Lease Options - Part 3
How to get the Maximum dollars for your Option payment
This is somewhere I got very lucky when I started. I was doing a Lease Option in Bloomfield Hills – Short Sale deal turned into a potential Lease Option by a family who were making extremely good money somewhere in the tunes of $200,000 per year and had lousy credit due to some crazy credit card spending.
Anyway the purchase price of the house was around $250,000. I had no idea how to price an Option Fee – the potential buyer is sitting across the table and the wife goes “well how much do you need to put down for the upfront non-refundable Option?”
And I just blurted out “10% of the purchase price would be fine.”
And they shrugged and said, “That sounds O.K.”
FYI that was $25,000.
It taught me a valuable lesson in pricing the non-refundable Options – first I have no right to assume anything. I would have thought that $10,000 sounds pretty good at that time.
But I was wrong and you should not make the mistake either to use some magic formula to calculate the maximum Option. Yeah! I know that we all want a certain answer but ask anybody who owns a business in the real world on how many formulas they use in their business and they will look at you like you have lost your mind.
First of all lets understand that you should try to get the maximum option fee possible. As much as the market would bear and you could find out very easily by saying certain things.
Second the more Option you can get upfront more committed the tenant-buyer becomes in buying your house. Hey they already have a trunk full of money “invested” in “your house”. Do you think that may force them to be more committed to completing the deal at the end of the lease???
And last – and I really don’t have any scientific data to back up that assertion just from the trenches war stories from myself and fellow Michigan real estate investors – we have seen the more Option the tenant-buyer have invested in the property via a big fat Option payment – the better is the care and love they heap on “your property”.
Why is that? I don’t know but I think that in their minds that they already bought the house because they put a big “down payment” via the non-refundable option so they call you less, the grass gets cut, the landscaping get additions, the gutters stay cleaned and the kitchen looks spotless.
So how do you get big option payments?
Step 1: Understand the basic fundamental rule that governs all negotiations – you can always come down on your price but never go up. Most real estate investors chicken out too early. A good rule of thumb is to try and get 5% to 10% of the purchase price as the upfront Option fee.
Why this number? Because a large number of people buying Lease to Option deals have bruised credit. If they were to go and get approved from traditional lending sources and somehow they did get an approval, the lenders would ask for at least 5% to 10% down payment as a way of reducing their risk. I have seen lenders ask for 15% to 25% down payment for risky clients.
So if they have tried around getting a mortgage – they have heard the 10% number. Also if you decide to knock some price off to make the deal happen – it would also create a good feeling of win-win on both ends where your tenant-buyer would be happy that they are getting a good deal also.
I have asked for and gotten $10,000 as upfront non-refundable Option fee. Started at $12,000 – ended at $10,000. Buyer was pretty happy at his negotiating powers. I was pretty happy that he thought so.
Step 2: Don’t just give up after the first 5 calls. Start running your Lease to Option ad even when your house is being renovated. That would give you sufficiently bigger piece of time to get a feel of the market and how much people are willing to pay on the upfront Option fee. My suggestion is to treat the first 2 weeks in your local Michigan City as R&D.
Step 3: As them why they are looking for Lease Option deal? The reasons will tell you a whole lot about what can they afford. The serious ones who have driven by your house will talk to you more than the casual caller.
Step 4: Use an automated system to your full advantage if you don’t want to be bothered by too many calls or negotiate with everybody except the most serious callers. You can get an AVS – Automatic Voice Mail System for $10 per month. Website is even better because you can put the pics of the houses on it – inside if it is done; exterior and your Lease Option terms. I intend to give you some sample websites that you can take a look at when we get to the later part of this report.
Next: how to set up good marketing systems to attract buyers.