Back to the Future with Rent to Own Properties

There is always something new to learn about rent to own properties using sandwich lease options That’s why I’ve stayed in this business for decades. As you gain experience, you uncover new ways of helping people while making a handsome profit for yourself. Today’s blog shares a few of the subtle but valuable discoveries I’ve made along the way.

Every seller has a unique story.

Know the Difference Between Distressed and Motivated Sellers

Many investors lump distressed and motivated sellers together. There is a big difference between the two that you should know about as a professional working with rent to own properties. Distressed sellers are facing an imminent catastrophe – either financially or personally. These are sellers with something hanging over their heads tomorrow or the next day like a foreclosure, needing immediate cash, or burdened with a property needing major repairs. All too often, it’s too late for a lease option solution unless they can find a short-term reprieve from whatever is hanging over their head. A sandwich lease option takes a few days or even a couple of weeks to put in place. Distressed sellers tend to be procrastinators that don’t take timely action. That makes them very different from the motivated sellers that you can help.

Motivated sellers are proactive. They can usually wait to sell the house. They are proactive in the sense that these sellers are looking for creative ways to sell for the most money that doesn’t necessarily include the traditional method. They may not know much about rent to own properties but they are willing to discuss it with you. Because they want top dollar for the house, the house has to be in top condition. For most sandwich lease options, you want a motivated seller, not a distressed seller or a distressed property.

You’re operating at the quality end of the real estate market.

Investing with Self-directed Retirement Accounts

You have flexible ways to invest in rent to own properties. Self-directed retirement accounts are also called Solo 401k accounts or Checkbook IRAs. These are IRS approved retirement accounts that allow you to invest your money any way you see fit. Investing in real estate is a time-proven way of preparing for your retirement years. Investing with self-directed retirement accounts has huge tax benefits. Most importantly, the earnings go into your retirement account tax-free or tax-deferred. The massive power behind this is that you use the money you would have paid in taxes to reinvest to make more money than you could have using after-tax money. But with sandwich lease options, you’re investing almost none of your own money, which means you can close a lot of deals using a little money from your Solo 401k or Checkbook IRA account.

There is a difference between the Solo 401k and the Checkbook IRA. Mainly that a Solo 401k requires you to be self-employed, which makes rent to own properties an ideal business to be in. Still, anyone can open a self-directed IRA, meaning that even if you don’t “officially” run a business, you can still invest in rent to own properties. Either way, all of the taxes stay in your retirement account to earn you higher rates of return.

Something important to understand is that because you are not paying taxes, all of the transactions have to go through your retirement account. These earnings are for your retirement years. You can’t use these for personal expenses until you are at least age 59 ½. All of your earnings from a particular property must be deposited into your retirement account and all business expenses for that property must be paid from your retirement account.

You can invest in lease options using both tax-deferred funds and business funds.

You can still make a handsome living by investing in rent to own properties. All you have to do is keep separate records and bank accounts for your different investments. That means keeping all of the records for one house separate from other houses. The ones held in your self-directed retirement account benefit your future retirement. Records for other rent to own properties are kept in your business account and the earnings are available for you to enjoy today.

Solo 401k and Checkbook IRAs might not be where you begin but can become important to your retirement as soon as you start making serious money!

Determining the Lease Option Sales Price

This isn’t a new subject related to rent to own properties but it’s so important that it needs to be brought up frequently. Comparable home sales are the bedrock for establishing the purchase price of lease option houses. You want quality houses in the same neighborhood that sold recently so that you price the lease option at the high end of the market. This is a big positive for the seller because you’re asking top price for his or her house.

You also need to understand the market trend for appreciation. When appreciation is reliable, you can build some (or all) of that into the future sales price. You need to estimate when the sale will close and what the house will appraise for at that time. Almost always, the sooner it closes the better because your estimate will be more accurate. You can also build in a small premium to maximize the price. Remember, this is part of the cost the tenant/buyer pays for their rent to own property.

You include a safety valve in the agreement with the seller in case the appraisal comes in for less than the agreed sales price.

The seller might need to back down (within reason) to meet the appraisal price. Still, this can reassure the seller that he or she is receiving the top price based on the market at the time the deal closes.

Values will vary among comparable houses based on needed repairs, maintenance, and other factors. The most important thing to do is use very similar comparables. A 2015 house is not very comparable to a 1970 house. A three-bedroom is not comparable to a five-bedroom. And a lakeside country home is not comparable to a land-locked suburban home. Also, comps must be current. Some mortgage companies accept six month old comps but three month old is always better.

Remodels Can Happen – With Caution

Some tenant/buyers want to remodel before the sale closes. This can be done but there needs to be a clear and written process with a full understanding between the seller and tenant/buyer. Generally, only licensed contractors are used and everything requires permits. The details have to be in writing and approved by the seller. The seller needs to understand the risks such as the tenant/buyer might not pay a contractor and the contractor could place a lien against the house. It’s very important to understand local laws and regulations.

Remodels have been done. It can increase the value of the seller’s property and make it easier to sell if the tenant/buyer doesn’t complete the purchase. There are other variables to consider before approving a remodel. The tenant/buyer could lose their investment if they don’t complete the purchase. Or the seller could credit part or all of the improvement towards the sales price – the appraisal plays a role here. The seller doesn’t have much motivation to credit the improvements because it doesn’t automatically change the agreed-to sales price of the original contract.

Wendy