much stricter on what homes they buy than I am, specifically because they’re buying the house, whereas I often doing sandwich lease options (less costs). The Realtor pays me a marketing fee for bringing a qualified TB--between 17.%-25% of their commission, which may be the full 6% if the listing agent knows how to work with HPA and can represent both sides, another great selling point. This averages $750-$1,500 (split or full commission) on the national average sales price of a house at $200,000. Not bad for little more work than referring someone you didn’t originally think you could help. This is a high volume, lower pay tactic that requires only a little work up front to market for tenant buyers. Like I said, our marketing costs for TBs is $0, because I use Craigslist, Facebook Marketplace (not ads) and free local papers is all I need and I get plenty of TBs. Now, I do have a CRM setup to capture all their info and filter them out and then have a VA follow-up with them. So there was some setup work initially, but now it allows us to focus more on the tenant buyers that do meet our criteria for our lease options.
Calling All Wholesalers: Speaking of turning dead leads into money, who else do you know who might have quite a few dead leads that cannot or will not give a discount on their home but still needs to sell? Wholesalers, that’s right (good guess). I know many wholesalers that focus exclusively on wholesaling. And while there’s nothing wrong with that, I work with them to distinguish the ones that may work for us. They simply pass along the seller’s info to us and if it becomes a deal, I pay them 25% of our 5% option fee, which averages a $2,500 referral fee. The wholesaler is happy and after a couple of those deals, often wants to know a little more about lease options.
Wrapping It All Up: Hopefully you see how lease options can be an incredible tool to make lots of different deals come together or to make more money with the deals you’re already working. They’re not for every single deal of course, but when you learn them, they are a powerful tool to have at your disposal. Please comment and ask any questions about anything you don’t understand. I’m happy to help.
- “LOs are illegal in my state.”
- Not exactly true. Now if you specifically call them LOs, then they may be perceived as illegal. However, the core of the deal structure “equates” to a LO. For example, in Texas and North Carolina, it may need to be structured as an owner financed deal, versus a lease option, however, the essence behind it is the same, just with different terminology. This is why you pay an attorney to properly facilitate the paperwork. Don’t call it a lease option, just explain the structure of the deal and let the attorney do what they’re paid to do.
- “I don’t need to do LOs, my fix n flip business is going just fine.”
- I covered this above, and as you saw, you can get the same amount of money per year with fewer flips...or same number of flips but with WAY more money.
- “I don’t understand LOs”
- Learn it. I’m putting together some basic training programs for free for my BP family. Go find a mentor locally. Go to your REIAs, talk about LOs and see who perks up. You can learn the basics on BP or YouTube so start there. Just start getting familiar with them until you’re ready to move forward. But DON’T count them out; and now you see why.