All Forum Posts by: Wendell De Guzman

 Brian, not a problem. I am open to other ideas and my way is not always the best way (I even voted for your reply to my post). There's always a better way. That's what cool about Biggerpockets is that one can always learn and improve. There is no place in BP for the know-it-alls (or those who think they have nothing else to learn).

1) On the language to use - we'll use that from now on (Lease option or Lease with Option to Purchase). I am notifying @David Perez, our VP of Lease Option Sales.

2) Good idea to get our tenants through the FHA Homeownership online course.

3) Great idea on getting a servicer. We'll look into this.

4) Forced savings deposit - again, we'll look into this.

5) The way we do lease options is that we truly encourage and work with the tenant/buyer to buy the house and we don't over-charge them the rent or the price. All the properties we sell rent to own are rented at market rents and the price premium of 10% is all disclosed as well.

6) We don't give rent credits - I know that's not allowed by Dodd Frank unless the property becomes owner financing. In terms of repairs, our properties are renovated and are "like-new". 

Thanks Brian for your great inputs.

I've said this before and I will say it again, BP Nation - listen to Brian Gibbons - he is a master with Lease Options :-)

 Terrell, what you are talking about is sandwhich lease/options but that's a cool strategy too. Thanks for sharing.

 My experience is much better. 25% to 50% of my tenant/buyer buy or qualify for bank financing specially if you focus on the following:

1.  Collect as much downpayment as you can. Our average is $10,000. The highest downpayment we were able to collect is $27,500. Other investors who have very low percentage of tenant/buyers who exercise their option to buy only charge the first month's rent or $5000 or less.

2. Focus on the $150K to $250K price range (at least for Chicagoland - this range could vary based on your market). Below $150K, I tend to get more renters who usually don't buy and above $250K, my cashflow starts to suffer.

3.  On Day 1 of their Option, have them work with 2 people - a Credit Repair Specialist and a Mortgage Broker. These 2 will formulate a game plan so your tenant/buyer's credit improves and his paperwork and other qualifications are in order for him to qualify for bank financing.

Most investors don't do the above and hence, they tend to get people who are more 'renters' not buyers and hence, they get a very low percentage of their tenant/buyers qualify in 2-3 years.

 You're very welcome Madeline.

How's the market in your part of the world? Is rent to own something that other investors do there?

 Thanks Steve for mentioning the watch outs. I will mention some of them in my next posting so thanks for helping me narrow the list some more :-)

Yes - LEASE OPTION...as in any real estate strategy has to be done in the right way for it to work.

Based on experience and based on the Chicago market (where I am based), the sweet spot for rent to own is $100K to $250K. Below $100K, you tend to get more renters who don't exercise their option and above $250K, the cashflow you get is not good enough.

So depending on the house you're trying to flip, it might make sense to rent to own it or just flip it outright.

Rent to Own is great for newbie investors. Here are the reasons why:

1. With rent to own, you can buy a property at closer to market value and still make money. The problem in a hot market is that getting good deals is harder and harder (and specially hard if you're a newbie). With rent to own, you can sell the property at a 10-15% premium vs. market value (since you're selling it in 12-36 months), you don't pay any closing cost (when you sell), there's no dickering on the price (this could save you 3-5%) and you don't pay any realtor commissions as well. Below is a comparison of doing a fix-n-flip vs. rent to own and how much you can make on a $200,000 house that you buy-and-rehab for $150,000:

2.  With rent to own, you pay less in income taxes as a percentage of your profit since you're paying long term capital gains vs. ordinary income taxes with a fix-n-flip.

3. With rent to own, you can get passive income while you wait for your tenant/buyer to cash you out. Upfront, you get a $10,000 non refundable option consideration as well. This is great for a newbie investor to build a cash reserve pretty quickly (you can't do that with rentals).

4.  Since you're getting a big chunk of cash upfront, you tend to get better quality tenants (they have more skin in the game and therefore more to lose). You still need to SCREEN your tenant/buyers in the same way you screen a regular tenant. Below are the tenant screening that we use:

- check credit; credit has to be at least 600 specially if you want the tenant/buyer to cash you out in 12 months; also there should be no 90-day lates in the past 12 months
- check criminal history: no felony in past 5 years; tenant can't be a registered sex offender
- check income/ verify employment; salary has to be 3 times the rent
- check civil cases: no evictions in the past 5 years; no BIG civil suits judgments
If you're a newbie, you can't afford to get a bad tenant. With rent to own, you decrease the probability of getting a bad tenant even further because you're looking for a tenant with $10K down or more upfront.

5.  With rent to own, the tenant/buyer is responsible for maintenance and repairs not the landlord. So, with rent to own, you tend to get truly passive rental income even without a property manager. If you're a newbie, you probably don't know how much repairs cost or you don't have good contractors or a good and low cost handyman to take care of the repairs for you.

6. With our rent to own, we get an average of $10,000 upfront plus the first month's rent. With a rental, you get the first month's rent and the security deposit (which is usually, the first month's rent). So if you have to evict a tenant, you will be in negative cashflow territory (i.e. all your rental profit is gone) but with rent to own, you have enough reserves to draw upon(because of the $10K upfront) and you will still make money.

However, you have to do rent to own in the right way. My next post will talk more about this.

What about you BP Nation? Anyone out there who did rent to own? What's your experience with it?

They are basically the same. A mortgage lender is usually a mortgage broker who shops around for the best deal by asking different banks.

 If you have a 720 credit score or above, you can get an UNSECURED BUSINESS LINE OF CREDIT. I've seen even beginning real estate investors qualify for $100,000 in unsecured business line. Since it's unsecured, it's not tied to the property and you can use it as downpayment for your first deal. 

Here's an example of a successful BRRRR.

Address: 2520 Heather Rd, Homewood

Purchase price: $70,000
Repairs: $30,000
At the time we bought it, the ARV is $140,000.

We sold it rent to own for $1590/month rent, we collected $5,000 (non refundable option fee) with an Option price for $150,000. 

12 months later, the property appraised for $168,700 so we are ready to refinance out of it. When we refi, we will pull out our $100,000 out so we can reinvest it. The fact that the property is worth close to $170,000 is a great benefit to our buyer. When they close on their lease option, they will have a house with $20K+ equity.

If they default on their lease and option, we take back the house and can sell it at a higher price. We are in a "lose position" because we bought the house in the right area that we know would appreciate and sold it on a rent to own basis. This allows us to refinance so we can reinvest the money in our next deal.