Lets look at a couple of ways to make money using options. You will
encounter seller situations where, if you know how, you can solve the
sellers problems and make good money yourself. It may be a strait
option to purchase, a sandwich lease-option strategy, or an assignment
of an option. There are pros and cons to all of them.
You may find yourself creating a hybrid strategy gebining the best of
a buy and hold strategy with a lease option exit strategy on the sale
of the property. This is a great way to control risk factors and
maximize your return on investment (ROI). Weve discussed some of
the reasons it makes sense to structure a lease-purchase transaction,
now lets review an example. The following example from my portfolio
illustrates how you can create multiple paydays using this buying
strategy.
Example: House on Twin Loop How I Found the Property:
A seller responded to my yellow page ad that stated
that I bought houses. I gave him a FREE report, which educated him on
how I could help him.
Motivation for Selling - Find Out The Why The
husband had a job transfer 150 miles away and they had already
purchased another house.The Realtor had been by and told them they
needed to spend $5,000 to fix it up before they could sell it because
the basement was not 100 percent gepleted. It was a nice house in a
good area. Solve the sellers problem.
I told them I would be willing to lease the house for 1 year, for $600
per month, as long as I had at least a one-year extension. Their
underlying payment was $750 a month. I told them that in order for me
to lease it, I would need them to subsidize the payment at least
$150/month, so I could make a profit.
Pay-Day #1: Monthly Payment Spread
You may ask why would they ever do that? Well, there are lots of reasons:
1. They wanted to sell the house, not just rent it.
2. A Real Estate agent wouldnt make the payments while it was listed.
3. $150 a month payment is a whole lot easier than $750/mo.
4. They couldnt do 2 house payments.
I think it also important to say that they bought me. We developed
instant rapport, and they sensed that I knew what I was doing. They
knew that I could solve their problem. People will pay for specialized
knowledge. I found out the Why, meaning: Why they needed to sell,
then I solved their problem.
Within a few weeks, I had rented it out to a new buyer, and created a
monthly payment spread of a $200 that equaled $2,400 a year.
Payday #2: Front-End Option Consideration This is the difference
between the amount of option consideration that you pay the seller, and
the option consideration you charge the buyer to get into the deal. In
the above example, I only had to make the property payments they owed.
Since they were moving, that was $600 due in about 2 weeks.
I immediately began marketing the property as a Rent to Own. Within a
few weeks, I had found my buyer - a mortgage broker with a few dings on
his credit. He figured he would be able to buy in about a year or so,
and was willing to give me $5,000 as option consideration, and rent of
$800 a month. I had to take the option payments over time. $2,000
to get in; $500 in 30 days; plus $2,500 in 6 months. I said, Sure.
Lets get back to the sellers for a moment. I had determined that the
sellers were payment sensitive, and credit sensitive. That was why they
were willing to subsidize the payment. They were willing to basically
give me their house for their payoff, plus $5,000. That was the
equivalent of a purchase price of $85,000. This brings us to the third
form of cash flow.
Payday #3: Back-End Spread What I mean by Back-end spread is the
difference between my contract purchase price ($85,000), and the price
that I had sold it to my new buyer ($115,000), less the option
consideration to be paid by the new buyer. The reason I call this the
back end is because the money is paid to you when your new buyer
exercises his offer to purchase. You basically earn the spread
between the two contracts. Before I recap this deal, I want to talk
about the buyer. I had sold the property to them for the option
consideration of $5,000, paid over time, plus monthly payments of $800.
You may ask why would he pay so much to get into a house that he wasnt
sure he wanted to buy? The fact is, most buyers in his situation will
do almost anything to buy.
He was a former homeowner. He knew his credit situation would not allow
him to get better then an 80 percent loan to value in the near future,
which meant he needed at least $20,000 to get a loan. He didnt
have it, and he had to wait at least a year to get his credit scores
up. Besides, when I explained that I would give him a monthly credit of
$250 towards the down payment, from his rent payment, it made it a sure
thing. The $250 is known as a rent credit. With a monthly rent of $800,
I gave him $250/month back, deducted off the option purchase price in
the form of a credit. Not bad, huh? Once the buyer realized that he was
basically only paying $550/month in rent, and $250/month towards the
purchase price, it was a slam-dunk. Structuring a lease/purchase for
the buyer this way helps mitigate any concerns they may have about
paying a little higher rent payment.
We all know that the bulk of a typical mortgage payment (99 percent or
more) during the first few years goes to interest. Only a very small
percentage goes to principle. I just show them an amortization chart
vs. a rent credit for a lease purchase, where or a 1/3 of the payment
goes to principle reduction. Its easy. Finding the buyers, if you have
the right properties, just isnt that hard.
Now, lets review....
PAYDAY #1:
Monthly Payment Spread
Payment Out (Monthly) To Seller - $600
Payment In (Monthly) From Buyer $800
Monthly Cash Flow: $200 x 12 months = $2400
PAYDAY #2:
Front End Option Consideration
Option $ Collected from Buyer $5,000
(Paid in 3 Installments)
Option Payday = $5000
PAYDAY #3:
Back-End Spread
Purchase Price to Seller $85,000
Sale Price from Buyer $115,000
(less the $5,000 option consideration)
Rent Credit to Buyer ($200 x 12 mo.) $2,400
Back End Profit = $22,600
GRAND TOTAL (ADD UP ALL 3 PAYDAYS)
$30,000.00 PROFIT
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