I’d like all of your opinions on doing Lease Options (buying side) in nice, well-kept areas. Some people recommend it, and others don’t.
If you have the owner put the deed in escrow (do you set this up with the title company?) … what are the real risks? And does doing this prevent the seller from putting liens on the property?
agkatz,
See if this stands to reason. If you do not have the Deed in your name to the property then anything that happens to the owner (Lessor) in the case of a Lease Option, such as a Lien or any type of Encumbrance then these will attach to the Sellers property.
If you as the (Leasee) want to tell the IRS that they cannot place a Lien on the property because you have a Lease/Option, you can probably guess the outcome of this senerio. If the Seller borrows against the property let’s say using a HELOC loan, how would you stop them.
You can record anyting you want to but, until you file the Deed, you are not the owner of record. To say, well the owner has to pay off any Liens or Encumbrances, Seconds, etc., would be a pipe dream if your seller is broke or not willing to.
You will have in turn found a Tenant/Buyer who will be looking to you to give them clear title, so would you pay off the Liens or Encumbrances to fulfill you commitment to your Tenant Buyers? You will also find out that Tenant/Buyers rarely purchase the property, then the time will come when you must either purchase the property or give it back to the owner.
Most people who start out doing Lease Options, quickly find out how easy it is to get the deed, not that Subject To investing does not have a few obsticles, however you will find the rewards far out weigh the risks.
Having not done Lease Options, the reasons I have given are why I haven’t, it makes sense to me.
John $Cash$ Locke
I should have qualified my question
Suppose you’re dealing with a seller who owns the house free and clear, and he isn’t interested in letting you take the house Sub.2?
Could you have him put the house in a land trust, with an attorney as trustee to prevent the drawbacks you’ve described?
Thanks for your input,
Adam.
agkatz,
Just about the same senerio, even though the Attorney is the Trustee, unless the Land Trust prevents any type of attachments then the owner will still be held liable.
Every State has different State Statues regarding Trusts, so unless I knew what the Statutes were in your State, then I would only be guessing if this would prevent Liens and Encumbrances from attaching.
My advice to someone looking for assest protection is form a Family Limited Partnership with different entities under the Partnership, such as Land Trust, LLC’s, etc., structured properly the General Partner of the Partnership would only be liable for 1% of any attachments. I doubt your seller would be willing to go to this extent, so.
The next best thing would be to have the seller hold a Trust Deed (Mortgage) on the property and have you put on the Warranty Deed. Then at any time you want to refiance or sell under a Contract I would make sure the Trust Deed is assumable and their was no Pre Payment clauses in your Trust Deed with the seller.
If you are looking to sell the property with you holding the financing and there is a Due on Sale clause, be assured the Seller will call the note due if he gets a whiff of this.
I am second guessing here as to what you are trying to accomplish by buying the property, am I close, if not put me on base.
John $Cash$ Locke
First, understand I have never bought by way of a L/O… But, if I were I would do it different than most… I buy more than my share of houses subject to…
So, Could you protect yourself… ??
To a point…
When would you use them…
When you you don’t want any liability… but, strangely enough… it opens you up for more liability in other areas… At least in my mind…
Like your ability to perform… What if the seller gets greedy… What if the title company doesn’t recognized the option… or memorandum thereof…
Another reason might be if your afraid of going all the way… committing to the deal… maybe you just want to kiss the girls but, are afraid to make them cry…
I would require the seller to put the property into a trust… To keep him from either incumbering it further… or putting liens on it…
Now, if you talk them into that you could buy it subject to…
If I were going to buy on L/O’s I would do it this way… I would treat it as a flip…
I would tie the property as long as possible… like normal… for their payment amount… or a healthy rent credit if they had equity… I would want to know the underlying balance…
I would then find a tenant buyer and get my profit… in cash (option monies) and my cashflow in the form of a note(problem, no security) and let their payment be the same as my payment.
I would then sell the deal back to my seller or another investor for more profit… I would have liability protections (deeming me harmelss) signed by both parties…
Now with that said… the traditional L/O deal where you stay in the middle… I think it’s dangerous… and I believe why would you do that…
Let’s say you tied up property for 5 years under L/O… You sell it on a L/O to several tenants over that period… but, after about 4 and half years…
You get the property back… which in most cases you will… the property has appreciated… say by 40k… You;ve paid down the loan… by another 5k… and you have a healthy profit waiting…IF YOU CAN CASH OUT your Seller…
Otherwise, You LOSE…
You now have to go back to work to find a loan or a buyer to save your deal…
I believe in… work once… get paid forever… as you get highly into invested… having to do more work without the proper systems inplace becomes a hassle… If you buy subject to… you don’t have that problem… You own the property and the upsides… More Risk…
But, I don’t ever want to risk my profit… That, besides helping people is why I’m in the game…
David Alexander
[/b]
I’m not sure how you post to a specific post on this board…
Ok…
First understand… you should be first finding out the sellers wants… and the sellers needs… solving the problems based on the sellers needs…
How you do it is based on you knowledge or that of whoever is helping you…
What buying tools do you know… which can you effectively use…
If a seller owned a property free and clear… I’d first find out price… and negoatiate that… (you only have to negotiate price once)…
I’d be wanting to find out how much cash they are after, Or are they just wanting cashflow… or some of both… never offer both… never mention interest… or payments if you don’t ahve to…
If they wanted Cash… You might be able to do the 50% now 50 later thing…
If they want cashflow… You might be able to trade a note… or secure with another another property…
A lease Option would be the last place I’d go on a free and clear property…
David Alexander
Cash and David
Thank you for your replies.
I’m not understanding, though. The crux of your argument seems to lay in the idea that the sellers will-- at will-- break the contract (option) anytime there is equity in the deal.
This would suggest that options (and contracts in general) are absolutely worthless.
In my opinion the steps necessary to adequately reduce the risk on a L/O require a seller that is motivated enough to do a Sub2.
The only way to protect the title from further encumbrances is to transfer title to a trust or an entity in which you have some sort of control. Even then, I’m sure it’s not failsafe, but it’s much closer.
To me there are only two primary advantages to a L/O. The first is that it’s an easier sell when just starting out. Once phone skills improve, it’s no more difficult to sell a Sub2. The second is that you have a built-in out in the contract. In other words, if you have a 12 month term with X number of renewals, if the market turns against you, then you simply choose not to renew the following year. So, a little experience and buying right removes the only advantages to a L/O.
The downside risk, as already mentioned, is that your ability to perform on your obligations to others becomes hampered by the fact that you don’t have full control of the title. Even if the investor has the property in a trust and all necessary documents needed to close the deal are signed up front and held in escrow, will this prevent heirs from contesting or prevent a bankruptcy judge from including the property?
Granted, I think these risks are not high probability, but they do exist. Again, like many aspects of REI, this is affected by the quality and quantity of deals done. Obviously, lesser quality and higher quantity will put the investor in a higher risk category.
I agree with David on the free and clear. I’d want title however I can get it and wouldn’t even consider pitching a L/O. And yes, regardless of the technique, a seller soon forgets you were a hero removing the pain as time passes. Add to that the possibility of greed gland inflammation and there is potential for problems. At that point ownership becomes key.
So, there’s something to be said for “in and out” when giving up control.
Adam,
It is not a matter of anyone trying to break a Contract or saying Contracts are not valid. It is a matter that if you do not control the Deed there are other factors, Liens or Encumbrances that may enter the equation, thereby causing the Contract to become negated.
In the senerio you describe your best option to protect you is to have the seller hold a Trust Deed and give you a Warranty Deed, period.
If you were wanting to purchase this property figuring the Lease Option method would be better for negotiating purposes, a smaller amount of money to get in, then this may be the option you wish to pursue. I would have to know your thoughts of what you were thinking concerning this deal.
John $Cash$ Locke
Yes, John… exactly.
I’m thinking of using it for a pretty house that is owned, outright.
The owner is educated but does not want to hassle with it. (He had been renting it to his kids for the past 12 years. I was driving through the neighborhood and saw the adult kids in front, with a Starving Students moving van.
I asked them if they were moving and if they were selling their house? They replied that it was their fathers and that he had not yet contacted a Realtor-- but was planning to do so on Monday. He didn’t want the hassle of dealing with tenants who weren’t family members.
I don’t know how motivated he’ll actually be… once I talk with him… but his kids (who seemed pretty bright) were very eager to take down my information. Who knows how this will play out. ???
I remember this place well…
Driving neighborhoods looking for deals…
In my mind not the most proactive approach…
Get past this part as fast as possible… Get so many deals coming to you that talking to sellers is no big deal…
If you get the deal… Cool… If not So what… Next…
At first that mean 30 or more leads a month to get a deal… then it will be 20… then 10… then 5… and so forth as you get better at screening, recognizing etc… Once you find a motivated seller, just once… You’ll nver wonder again…
I’d hurry set an appointment… find out motivation and needs and go from there… anything else is just playing investor…
The time to make a plan is when you sitting toe to toe with him… and you’ve found out motivation… and needs… and your the white night creating a solution… then negotiate the best deal possible… Don’t be afraid to buy the house… Cause, if it’s a deal… even you don’t want to do it… someone will buy it from you…
Getting in low doesnt require using a L/O… I buy houses all the time with nothing out pocket… that jsut depends on the structure of the deal…
In fact… short sales that I’m just learning to work… Are Money for Nothing… and the Checks for FREE… gotta love it…
David
How much are you getting them to discount on your short sales?
It was my understanding that even if you get them to knock off 20%, you’ve still gotta come in with your own financing to buy out the bank, no? So, how is it no money? Are you going after extreme uglies?
As for the leads… I’m getting tons of leads, but they’re mostly crap no-equity leads. Most aren’t in foreclosure yet so I can’t pursue the short sale (or can I? Correct me if I’m wrong).
I know it’s just a matter of time… but by using Tim’s standards for “What a deal is,” I think it’s going to take far more than 30 leads, on average.
I don’t see it as being a salesmanship issue… as I AM money, baby!
Havent got any excepted yet…
Although I expect discounts in a wide range from 10 - 80%…
Waiting for some come back though…
I don’t really care the numbers… Were gonna make our marketing after the buyers…
And slam the two together…
So… You pick up a deal up a 100k deal and they only discount 10%… You pick up a check… resulting from no money out of pocket except marketing…
And pick up the pennies…
You only finance the deal with your money if the number are right…
For instance, I ahve deal that going to cost us 5k to get in with a 150k balance worth 200k… We aere still going to go for a short sale… because it has estate problems… but, regardless if fnot we’ll buy it subject to…
Or another were working on… Ugly house… the lender didnt even have short sale package… but, I assure you they don’t want this house back…
It’s ugly with a balance of 37k and 4k behind… about 12k worth of work needed… and looks like 25k… I plan on buying that for about 10k or so and flipping it for 17 -25k… fixed up it’s worth 52-55k…
The short sale type deal changes the formula if you have a buyer with financing in the wings…
David Alexander
Tim Randle, John $Cash$ Locke, David Alexander and other GURUS :)!!
What an AWESOME board this is! And you guys are equally impressive - both in your individual and collective knowledge and in your readily apparent willingness to help/mentor!
As a newbie/rookie (ALRIGHT, VIRGIN!), I have lurked and posted on a few different REI boards for the past several months, improving my own sophistication in this ocean called REI, and along the way, picking up many nuggets and implementng some of them too! Thus I can honestly say that this is a FANTASTIC board!!
And this particular thread - another gem! For quite a while now, I have marveled at the virtues of the S2 method of REI. Therefore, I salute your unanimous espousal of S2. But I feel somwhat held back by the lack of a GOOD telephone technique, even if I have a live wire on the line!
So I’d like to make an earnest request: Can you please post a ‘role play’ phone call (ideally, one from each of you!) where you handle an S2 seller? Boy, would I LOVE to get a sneak preview of your technique(s)! This alone would probably shave off a HUGE chunk of time from many a newbie’s probationary period, or straighten out their learning curves quite a bit! As for me, I know I would value such post(s) TREMENDOUSLY, for I TRULY believe that I am THIS close to blossoming into a sworn S2 buyer!
HELP, PLEASE!!
Thank you gentlemen (and ladies, if any of you choose to pitch in!),
Vinny
Hang tight… Tim’s gonna be coming out with a product like this soon… and it will answer all of your questions on phone technique and take your game to the next level.
Right, Tim?
(Say, “Right, Adam.”)
vinnychary,
If there was one peice of advice that I would give any new person, it would be that the telephone is used for setting the appointment, not to qualify whether the person is motived or not. If they call you they are motivated.
Get in front of the sellers, where you can tell them what you have to offer to help them.
I knew an investor that went out of business because he became so proficient over the phone that he could tell whether the caller was motivated or not motivated. Seems no one was motivated enough for him. :dance2
John $Cash$ Locke
You mean to say that you run out the door EVERY TIME somebody calls you?
You state "If they call you they are motivated. "
This makes no sense to me.
Many people are motivated… motivated to sell their house at a retail (or above retail) price and are really looking for a realtor, not an investor… since their time frame to sell their house is limitless. In essense, they ARE NOT motivated, by an investor’s definition of motivation.
How many calls a day are you getting?
Please explain your position, further.
Thanks.
Adam,
Yes, the plan is to get the Buying Strategies product out next month and then release a new installment every three or four months after that. Negotiating Strategies is currently in the queue for the second spot.
Cash said…
If there was one peice of advice that I would give any new person, it would be that the telephone is used for setting the appointment, not to qualify whether the person is motived or not. If they call you they are motivated.
I agree with this for new folks as there’s no substitute for the lessons in the belly-to-belly meeting. However, for someone more experienced I disagree. Using the phone to prequalify makes perfect sense depending on the investor’s circumstances.
For example, it’s not a good idea to shut the buying machine down, but if I have 5 vacancies I’m working on, I can certainly be more selective in what else I pick up. Or perhaps I’m just having a bad hair day and don’t feel like being an investor today. Or perhaps I’m only in the market for a certain type deal right now. The reasons are endless. But again, the sellers will frequently say yes to a proposition in person they would never would have considered on the phone. Prequalification becomes a “find the balance” event like so many other items in the biz, in my opinion.
agkatz,
If you noticed what was said that a New Person should go meet with the sellers, this way they will gain experience and can practice their techniques.
What Tim said is true, in essense as you gain experience then you will learn how the screening process really works on the phone.
I find most New People use the excuse that the seller was not motivated relying on the phone call only, thereby never doing a creative real estate deal or cheating themselves out of deals where they thought the seller was not motived when they talked to him at 9am, but the next investor the seller talked to at 10am was motivated. Go Figure.
I recieved the phone call went out, met belly to belly with the sellers, I have bought and sold 500+ properties using my ‘Subject To’ method in about 6 years time. I wonder if I should have screened the callers more carefully, maybe I would have bought and sold 250 houses, if I would have been more selective over the phone.
My marketing and advertising is targeted for a specific audience so when I recieve a phone call it is from a person who needs my help. I do not advertise for problems, in foreclosure, behind in payments, tax liens, etc. I gear my marketing and advertising on a positive note, that I provide solutions for the sellers.
Example:
I Buy Houses
$Cash Now$
48 HR Closings
555-1212
(Positive)
Solutions!
I Buy Houses
In Forclosure?
Tax Liens?
555-1212
(Negative)
Problems!
There is more to this creative real estate business than saying ‘now I are one’.
John $Cash$ Locke
You state “People use the excuse that the seller was not motivated relying on the phone call only”
I think that this suggests more that the investor truly isn’t motivated.
I am a newbie. I have met with aprox. 15 sellers in the last month… so obviously, I’m not afraid to hop in the car and drive an hour down the highway to try to tie up a deal.
I use positive advertising, too. In fact, last month I did a lot of Christian advertising where THE ONLY ADVERTISING they’ll allow you to do is positive advertising. Anything that might even remotely be perceived as competitive or negative gets nixed.
And still, I get calls from buyers that go like this
“Hi, I’ve got a house off of Brody Lane and Eskew ($125K area) that is in good condition. I want to sell it for $130K. But I heard your ad this morning. Here’s the deal I’m in no rush to sell it. I don’t need to move for another 9 months and all of my payments are current. By the way, I signed with a Realtor last week and we’ve already started to get some calls. Do you want to come out and buy my house?”
If you (the newbie) have done your homework, I don’t see why asking a couple of questions on the phone to find out if the seller is at all open to being flexible on price or terms couldn’t prevent you from having to drive out to the house to find out this same information?
I agree with you, that it’s good to get comfortable talking with sellers. But I don’t see anything wrong with pre-screening motivation on the phone.