1st post - questions for a rookie looking to make 1st deal

I love forums, and I’m getting into real estate investing, so i’m happy i came across this site. 1st off, I do have a mentor, so I am not going in completely alone to get toasted. However, he usually is pretty busy, and I’d rather turn to here to maybe get some questions answered (for anyone who would like to help).

I went to a seminar on lease options, and i’m excited to get started - I’ve been calling “for rent” ads in the paper, for rents online, and recently just contacted an agent to pull some listings for vacant homes on the market 90 days or more, with an existing mortgage. Couple questions on lease options in general:

  • I want to be upfront in every deal that I make, basically telling the seller that I will be selling their property for more than they sell to me, and telling the buyer that I will be selling to them for more than I optioned for, and at a monthly payment higher than what i’m paying. Do you have any objections to telling these things to both parties and how do you handle it?

  • As far as the non-refundable option fee, and commissions to an agent, how are these paid out and how do they get applied to the deal? Do agents get half their commissions up front and half at settlement? Do the upfront commissions come out of my pocket? Also, does the option fee get applied to the purchase price in any way?

Welcome 700level,

As you can see, I’m new here too. I’m also a hopeful investor like you, so I’ll leave the detailed question regarding agent commissions to someone who’s more experienced in real estate. I just wanted to offer my 2 cents on your strategy to be open about your profits with potential buyers and sellers… I just don’t see how it’s going to help you. I mean, yeah you may win somebody’s respect by being “open” or “honest”, but I just don’t see it playing out in such a way that will benefit you. From a seller’s standpoint, they’re going to resent the fact that you’re making money off them… and while they may be contractually obligated to fulfill a sale to you from the option, if they feel like they’re getting taken advantage of (and they probably will if you’re getting the home under market value), then they’re going to drag their feet and pull out any stops to get out of the option. Likewise, if a buyer knows that you’re making a significant profit off them, they’ll probably try to negotiate down – at least that’s what I would do…

I guess my point is that they should know that if you’re an investor, you’re going to look for profits. But if they’re ignorant of that, let them be… you’re not going to win very many people over if they think they’re getting taken advantage of.

Emphasizing to homeowners that you will be making a profit will surely prevent you from making a profit. They already know you’re in the deal to profit from it. No need to throw it in their face.
Their only concern need be whether or not the deal they are getting from you is fair for them.
And why would you be working with Agents? One more hand reaching for a slice of the pie can only hurt your efforts.

question 1: I don’t want bad blood between myself and the seller, as well as myself and the buyer. If either party finds out that I made $20k on this deal that I was “in it to help them out”, I don’t think that would go over well.

question 2: Working with an agent. Why would an agent work with me on lease option deals if they get their commissions 18-24 months down the road? Doesn’t seem like too much of an incentive to me. I’m wondering how people utilize agents to do these deals, do the investors pay a part of the commission upfront and gain it back on the back end?

what is confusing

I’d be careful about using the “I’m in it to help you out” card… either they’re going to see through it, in which case they’re going to think your full of BS, or they’re going to be ignorant… at which point you’re going to tip them off about the fact that your making a profit and they’re going to think you’re full of BS for “helping them out” anyway… it seems like a lose-lose to me.

If you’re going to mention any profit, which is ill-advised, then shy away from any specifics. As for the agent, what are you wanting them to do – find you a deal? If that’s the case, know that they are the procuring cause of the transaction and will be looking for compensation for that. I’m not sure how it works with lease-options, but I would imagine that the agent would be paid a commission of the lease term, then if the buyer exercises the option to actually purchase the property, the agent would then be paid a commission on the purchase. Can anyone advise as to how commissions work with lease-options?

ok so as far as the protocol goes for closing a lease option lead with a seller…

basically just establish terms & price, and then say i’ll be subleasing the house, in which i will have all landlord responsibilities.

i guess profit really never does have to come into play

just for clarification, are you talking about profit via sub-lease, or are you planning on leasing it, exercising the option to purchase the property, then resell it for profit?

profit via sub-lease

Then I don’t think you have too much to worry about… monthly profits would be marginal, and it’s really not any of the owner/seller’s business how much you’re subleasing it for anyway. Do you have a strategy in mind for exercising or selling the option?

Honestly if I get a house under contract, I don’t think finding the tenant buyer would be the difficult part. As long as I put in the contract that the tenant needs to be actively repairing his/her credit, and do my due diligence in the screening process, I believe I did my part.

Another question - if you can’t get owner financing on the house, what is the next move if it’s still a good deal? Mortgage? Private lending?