If you’re an investor whose closing deals and making money now, you know that it’s a subject-to and lease option market. However, because of the crazy fall in home prices a “problem” has developed in selling houses on a rent-to-own basis (my favorite way to sell a house because the tenants take awesome care of it).
Here’s what I’m talking about: I was just talking to a newer investor and she mentioned that she had a tenant who was trying to buy the house. The appraisal was done and the house appraised for far less than the amount which the investor and tenant had agreed upon. So guess what happened?
Well, if you’re familiar with selling a property on a lease option, you know that we always get option money up front.
In the good ole’ days, it was anywhere from $5,000 to $15,000. Now it’s more like $3,500-$5,000 that you’ll get upfront. So, the investor friend of mine had a clause in her contract that said if the house didn’t appraise, the option money was refunded and the tenant could opt out of the contract.
I told her this was a terrible idea and to never do this again. Of course we all make mistakes when we don’t know any better, so this was a lesson learned for her. Here’s what you do when this happens, because it just happened to me with a property I have in Baltimore, MD: On my MD property, the appraisal was $17,000 below the agreed upon sales price. Here’s what I did:
First, I told the tenants they could bring the $17,000 to the closing table to make up for the difference (obviously this is an unlikely scenario).
Next, I referred to the lease option agreement which states that if the property does not appraise, then we will get it re-appraised every six months until it appraises for the purchase price. And, of course in all my lease option deals the option money is always non-refundable. I even make my tenants sign a document that states they understand the money is non-refundable.
Yes, this market can be a pain in the butt sometimes, but smart investors always adapt and adjust.
Also, since I’m cash flowing on my properties I can hold onto them as long as need be until they appraise. By the way, you should be picking up properties now, like Bill Clinton picks up women. Because with the rampant inflation we’ll soon experience, we’re all going to make boatloads of money.