Chapter 12: Options and Lease Options
Obviously there will be times when you simply cannot get the deed to a property. This does not mean you can’t negotiate some sort of a win-win contract with the owner. This statement especially applies to so-called “pretty” houses. The owner may really need to sell, but he also knows that he has a nice property to sell. He most likely is trying to sell it as a FSBO. Since you now know how to advertise to get interested buyers (you have created your Buyer’s List, haven’t you?), you are in a much better position to find a buyer. Instead of requesting the deed, you offer to buy the property on an option or lease/option basis.
Of the two choices, you first request a lease/option. That will allow you to find a tenant/buyer similar to what we did with the tax-lien house. This is the more preferable approach because you will immediately have someone else paying rent. You agree to pay the owner a nominal non-refundable option payment plus a nominal monthly rental. You then obtain a tenant/buyer who pays you a larger non-refundable option payment plus a higher monthly rent. You get to keep the differences. You pick a realistic timeframe for the option; not less than one year. You must also get the owner’s permission in writing allowing you to sub-lease his house. You additionally request automatic renewals of the lease/option just in case your tenant/buyer can’t close on the deal within the original time frame. As an example, you negotiate a one-year lease/option with the right to renew that contract 3-4-5 more times. The seller should be happy because you’re now paying all the costs and he knows he has the property sold at some point in the future. Yes, the mortgage is still in the seller’s name, but it will just be a matter of time before that is completely paid.
If you can’t talk the owner into a lease/option contract, you can still negotiate a straight option if you believe there is enough money in the deal to make it worth your efforts. In this case, the owner would continue to try to sell the property and the owner may also then list the property with a Realtor® as long as that listing takes place after you obtain your option and the listing identifies that you have the right to purchase the property without the payment of a real estate commission. You have no obligation to sell the property and you have not paid any fee for this option (well, you’ll pay a nominal $10 to $100 just to make the contract legal). If the property is in a desirable neighborhood and if you’ve compiled your Buyer’s List, the chances are you’ll be able to market the property very quickly. While a straight option is not the most desirable way to obtain a property, don’t overlook the possibility when you find a nice property that you’re sure you can market.
Recently, I received a phone call from a woman who had a very nice house for sale in a very nice waterfront community. She told me that she had my classified ad indicating that I bought houses in any condition and in most areas. Would I be interested in her home? From her description, it sounded like a pretty house in what I already knew was a good neighborhood. Her reason for selling was that she and her husband were building a new home and it was almost finished yet she still had not been able to sell this home. They didn’t want two homes. I went back to the newspaper and found their display ad. They were asking $127,000.
When I saw their ad, I immediately knew why they had not been able to sell. It was a picture ad in a box at the top of the column. The picture was the typical washed-out newspaper version of what passes for quality. The wording didn’t tell a potential buyer what they really wanted to know. As a FSBO, these folks spent a lot of money for very poor results. A simple classified ad properly worded would have generated much more interest. Still, her description sounded interesting so I made an appointment to see the house.
It was on a center lot with two other lots adjoining, one on each side. The side lots were just lawn and trees giving the curb appeal of a larger estate. The house was in above average condition; not what I would call great condition. There was a separate shed and garage behind the house. Considering home prices in that area, it was fairly priced.
I made her what amounts to my standard three offers (see above regarding our planned offers to Ida Mae Fuller). I offered $90,000 all cash and I would pay all the closing costs. I offered $110,000 if she would carry back owner financing. I offered full price on a lease/option basis. The purpose of giving choices to a seller is that you imply that the property is sold. Now all the seller has to do is pick the offer that best suits their needs. Otherwise, it comes across as a take-it-or-leave-it offer. In this case, the woman had told me that there was another investor who was about to make an offer. I was sure that the other investor would only make a single offer and figured I had the edge with three. Sure enough, she took my $110,000 option and provided seller financing that was transferable to my ultimate buyer. Since I had my current Buyer’s List, it was just a matter of a few days before I was able to complete the transaction.
The sellers were able to avoid owning two houses with all the associated carrying costs while generating a higher income than would be available at a bank. The buyer obtained a house at the fair market value but avoided the costs of obtaining a new bank loan and all the garbage fees that go with a bank loan. I made a quick $17,000 for just knowing what to do and how to solve the seller’s problem. Was that worth a couple of hours of my time? Was that a win-win-win situation? Hopefully, I’m starting to convince you that you really are providing a service to people who don’t know how to do it for themselves, and you’re being well paid for your knowledge and expertise. You can do it, too.
NOTE: Stay tuned for House Exchanges & Auctions