Crash Course on Wholesaling Lease Options

crashAs investors, we must stay in tune with what is or is not working in the real estate world…

One method that is defiantly working is wholesaling right now is lease options. Some people may have some familiarity with wholesaling lease options, while others may be like… what? Wait…. what?

So for those of you that are like “… wait… what, we have called in our wholesale lease expert Joe McCall. And today he gives us a snapshot – an elevator pitch version of here’s what it is and here’s how it works.

Joe says…

I would love to share some info about wholesaling lease options…

What I have learned is lots of times, sellers don’t have any equity or they may be even upside down. Even in this market, things are starting to turn around and prices are coming back up a little bit. There’s still tons of sellers out there who don’t have any equity in their house (or not enough) and their house is sitting on the market forever – and it’s just not selling.

And so what can you do with those people? They don’t want to rent the house out because they don’t want to be a landlord. A lot of them are moving out of state, you know. They don’t want to do a short sale. They don’t want to come to closing with any money.

So what I do is I just ask them, “Well, I’m looking for an investment property that I can lease for a year or two and then buy. That would work for you or wouldn’t it?” And they’ll say, “Yeah, maybe I’ll consider that.”

And this is what’s so beautiful about it: I’m not negotiating anything. This is my offer:

What do you want for your house?”

Okay, I’ll get that for you.

I find out what they need to sell it for and I find out what monthly rent they want. I give them a lease-option contract and that lease option contract allows me to assign that contract to anybody else that I want.

Let’s say they want $200,000 for the house and they want $1,500 a month in rent. They want $200,000 because that’s what they owe. So I’ll give them a lease-option contract for $1,500 a month and $200,000. And that’s about what the property’s worth today, okay?

So then, I’ll turn it around and I’ll bump the price up to cover my assignment fee. I’ll bump it up a little bit to cover rent credits or account those towards seller concessions to pay for my buyers’ closing costs. So I’ll take a $200,000 house and I’ll bump it up to maybe 210, 215, and I’ll advertise it for $210,000 or $215,000 as a lease-option to a tenant/buyer.

wordThe 3 Four Letter “F” Words: Find, Flip, Forget

Okay so “forget” has 6 letters, but that would have totally ruined my theme… so just go with it.

Anyway, 100% of the rent goes to the seller every month. I don’t keep any of the rent. I’m not managing the property… I’m just selling my contract. I find it, I flip it, and forget it. The three F’s.

I advertise it as a lease option. I find a tenant/buyer who has a realistic shot of getting a mortgage in one to two years. I want to make sure I’m working with somebody who has a realistic chance to buy the house.

So I have a mortgage broker that helps me review their credit worthiness. And I don’t care about bad credit. I just want to make sure they can afford the house, and you know, there’s not any huge judgments or liens that are going to prevent them from getting a mortgage in a couple years.

Ready to go Rogue?

When I find somebody like that who likes the house, maybe they’ll put down 2% to 4%. I keep that as my assignment fee. So then I assign or I sell my lease-option contract with the owner. I sell that to the tenant/buyer. Now it’s an agreement between the tenant/buyer and the seller. And I’m completely out of the deal. I’m done.

I use a title company and an attorney to close my deals, and they do this for me in all 50 states. So I pay the attorney to handle all the paperwork and stuff and it’s great. Even if the house is upside down. Let’s say they owed $250,000 on this house, and it’s worth $200k today. I can still do a lease option with that. I’ll tie it up for $250,000. I’ll bump it up to maybe $260,000…

I bet you’re thinking, how on earth can you do that? Nobody’s going to buy it.

Well, I set the lease-option period to be 5 to 10 years. So this tenant/buyer now has 5 to 10 years to buy the house, and they get to buy it at whatever the loan balance is in that 5 to 10-year period. So the seller wins. The seller gets somebody in their house who is going to buy and going to take care of it and treat it like it’s their own home. They take much better care of the home because they have more of a homeowner’s mindset.

While that rent is being paid, we use a third-party escrow service that collects the rent and pays the mortgage every month so we’re sure that the mortgage is being paid. And if you’re looking at an amortization schedule, that house that’s worth $200k today and they owe $250k, in 7 or 8 years you have to look at it. That loan balance is going to be, let’s say, $180k, and that house is probably going to appreciate over the next 5 to 10 years.

So when that tenant/buyer finally decides to buy the house, there’s going to be a pretty large equity spread in that house for the tenant/buyer. So there’s a lot of different ways you can structure these deals. When a seller says no, even if they have equity, but maybe they’re not willing to share any of it with you, you can offer a lease purchase.

I like lease purchases a lot better than “subject to’s” or contract for deeds.

The reason why is I think they are less risky. I don’t like the idea of taking over a mortgage, subject to. Or taking over the deed. It’s just a lot easier to sell the seller on a lease purchase. You know, we’ll lease your house with an option to buy it in the future, and I think it protects the seller more down the road if the deal goes bad. It’s easier to get out of it

Let me break it down into steps…

To Talk the Talk; You Gotta Walk the Walk

  1. Find a motivated seller who wants to sell their house on a Lease Option;
  2. Get the property under an “Option To Lease Option” contract;
  3. Find a qualified tenant-buyer who has a good down payment and a good chance to get a mortgage in 6-12 months;
  4. Sign the Lease Option paperwork with the Tenant-Buyer;
  5.  Assign the Lease Option docs back to the seller;
  6. Keep the Option Consideration/Deposit and give the Seller the first month’s rent;
  7. Put the Tenant-Buyer in a credit repair program with your mortgage broker;
  8. Deposit your money & move on to the deal!

What do you Think?

Was this info helpful? I sure hope so… share some thought in the comments section below.

4 Responses to “Crash Course on Wholesaling Lease Options”

  1. PK Smith Reply

    Good scenario.

    • Patrick Riddle Reply

      Hey PK, glad you enjoyed this lesson.

      – Patrick

    • Thomas Bernard Reply

      I think the information on wholesaling the lease option was very helpful my question is how do you extend the option period from two years to eight to ten years

      • Patrick Riddle Reply

        Hey Thomas, it’s all negotiable. Instead of asking for two years, ask for how ever many years you want the option period to be.

        – Patrick

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