Real Estate Investors

Investing in Lease Options

William Johnson

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Smashwords Edition

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Table of Contents

Copyright Notice

Disclaimers

Your Need For Legal And Tax Advice

Preface And Thank You Gift

Introduction to Lease Options

Types of Lease Option Deals

How to Find Motivated Sellers

Turning Seller Leads into Deals

Lease Option Escrow and Closing

Finding Buyers and Cashing Out

PREFACE AND THANK YOU GIFT

First, I want to thank you for your interest in this book. I am certain that if you read this book you will find at least a few nuggets for you to take with you as you begin to invest in lease options.

This book is your quick-start guide to building a business centered on creating profits with lease options property. You will learn the basics of the lease option process, building your team, finding motivated sellers, property walkthroughs, analyzing the deals, negotiating for the best profits, making offers, and closing the transactions smoothly.

With this book, my goal is to give you enough information to show you that there is money to be made with this investing approach. There are properties out there waiting to be discovered and repurposed. There are people out there waiting for something to happen with a property they don’t want. Learn the concepts I’m giving you and put these ideas into action.

Remember, I’m only focusing on the basics in this book. I want to give you a summary of what you need to succeed in this business, but it would take a lot more information to truly give you the complete picture of everything you could possibly run into when investing in lease options.

As my way of saying “thank you” for taking the time to read this ebook, I’d like to offer you the opportunity to download a complimentary copy of the audio version of the ebook which is available at…

www.FreeLeaseOptionCD.com

(Just input your email and the passcode “LOCD” to receive the digital download.)

Introduction to Lease Options

Welcome to Investing in Lease Options, where you're going to learn how to make money in real estate even if you have bad credit or no credit or no down payment or no experience or contacts in the real estate business.

You're going to learn how to find properties that are perfect for doing what we call lease option deals and you can create multiple profit centers from doing these.

You're going to learn how to market and advertise in order to find people who own homes that they're willing to sell.

Then you're going to find out how to get tenant-buyers contacting you wanting to buy those properties or lease them until they're able to buy them.

And then you're going to learn how to negotiate good terms for your lease in order to make sure that you're making money in the middle, doing things right, reducing your risk, reducing the liability that you have during the time that you're a landlord.

This isn't normal landlording where you go out and get a thirty year mortgage in your name using your credit and you manage normal tenants and experience those kinds of frustrations and hassles for thirty years and then you finally make money. No, you're dealing with tenant-buyers. We'll go into the benefits, but basically they have more invested and less risk for you.

You also don't need to fix up houses, worry about the financing, borrowing money from banks. You don't even own the property or have to own it doing lease option deals. You just need to control them. So you're going to learn how to do all of this and more. Let's go ahead and start by defining some terms.

What is a lease option?

A lease option deal is one where you find a property that you can make money from and then you control it through what's called a lease option agreement. You don't have to own the property. The property owner or the seller, the previous landlord or whoever, he can continue owning it. But this lease option agreement gives you the right to occupy this property and to purchase it at a price that you set in advance.

You have full use of the house and you can make money by finding the tenant-buyer, who then buys it from you later, once you've bought it from the seller. Or you can assign the lease option agreement that you have to some other investor and just get paid right now. If you structure it right, though, there are multiple profit centers, multiple ways to make money from just one property.

Now there is another way of structuring this deal that is especially helpful when discussing it or dealing with real estate agents: a lease purchase. This is a lease agreement combined with a purchase agreement where you commit to purchase the property within a certain period of time. The option agreement just gives you the option or the chance to buy, and that's a big difference compared to the purchase agreement, where you do agree to buy up front.

Suppose there's a property that's worth about $200,000 and you find a seller who's in a bit of a jam. Maybe they have some problem tenants or maybe the property needs $5,000 or $10,000 in minor repairs that they just don't have the money for. Let's say, for whatever reason, they're willing to sell it for $150,000, or $50,000 below market value for that property. You go ahead and sign a lease option agreement that says you have the right within the time period you set, which could be twelve months, twenty-four months, ten years, or whatever it is you negotiate. The agreement says you have the right to buy the property for that price, but if you don't, it's also not a big deal.

Now let's say you find a tenant-buyer who can't get a loan yet. They can't buy it at any price. But if they could only get a loan they wouldn't mind paying full market value for a house, right? Because that's what most people do. They pay full market value for homes. Most people are not investors like you and I. So you can sign a lease purchase agreement with them, saying that they have the right to lease the house from you and someday buy it within this time frame when they've cleaned up their credit and can get a loan for $200,000. You make the money that's in the middle. Or you might sell it to them for a little less than that because there are repairs to be done or whatever.

But the first way that you make money is by helping the lease option tenant eventually qualify for a loan and purchase that property, and you make the difference between what you sell it for and what the original seller agreed to sell it to you for.

The second way you make money is by asking that lease option buyer or that tenant who wants to buy it from you within twelve months or so, maybe twenty-four months, you ask them for a nonrefundable lease option deposit. That can be substantial as well—$5,000, $10,000. We'll get into the specifics of negotiating later on. But it's not uncommon to get $5,000, $6,000, $7,000 of nonrefundable money in your pocket and that goes towards the purchase price of the house if and when they buy. If they do, you just get that much less money at closing, but least you get some of it now and that covers your cash flow. It gives you the money to advertise and find more of these properties and grow your business or accomplish the goals that you have in mind or other personal projects—things that you want for your life, right? So it's better to have some cash now.

That's the second way that we profit from these deals: the non-refundable lease option deposit we collect up front from the tenant. If, heaven forbid, some day they don't buy the property, then they forfeit that and you can collect another one from the next person. It minimizes your risk, and it helps to cover carpet and paint and things that have to be done anyway and paid for out of pocket when a tenant moves out.

And the third way that you can make money from structuring a lease option deal is what the tenant pays you in rent during the time that you control the property. If the seller has a mortgage payment of $700 and he agrees to rent it to you for $700 or $750 or $800 or whatever, and then you agree to rent it to the tenant for $900, then you're making at least $100 a month, maybe $200 or $300. Then again, I've seen some people renting higher end homes for like $1,000 over the original rent and making that spread every single month. So that helps your cash flow as well, to structure it so that the rent money coming in is greater than the rent money coming out. And of course you want to negotiate that payment down as far as you can with the seller and up as far as you can with the buyer.

Types of Lease Option Deals

Now there are different kinds of lease option agreements that we're going to go into. I want to have you all prepared with a couple of different types of scenarios so that you can find the best way to make money in each one. You're going to be spending your time finding sellers and talking to them. This is going to help maximize your chance that you can do a deal when someone calls you, no matter what the unique situation is.

First of all, you're familiar with lease agreements. You may have signed one yourself. You may have been the landlord in a lease agreement. The way a lease works is where one person promises to make payments to the other for the right to use that property or live inside of it following certain conditions for a certain period of time.

There's also what we call an option agreement. An option agreement is a type of purchase contract to buy real estate, like the one you may have filled out when buying a home. However, an option agreement is different. It says this person, the buyer, wants to buy this property from the seller within a certain timeframe for this price. At any time, they can say, "Okay, I want to buy it now," and the seller has to sell it. The seller is bound to keep that agreement.

But you don't have the risk of a purchase contract that says you promise to buy this house within thirty days of whenever. And if you don't, then they can enforce that contract or even sue you for specific performance in order to get them to force you to buy it as you promised you would, right? So you don't want that kind of risk or liability.

In an option agreement, you make it very clear to the seller: I'm not promising to buy it. I want to have the right to do it; however, I do feel confident that I can find a way to make this deal work with the people that I know.

So here's a couple of different scenarios that you may find yourself in when you are generating leads of motivated sellers. The most common kind of lease option agreement is where you are right in the middle of the seller and the buyer, right, like a sandwich. We call it a sandwich lease option. There's someone who wants to sell their house because they're motivated. Maybe they inherited it. Maybe they had to move quickly because of divorce. Maybe they're in foreclosure. Or maybe it's a landlord that has some problem tenants and he's just not equipped to deal with the property, or maybe he even lives out of state. These kinds of scenarios happen all the time.

He's got a tenant in the property. He can't wait to get that tenant out. Maybe the tenant just moved out but left it in bad condition. All right, you help him out by telling him you're going to find someone to move in instead because they may want to sell. He may be looking for a new tenant, who knows. But either way you can help him out. By the way, get a one-page lease option agreement with the seller so it's all in one contract, in case you have a dispute, and you can show it to the judge.

When you find a lease option buyer to buy it from you, have a separate lease option agreement. If they ever fall behind in payments, just show the lease agreement to the judge. Don't even bring up the option because it's irrelevant. Your agreement should say that their option is forfeited if they stop making lease payments anyway, so you just want to treat them like a normal tenant should that ever happen.

Why would you find such a person who's willing to move into the property before they've been able to buy it and maybe even do some repairs to it? Why would a tenant do that? There are a lot of people out there who have bruised or bad credit. Sometimes it's their fault and they realize their mistakes and they've changed their ways, but it still takes years to rebuild good credit again. Other times, certain things weren't really within their control, like some surprise medical bills from an emergency that were so substantial that it maxed out all of their credit or caused a bankruptcy or something like that. These things happen.

So you find such a person who has bad credit for a reason that you can understand or who appears to be working on it. Maybe the mortgage broker or loan officer that you work with has looked at their credit report and can tell you, "Okay, they should be able to get a loan in six months, nine months, twelve months, maybe twenty-four months if they do this, this, this, and this." That's the kind of person you want on your team.

Then you work with that potential buyer, and you also know that they're more accountable and therefore more likely to do what they promised and buy the house and fix their credit if they give you that nonrefundable lease option deposit. And the bigger the deposit, the more likely it is that they're not going to completely walk away from it later on and forfeit it by not doing their part.

Again, after collecting some cash up front or maybe even getting monthly payments from the tenant-buyer, the main way you make money is when they get that loan. That's the goal for both of you. That's when you get the difference between the amount you agreed to pay the seller when you exercise your option and what you're selling it for yourself. This can be even larger if the property appreciates in value during the time that the tenant is there.

I know people who have lease-optioned the same property to several different tenants. Each one stayed a few years and had to move or whatever, for whatever reason. Something happened. They couldn't buy it after all, so they moved out. And they just kept doing this, trying their best to help the person get qualified for a mortgage loan. None of them bought it. Did it matter too much? No, because each year the value is going up and up and up and up.

I know a few people who lease-optioned their houses when the market was going up very quickly. At the same time, I was flipping houses and just cashing out. Well, some of those guys who waited a year or two before finally selling it to a lease option buyer, they made a lot more. Or the tenant-buyers didn't work out, but the properties were now worth $50,000 more than they used to. So you can make a lot more in this game. It has a lot of those benefits of being a landlord but without the hassles. So that is the basic sandwich lease option in a nutshell.

Now, normally if you were going to rent a house somewhere as a prospective tenant or an apartment, you would expect to have fresh paint and relatively new carpet, right? You would certainly expect nothing to be wrong with the house, such as broken windows or shutters or major things. But that's where lease option tenant-buyers are so much better than normal tenants that it's worth it again to be a landlord. Again, the reason is that they give you the nonrefundable deposit. They're more serious. They're more committed. They're quality people. They really want to own a home. They're not thinking about it someday, etc.

And they will pay more per month. Many of these folks make a lot of money. They just can't get a loan because they have bad credit. Sometimes, if they have their own entrepreneurial business, it's harder for them to get a loan. And sometimes, they have just short of the down payment that they need.

So, you get higher rents and you're going to need fewer repairs. The thing about most houses is they almost always need some kind of work, even it's just paint and touching up, before someone's ready to buy them. And the problem is that repairs cost money, and you have to come up with the money in order to make money later on. You may also have to make monthly payments while waiting for the work to be done, and those are your holding costs and that's not very good.

So rather than buying the property, get the right to buy it for nine months or twelve months with an option to purchase it. And if it's not yet habitable, meaning it's not in a condition where anyone would want to live in it, then try to negotiate better terms for yourself. Make a lower offer to the seller. Negotiate a lower monthly payment. Then find a tenant-buyer who's willing to do the work to make it habitable. But don't let them move in until they've done at least a certain amount of it.

And this works pretty well because often someone can't leave their current apartment or whatever until their lease expires at the end of the month. But they've got two or three weeks within that month where you could sign the agreement in advance and then they get to work fixing the doors or windows or anything like that. Or to do any work that they agree to do in advance because sometimes people are handy. Other times if it is habitable or once it is, there's other work that you can agree for them to do between now and the time that they exercise the purchase option with you.

So that's all negotiable as well. Can they pay you a lower nonrefundable security deposit? Sure, why not? Either way, they're investing in the profitability of your deal and of that property. And as long as they can show you that they're doing all the work themselves and it's for materials, then you can take the material cost off of what they would normally pay. And you can expect to have a lower nonrefundable deposit if they're doing the work because it's a kind of give and take. But also make sure how good they are at getting it done. Otherwise you can just collect as much of a security deposit as you can from them and then hire your own subcontractors to go in and do the work. And that's where the money comes from to do the repairs needed. And then if they move out, at least the property's in better condition again.

Now here's another idea. Suppose that you don't feel like being in the middle of this property and in a sandwich lease agreement for the next couple of years. Let's suppose you just want to get some cash now. Suppose that's not an area of town that you want to deal with, but you know somebody who would want that particular property, right? Because every investor picks and chooses their own investing style. Well, let's find one that you just want to make money on quick and get out of it. You can assign your rights to a deal that you put together to someone else, like another investor. They pay you some cash up front to be in your shoes and then they go on to make the difference between whatever the property sells for and what you agree to buy it for.

So if you've heard of wholesaling before, in many states you can assign a purchase agreement to someone else who then buys it instead of you, you can do the same thing with a lease option agreement. You should probably disclose it to the seller. Also, check the laws in your state to see if this is too close to being an agent or a facilitator rather than as a principal. You want to look into that.

But basically that's a way to get some extra money because sometimes you can only get $5,000 in nonrefundable security deposits for a certain property based on its price, the part of town, etc. Well, what if you could make $10,000 by asking some landlord to give that money to you up front? Then you jump in, and then bam! Now he is in the middle of this deal with only $10,000 invested, which is great compared to what he might have had to invest in a down payment to buy a property the traditional way.

And, lastly, there's a type of option that's called a straight option. It's just straight up. No leasing involved. It's very simple. You have an option agreement but no lease agreement signed with the seller saying you have the right to buy the property within some period of time for some price and the seller has to honor it. And if you don't, then you lose nothing or whatever the deposit is you made to get into that agreement with the seller which, by the way, should never need to be more than $500. I usually do $10 to be honest. Or $100. But even that's a note to be paid at the time of closing. If they're motivated sellers, they don't really care about that. Present yourself well and show that the odds are high that you will find the right kind of person to make this work. I never lie to a seller. It's just not necessary to do. You may lose some deals because of it, but you'll also lose a lot of problems that can come as a result of it.

So with the straight option, you could get the right to buy a property at some kind of discount and then you could assign that to someone else and make money off of that, another investor, pretty much wholesaling your option agreement. You could find a tenant-buyer, but you're not going to do that in this case. You could put it right back on the market, even listing it yourself with an agent, and get it sold. And that's when you exercise your option agreement to buy.

So there's another way to make money from it as well, if you only plan on doing something in the short term. Perhaps the seller will tell you, "I don't want to be a landlord anymore. Not even with one of your awesome tenant-buyers that you're going to find. I just want to be out of this thing." And you say, "Well, how long can you wait?" And if they say "six months," then great. You lose nothing by putting it on the market and trying to find a retail buyer during that time and maybe even make the big profits now without even having to wait twelve or twenty-four months for a tenant-buyer to qualify.

How to Find Motivated Sellers

So now we want to look at how to find the sellers in the first place. We're going to cover the whole process of doing a lease option deal starting with marketing to find the seller.

You want to have as many motivated sellers calling you as possible. The reason is if they're not motivated then they're going to want full market value for their house and they're going to want payment in full right now within thirty days, right? That's the way it is when most people sell their house.

Sometimes there's a situation or a scenario going on where a person is more motivated and is therefore more flexible and you can ask them for a reduced price and often the time to qualify. And even though that's not as good as some magically qualified buyer who loves the house appearing out of nowhere, which as you may know is difficult to find sometimes when you're trying to sell to a retail buyer, it's not as good as that for them but it is better than what they have.

And what they have is either a problem tenant or a vacant property. They're trying to find a tenant. They just got rid of a bad one and they're afraid that it's going to happen again. Or maybe it's just a motivated seller who is going to lose their home or is about to ruin their credit and they just want to walk away and make sure the situation doesn't get any worse. People get into that situation and they're thinking, "I don't care. I just want out of this stress." We make decisions based on emotion, and not everyone's trying to maximize what they make every single time they sell a property.

Basically your ways of finding deals are through people, through outbound contacting, and through my favorite, inbound contacting, where they call you or they get in touch with you. The first one, through people, is networking in general. You obviously want to tell everyone that you know that you're a real estate investor and that you are looking for houses that you can buy through lease purchase or making a cash offer. You want people to know how you help people out of flexible situations.

Tell everybody what you do. Get some business cards made. It doesn't have to be anything fancy. Just your name, what you do, and the main benefit that you offer. And that's a fast sale where maybe the cash out isn't fast, but it's a hassle free sale. They can pretty much walk away from a problem, get help in a bad situation, etc. Tell people what you're looking for and use the back side of the card as well. I used to have a card that listed all of the bullets of the different situations someone could be in: inherited property, divorce, behind on payments, fire damage, and all kinds of things. And that tells people exactly what you're looking for.

You can also work through real estate brokers who, of course, have the multiple listing service (MLS) at their disposal to scan for deals each and every day. And that's pretty cool because that alerts you to more properties that are for sale than you would think. Sometimes sellers are approachable. The problem is if you're working with a buyer's agent, not only does he have to understand the kind of deal you're doing, but the seller's agent has to be educated as well, and that can be tough. However, you can contact the selling agent directly and propose the idea to them and sometimes that happens. You just have to find a way to make it worth the while of the real estate broker, which is often hard to do. It really is.

However, just by knowing real estate brokers in general, you can get their pocket listings. These are listings that never even hit the MLS because they just contact people they know and it's instantly bought without having to go through the trouble of going out there and putting the sign up and do all that work. You want to be that go-to guy.

So talk to everyone you know and let them know what you do. You will find some through people. You can even offer bird dog fees and things of that nature if they help you find one. Just help the legality on that and test it yourself to see if that motivates people. Sometimes they just tell you because that's what people do. They send business to and from each other.

The next way is outbound marketing. Now some of this can be done to the same people that you'll do inbound marketing with. There are obviously different types of scenarios out there that would motivate someone. There's a list you can get of each of those, if it's not already being compiled somewhere, that you can just buy, then you can do it yourself on your computer or pay someone to do it pretty inexpensively.

So these would be for-sale-by-owner properties. These are owned by people who have an ad listed trying to sell their home themselves. It's hard to do. You don't always make that much money yourself. You don't get as much exposure as the MLS. Sometimes they're a little more motivated. Foreclosures. Burned-out landlords. Landlords going through the eviction process who filed for an unlawful detainer or whatever it's called in your state when they've begun the evictions process.

Even junky houses. Driving around, looking around, do you see any houses in your city or your county that have broken windows? Vacant? Maybe the door is broken. Fire damaged. The grass is three feet high, six feet high. Junky cars. Roof problems. Broken tree. You know, anything that shows that something is going wrong here. That is a more likely person to be motivated than Joe Schmo in a nice cookie-cutter neighborhood with his well-maintained property.

So make a list of those addresses as you go. You can find out through the tax records, which are either online or at the courthouse. You can make the occasional trip to the courthouse and find out who the tax records or the tax bill is being sent to. It'll often show their name and address. You can find out people's phone numbers using 411.com or white pages and other Internet search sites. I mean, sometimes it's out there. Sometimes it's not.

So why am I telling you all this? The point is to build different lists of different types of motivated sellers that you want to contact. And then the choice is up to you whether to send them mail or make phone calls or both. This is outbound marketing, making phone calls. I have called people in foreclosure before. I have knocked on doors of people in foreclosure before. You can do the same thing. Check the newspaper. Check the legal section for all the trustee sales. Find out when they are. Look up the property. Find out the owner's name or just go knock on the property door and ask for the person.

I did that five weeks in a row for about two or three hours once a week. So every Thursday night I'd go out and knock on ten…was it ten doors? Maybe five or ten doors a night. It took a while to go from one to another, but only one or two in ten don't even open the door. But the last house I knocked on, he was like, "C'mon on in. C'mon on in. Let's talk about this." I was about to give up. So if you're going to try knocking on doors, knock on at least thirty. I would say at least fifty. I got lucky. And you just have to ask yourself, is it worth however much time and gas I'm spending to do one of these deals? If it is, go for it. If it's not, just call them on the phone or maybe pay someone to knock on doors for you. It's a little more advanced.

You can make phone calls by getting phone numbers using services out there and then calling them up. If it's a FSBO ad (a for-sale-by-owner ad), then you bet they're giving their number out. You call them and talk to them and ask, "Why are you moving or why do you want to sell it?" Find this out from them and then you can gauge whether they're motivated or not. You can always ask, "Would you consider the possibility of leasing the house to me until I'm able to buy it from you?" And test the waters with that.

This involves some time and the vast majority of them are not interested. And so it can be a lot of no's, a lot of resistance. You might think it doesn't work. If you're going to do this, honestly, commit to doing it a hundred times or more. A lot of investors have cut their teeth doing this. But it can be unnecessarily scary or out of people's comfort zones. So if you're not really feeling that, then you can try just sending people mail.

I have hired someone in the past to call people in foreclosure because they probably don't want to talk to anyone, you know. They're probably hiding their heads in the sand like a camel. They're just trying to get away from people contacting them. They might think you're another bad guy, another bill collector, their mortgage company again. So they can say things like, "We've got it handled," and you need to have responses for them.

So I did that for a while myself, but then I paid someone around $15 an hour to call every single person in foreclosure at least three times each—at least attempt to call them three times each. It probably took her twenty hours a month. So I spent $400 or $500, but we got one deal out of it, where we made $10,000.

So that's something else to keep in mind. All of these things I'm teaching you, some of it might be your style, some of it might not. But pretty much all of it can be delegated to someone else and once you test something out for yourself, you don't want to be the one implementing it over and over and over and over and over again. So do it yourself for a while. Then once you've got it down pat and you found out that it works, hand it over to somebody else.

Now about inbound marketing. This is when you do something to get the attention of someone with a house for sale and get them to respond in some way and contact you instead of you calling people, "Surprise, surprise. Here I am on the phone." It's a different kind of situation. If someone actually picks up the phone and calls you, then they have at least raised their hand and shown that they're at least somewhat interested, right? So you can avoid having to talk to people and spending the time and emotional energy on folks who aren't even the least bit interested. That's the way to go. It's easier to do. You always want to give them a way to respond by phone or filling out a form on your website if you have one.

Now the most common way to do this—and it is effective—is to send mailers to these various types of sellers that you found out there. You can get lists of property owners. There are websites out there: ListSource or Melissa Data, to name a few. Test different ones and see which ones work the best or have the best word of mouth, or make your own lists. Like I said, drive around and make lists of junkers, for sale by owners, foreclosures, landlords, etc.

Probate properties is a whole other topic. We've got a book on that as well. Basically, once you have your list, then you have a mailer sent to them. You can send a letter or you can send a postcard. Test different ones and see what works. Maybe a hundred of one and a hundred of the other. Keep it super simple in the beginning.

To be honest, the key is to just keep repeating something over and over to your lists. Because we use a kind of marketing that doesn't just send it to them once. You want to have each person on the list getting mail for a period of time, months, maybe a year, maybe more. Maybe you can send one mailer per month every three months. Use some kind of system with multiple steps because people may need to see something of yours five times, six times, seven times before they finally respond. And so you want to maximize your chance that they will respond.

Plus, the little bit more that you spend compared to increasing the odds that you do a deal and make thousands of dollars, it's totally worth it. You can include phone calls in addition to your mailers if you want to increase your odds of getting through to them even more. You can also run ads online, not just offline. It's like sending them mailers. There are Internet marketing places where you can run ads.

First, we'll start with classified ad sites like Craigslist. It's free to go in there and announce, "I'm looking for houses" in the real estate section, services section, various places. Let people know your main benefit, what you do, what you're offering to people who want your help, and how to call you.

It's very easy to get in and write one of those ads and let it run for three days and then come back and renew it. It takes literally ten seconds to renew and then it runs for three more days. Or to make sure it's always showing, you could have three different messages that you're renewing. So you run number one today, number two tomorrow, and number three the day after. And then you renew number one and then number two and then number three, so that every day at least one of your ads is always running on that day. That's a great way to always have an ad up, and it only takes a couple of minutes per month to do it. Once you run your first one, it gets written, three ads, it's pretty simple. And maybe you'll get some calls from it, or maybe you won't. You might get a lot of calls, or you might not. But it doesn't take much time to do, so you don't risk much by doing so.

Another thing you can do is run banner ads. There are places where you can just pay to have banner ads that you create running on any website you want pretty much that has ad networks on it, on Facebook, on mobile phones, etc. So I won't get into that too much, but the rules of that are you also want to use multi-step marketing. So you're getting your ads out there, but then you have to find a way to get back in touch with them either by having your ad keep appearing to the same people, which is called retargeting, or by getting them to enter their e-mail information, or maybe they reply as a lead and you talk to them and they're not interested. Well, you can still start sending them mail at that point, or you can offer them a report and offer to mail it to them, or you can get their phone number and then call them to follow up on the report.

So there are other ways to do it, but direct mail's been a great winner for a long time, as has working with people. There are just different methods, and some are immediate and some are long term. But I want to challenge you all right now to pick three of these to do right now, three of these ways to implement, and make sure that you contact them seven times or more each.

And if you do that for three months straight, six months straight, it might not be till month six, but if you contact enough people, you'll start doing deals. You'll see maybe one out of ten calls will be to or from motivated sellers. Don't take too much time with people who aren't. Try to get off that call in five or ten minutes if this is the case. But you'll see for yourself how many people who call and how many of those are motivated and how many deals you can close out of those motivated sellers who call in response to these different lead generation methods you've just learned.

Turning Seller Leads into Deals

Now what happens once you get the seller on the phone that you're trying to work a deal with? The first thing you want is to get the key information from them. What is the story? What's going on in their life? Are they motivated or not?

I'll generally say, "Hello," and some introductory things to make some quick rapport, such as who I am, where I'm calling from, etc. Then I ask them to tell me about the house, and that gets people started and prepares them for future questions. This way, you can learn some facts and details about the property that'll be important and you would have asked later so you don't have to re-ask it over and over as a series of questions. Say, "Okay, great. It sounds like a wonderful house. Why would you want to sell it?" Unless you know why because they're on a certain list and you already know why they would probably be motivated. Then offer to help them out.

You want to find out what the property would appraise for. You want to find out what they're asking for the property, or the least they could accept in order to sell the house. And you want to find out if they have to have all of their proceeds from the sale now or can they wait for them until later if we can solve the situation quickly. If they say, "Yes, I can wait until later," then it's just a question of how much or how long will your option agreement be.

You want to find out what they owe on the property and any repairs that are needed—that's basically the most important information to get. Maybe bedrooms, bathrooms, the address, etc. But get as much other information as you can on the phone and then explain to them how a lease option works. And you want to pre-negotiate before you inspect the property. That means you want to get a feel for whether they're motivated now, but also that you want to come see the house and then make a firm and specific offer. You want to make sure that everyone who actually owns the property is going to be there at that time.

So that's your goal from there. Once you've found out that they're motivated, then you want some time to do your due diligence. It may take a couple of hours, maybe a few days, but then schedule an appointment to come see the property as soon as you can get out there. We'll cover more about what to do when you get there. But for now, they're on the phone. If they seem motivated and it seems like they would be amenable to waiting for their payment until later, then you do want to set an appointment with them.

Some people make money with lease options buying it for market value because sometimes the seller is maxed out and they owe market value. They just want out. There is still money to be made because of the $10,000 nonrefundable lease option deposit you could get. Some landlords might do it. Who knows? In a rapidly rising market you exercise the option. You find a retail buyer. These things do happen. But for the most part, their willingness to wait and willingness to discount are what's important, and you have to sense that for yourself.

Once you're there, have a business card with you. Ask them to take you for a walk-through. Don't intentionally pooh-pooh any of the things that need work because they might expect you and be on their guard to do that, but just note everything that needs work and ask questions about it and make a list for yourself.

Estimate what the repairs will be. Basically, for paint and carpet, you can usually allow $5,000 on a small house and $10,000 on a big one. For special things like roofs, $3,000 to $5,000 or more. Look outside. If it needs new landscaping, just figure $1,000. Basically, you'll get a better feel, but it's almost always in blocks of $5,000, $10,000, $15,000 of repairs needed. You can kind of guesstimate as you go. You don't have to be too exact because it's just an option to buy it.

Then you're going to want to start negotiating a specific offer that you make to them and have the agreements ready to sign. And that's why it's important that everyone be there. Worst case, they give you access to the property, you do the walk-through, and you fax them or e-mail them the agreements to send back to you.

Now you don't want to start seriously negotiating until you're already at the house and you've seen all the repairs and you have the information you need in order to formulate an offer. Plus, psychologically, they're ready. If they're motivated, they're ready to sign something that day. I mean, everyone gets kind of scared at the idea of contracts and paperwork. But they're there to sign something. So this is the point where you don't needlessly argue or scare them away too soon. You wait until now, good leverage time to negotiate, because then they're just more ready to go.

Before we get into the different things that you should keep in mind and try to negotiate on, each of which can save you a lot of money or make you a lot of money, just remember the benefits to them out of all of this. This is what gives you the gall or the courage, you know, to ask for these things. They're getting a higher selling price for their property than they would if they sold it for all cash. People who pay all cash for property, they can close quick but they always have to have that low price, lower than anyone else. They get relieved from their landlording headaches. They don't have to deal with a normal tenant anymore. They get to deal with you. Their mortgage payments are covered once you get the right person in there. Those payments will be coming in again.

If you've ever been in a situation where you're making the payment on a property because you can't find a tenant, then you know what it's like to be them and they want out of that very quickly. A lot of people can't afford to keep making two mortgage payments a month or whatever.

Also, the property is maintained for them. They're still the owners. They're still liable. But you have an agreement in place where you agree to do that, right, and that's very valuable. Very valuable. And if they've owned it less than two years, they may get some tax benefits from it as well because of long term capital gains. Check with the appropriate professional in your state.

So the thing you want to negotiate with them first and foremost is the price of the property. You find that out on the first call. What would you like, or what are you asking for the property, or what is the least you would accept? They'll tell you that. Does what they say mean that is what it is? Absolutely not. Just because they told you that on the phone, does that mean you can't ask for less later? No. You were just asking them what their asking price was.

So try to get a reduced purchase price. Point out the repairs. Point out how it's going to be difficult. My suggestion is to negotiate price first because that is where you make the most. I mean, $1,000 off, that's $1,000. $10,000 off, that's $10,000. It's all just words and it's the most leverage pretty much. Then worry about timeframes, rent payments, what you need to give them up front, and so on. So take care of that first.

You can always suggest they lower it, or they tell you what it is and you can just say, "You know what, I'm sorry the numbers just don't work. Can you do any better than that?" You know, "What's the least you would accept? What's your more …" If you know what they owe then you can just say, "Look, are you just trying to get out from under this?" Find out the specific need that they have for cash. Use a very specific amount. Let's say they're $2,000 behind in mortgage payments and they need $1,000 in order to move out and get into a new place.

Well, guess what? You could offer them $3,000 in cash. Solve their problem. You know that's what they need, right? That's other information to keep in mind, and that's something you find out on the phone. So reduce the purchase price and then go further down the option agreement or get into the lease agreement and talk about the monthly rent.

Are they trying to make money every month? Usually not. Usually they don't care about the $100 or $200 a month they might make between what's coming in and what's going out. They usually just want to make sure that their payment is covered and they don't have to worry about it. So that's what I would offer to do. If they start saying, "Well, why not more," later you can get into the reasons. Say, "Because it's often difficult to find a tenant who will pay more than that. I don't want to take that risk. And you probably don't want to take risks either. So how about we eliminate the biggest risk of all and that's this enormous mortgage payment every single month that you're having to make out of pocket. I can at least take care of that for you."

And then move on. Find out other things like how much money they have to have up front to make the deal work. And, like I said, you can find out what that is. Try to keep that as low as possible. Where does that money come from? It comes from your tenant-buyer once you've found him or her. Or let's say they have to have that money in hand pretty soon. Some people have used credit cards or whatever to get into the agreement, but I would not suggest doing that. I'd say the faster you can find a tenant-buyer, have them wait until then to get it and just give them some kind of option deposit in the meantime of like $100 or less.

One other thing that you'll want to negotiate is the length of your lease and option agreements. Now you never want to go more than twelve months at a time for the lease agreement. But what you can do is have annual renewals for five or even ten years, but they're at your option. Basically, if the market turns down sharply, you need to be able to get out with proper notice. So you want to keep the lease and the option agreement concurrent for the same length of time (and for simplicity) and try to make that as long as you can starting with twelve months and adding as many options to extend as the seller will allow.

And, by the way, it's easier to say, "This is my offer," and go from there than to ask them, "How many months or how many years are you willing to do this agreement for?" So basically you design an offer and say, "I've run through the numbers and this is what I can do." And you can err a little bit on your side, right, knowing that if you have to come up, you can. You can always start low and then work your way up if they balk. And sometimes they don't and it'll surprise you.

Or you can present them with different scenarios. One is going to give them more money now. Another scenario is where they make more per month. And another scenario they make more when the house finally sells. I like to reward people by waiting because cash is key and you don't want to spend too much up front. So keep all that in mind when delivering an offer or making multiple offers to the motivated sellers you're talking with.

Lease Option Escrow and Closing

Once you've got the paperwork signed at the seller's house, or you've gotten it back through e-mail or fax, you've got the most important paperwork done and that's what gets the whole machine rolling. That's the option agreement and the lease agreement, or you can put them in the same document: the lease option agreement.

Then there's a closing that's got to happen at a title company, where things are put in escrow. There's additional paperwork to be signed. This would be the time to bring it up. Say, "Okay, great. I'm going to send this in to the escrow company. Get everything set up there." Why does this have to happen? Well, one reason is they might want the assurance that payments are going through them to you, and they want their payment coming through a title company so they have the assurance that they're going to get paid.

The other reason is that you want to have all of the documents they need to sign in order to sell the house to you, you want to have them already signed when you go into this thing, and held in escrow. Just picture them being frozen or filed away never to be recorded and actually executed until the day comes when you fulfill your agreement to the seller, because you don't want to have to worry about them backing out later on.

Now some people have not done this and then they found a tenant-buyer and they got him qualified and twenty-four months later they're ready to buy and make a huge profit and the seller says, "You know what? I changed my mind. I don't feel like it anymore. I'm just not going to show up and sign the deed over to you and finally transfer the property." Can you believe that? It's a crazy world. You want to prevent that from happening because once you've solved people's problems, often their personality changes and they do crazy things that you wouldn't have thought that they were capable of.

So get these signed in advance at a title company or an attorney's office, and they will be held and you will have the assurance. By this I'm talking about a warranty deed of trust. And if there's any kind of carry-back financing, then you'll need a note and deed of trust. And they can hold these and other documents in escrow for several years or until you negotiate that they've sold the house to you and those are the documents that you sign. That's how you want that to look.

So you definitely want to protect your interest as well. Go ahead and record the option agreement that you have with the seller. You can record it in the courthouse. It will cloud the title so that they can't sell it in the meantime, even if something's held in escrow that's not public record. They could illegally sell it to someone else even though they've already sold it to you.

You want to put the deed in escrow. Record the mortgage if there is one. And verify that the seller's paying the mortgage if you suspect…well, always do it. Call the mortgage company up and verify that they're not behind in payments. Sometimes they are and they think that they're not. If the seller's going to continue making the mortgage payment, you want to check in with them from time to time and make sure that they are actually making that payment and not just keeping the money. I would send the payment directly to their mortgage company. Let them call and check and verify that it's being paid every month.

So doing it this way is kind of like a compromise, where on the other hand a lot of people—a lot of investors—say, "Well, I would never get involved with a property that I didn't actually own. I want the deed. I have to have the deed to the property recorded and in my name." And that turns off some sellers. And sometimes there's a deal that you could have, and you otherwise wouldn't, where they know that a third party, one that's not working for either one of them (like a title company), is working to enforce your agreements. They want to have that assurance that someone else is going to make sure this all goes down properly. And once you have that paperwork signed, then there's not much the seller can do to thwart things afterward.

Now whenever someone deeds a property to someone else, they sign a new warranty deed to you or your company name, as it ought to be. You don't ever want to set up deals in your own name. Get an entity. Maybe use your own name the first couple of times, but it's very risky. You'll want to talk to a tax professional or an attorney about that, and find out your options for getting that entity set up as quickly as you can.

Well, let's say a property's transferred into your name. Even if it's not recorded, technically it is in violation of a clause that is in the mortgage that says if the seller transfers ownership then the mortgage company could start foreclosure proceedings in order to get the property back. Now it's not illegal to do this. It's just cause and effect. There's if, then, and the consequences.

Now if the payments are coming into the mortgage company, do they care and do they even know if the deed is being held in escrow? No, they don't. If they see what's recorded in the courthouse, you know, I have never seen a mortgage company intentionally do anything as long as payments are coming in. So keep that in mind. This is something that I've asked an attorney about before and he said, "It's not illegal. Just do not lie. You know, always tell the truth to everyone. If they ask you, 'Do you own the property? There was a deed signed?' say yes." But you wouldn't even be having that conversation if payments come in. But if it ever does come up, then just answer with the truth.

That's true with tax issues as well. You want to find out what those are for yourself. If you're just assigning these, you'll probably be paying short-term taxes on it. The entity you use can determine how you're taxed.

And ask if it matters whether your sandwich deal ends and cashes you out in two years or more, or less than two years. The seller will have tax ramifications as well. Let them know what those are going to be. Basically, if it's been their personal residence, they'll be taxed differently than if it was a rental property. Also, the lease option deposits that you collect, by the way, are not taxable until they've either exercised or forfeited their option. So it's nice to have some tax-deferred cash coming in.

Finding Buyers and Cashing Out

Let's move on to the final part of the lease option fast start process, and that is advertising to find tenant-buyers. Get them calling you on the phone, screen them, sign the agreement with the right tenant, collect the deposit, and help them improve their credit and eventually buy the house from you.

Now the best way to get people calling you in the first place would be online classified sites like Craigslist and other sites that are meant to show homes for rent. And you can write lease purchase, etc., or sometimes it works better to put it in the "for sale by owner" section, or sometimes the "for rent" section because people might not think they can qualify so they're already looking in the "for rent" section. Go to a website called Postlets and it will announce this online on five to ten different websites for you just by filling in all the information once.

You can also run newspaper ads in the classified section of your newspaper. That will get it on their website and the print newspapers as well. You can put flyers in the newspaper boxes of the homes in the same neighborhood or area as yours because some people want to have their own friend living down the street from them. You can send mailers as well. And some people hang up signs in the yards and on corners—not in the other yards but, you know, the yard of the house. And then throughout the surrounding neighborhoods, maybe hang thirty signs, which lets people know that there's an available home nearby. There are also rental services, referrals, or word of mouth. Mortgage brokers can spread the word if they know someone that they're working with.

Now, you can have tenant-buyers contact you on the phone or by e-mail. They can go to your website and fill out a form. Or you can have them call and they get a recorded voice mail message. Some people have multiple properties they're looking for buyers for, and so it's press one for this property, press two for this property, etc. You can set that up however you want. I suggest giving them as much information as possible on your website or in the voice mail message so you don't have to keep repeating the same information over and over again.

And don't meet tenants one on one. Do an open house. So run these ads every day for two or three weeks. Tell everyone you're having the open house and come on and see it on that day. Everyone shows up. It's a little more competitive. People offer to pay more up front or per month than they might otherwise, and it saves you a lot of time. This is where you pick the best person when that's all done. Take their application and ask them for their deposit or at least an application fee, and they commit to putting up the rest of the deposit at the closing. Then run credit checks on everyone. Find out the fair housing rules and implement those.

Now what I used to do is take a small portion of their option deposit and label that amount on the lease agreement as the security deposit in order to validate the lease. To be legally binding, a lease agreement has to have a security deposit. But if you say that it is $5,000 or whatever, you have to give that back to them. If it's going to be what they're advancing towards the purchase of the property, then that's different. That's like a down payment in advance. That's the nonrefundable option deposit, and you'll want to label that differently.

The agreements that they sign, I would get done in a title company because there's thousands of dollars being transferred here. You might have to pay a couple hundred bucks to an attorney for their time or the title company's time, but it protects you to meet in there and it helps the tenant-buyer feel more comfortable as well. This is where they're going to sign a lease agreement and the purchase option agreement, or the agreement to purchase the property from you, as well as any other forms that might be needed at this time just for the rental agreement to be legitimate, like the lead-based paint disclosure form, and if your state requires you to have them sign any other forms at this time, that's when they'd do it.

They will sign a security deposit agreement outlining they understand that they don't get this back. They understand that if they don't qualify even despite their best attempts, then they forfeit that. But they should be confident and committed that they will be able to do that and follow the improvement process.

And this is where you can go over the final particulars.

Have a short lease agreement. Don't have it needlessly long, but know when the renewal periods are. Confirm it with them. Any other disclosures, watch what you say in there. Make sure they can't sublease it or sublease-option it to anyone else. Negotiate any rent credits at this time. Sometimes they'll pay more per month if they know it's going towards the purchase price of the house. So you might be paying the seller $700 and you charge them $1,000, they might pay $1,100 if you apply $100 more towards the purchase price.

Why would someone pay more for no real return? I don't know. Some people do. You can always just negotiate a higher rent payment in general and offer everyone a rent credit. Because it all comes out of your eventual profit anyway. And plus, they may not end up buying it, but at least you got higher payments along the way.

And one last tip, too, is don't give them a key to the house until you get cash or certified funds. They need to have delivered that to the title company, and you get proof that they did that and that they signed the paperwork. And then—and only then—give them the key to the property.

And once that's done, you put on your property manager hat and make the occasional follow-up call to make sure they're progressing well toward their goals that have been set with the mortgage broker that you recommended to them. They might have their own, but the odds are they didn't even know they needed a loan, or they didn't even know they could get a loan, and your guy found out it is possible.

So have them make whatever changes are necessary for their credit. It might be to get an extra car and make payments on it. It might be to pay off something that's behind. Get something removed from their credit report. Establish more income or for a longer period of time. Change their debt-to-credit ratio and so on. Make sure they're doing those things and not going out and buying brand new SUVs and getting deeper in debt, which ruins their chance of buying the house from you later on, while your payday keeps getting pushed further and further back.

You want to reduce the amount of landlording that you do to as little as possible. There's no need to overcomplicate things. You'll find that tenant-buyers want to be owners. They act like owners. Owners don't need people calling them and asking them about their property. Same thing with you. It doesn't take as much work.

Having said that, sometimes people still trash the place, make a big mess, fall behind in payments, etc. But you have the security of the lease option deposit and it just happens less frequently. You want to be a firm property manager, though. If something falls behind, follow up on it right away. You don't have to be rude, but tell them you expect that payment. You need them to do what's necessary and find out what they're going to do about it and when.

Also, if the tenant wants to leave early then just go ahead and do the final walkthrough with them and let them go. If possible, try to get some more time to do it, and if you can't, then at least you're covered. Sometimes tenants don't want to leave when the time comes and you can file for eviction. I've seen that resolved with just getting the notice in the mail, you know. A lot of them take you seriously.

Worst case, though, if they're going to fight it and it's going to be like five or six months, you can always bribe the tenant to leave with whatever amount of money it's going to take. I know it sucks paying someone who's being a jerk, but if you're going to spend the money anyway in the court then make it a business decision to get them out sooner so that you get paid sooner. Regardless, you want to make sure that they vacate properly and that you reconcile the security deposit while staying within the bounds of your local landlord-tenant rules.

So now you know the lease option fast start process. And on behalf of REIClub.com, I hope you have enjoyed this overview of how to find the deals, find the buyers, and make money on the side or as a career by doing lease option deals. I wish you the best of success. Remember to do three things starting right away to begin looking for new deals. Happy hunting and good luck to you.