How to maximize your cash flow in your Lease Options

Well for starters it should cover PITI (Principal, Interest, Taxes and Insurance) that you will be shelling out. It is funny to see investors forgetting to include taxes and insurance in their lease payments because:

- They might have prepaid the insurance for the full year at the time of getting the mortgage and forget about it.

- If their taxes are not escrowed then once again they might forget about it at the time of making a payment.

And off course you are sitting and thinking Hey! The property will be gone in one year anyway so lets make the payment as easy as possible.

Noble thoughts! But the problem with dumb idea is that if something is to go haywire and instead of closing on that deal in 12 months – you go an additionally 4 more months then you will get an insurance bill and a tax bill.

Look whether your insurance or taxes are part of your mortgage payment or not – it does no matter and they have to be included in your lease payment.

Also think about it this way – if your tenant – buyer has problems paying you the entire PITI – they how the heck they are going to get qualified on their own 12 months from today to get the whole thing in their name???

They think there income is going to go up?

Yeah! Sure! What if it does not?

Look in your local newspaper what the houses that are similar to yours in your city are renting for? That is comparable #1.

If you have MLS access then do a Quick Search in your city once again for houses comparable to you – typically the first 5-10 listings that pull up are rentals – that is comparable #2.

Call your friendly loan officer and tell them the FICO score of your tenant – buyer plus 30 more points and ask him/her what payment could he possibly get them qualified for the purchase price.

The point being that if your tenant buyer fixes his or her credit in 12 months and you end up flipping the house then you will need them to qualify for that PITI – well lets if their credit was a little better 12 months from today – then would they qualify or NOT?

Exit Strategy That Require a little (gulp!)…

The dirty word in real estate investing in Michigan – WORK – heaven forbid any of us have to lift even a finger to put millions in our bank account. That is for fools! But believe it or not a little preemptive strike actually will work wonders for your lease option flips 12 months from today when you get ready to cash out your backend profits.

1. Get them on Rent Reporters - $89 per month, it is in their benefit to pay that every month, get a good credit line like your lease reporting on their credit report, which is definitely supposed to work wonders. Don’t give them options – be honest – tell them hey I want to help you not to loose your OPTION money.

2. Educate them to get some secured credit cards – these are credit cards that they send out $100 – they get a credit card with a $100 limit. But it reports on all credit bureaus.

3. Get a Credit Builder Report – more on that at a later report and where you can go in Michigan to get one. Very very powerful tool not just for Lease Option players but also for anybody who want to buy and sell foreclosures and comes across buyers who have messed up credit.

It sounds strange right? I mean why should you give a flying ho-ha on what their credit is like? Well do you want your big fat check 12 months from today or NOT? Or if you have already refinanced and pulled all the money already then I am sure you don’t want to keep this house for the rest of your life.

Hence it is imperative that you work out a system in your Lease Option flips where you gently nudge your tenant-buyer into getting their act straightened so they can complete their transformation from tenant-buyer to a homeowner.

The Absentee Landlord Thing:

Apple to apple – you will likely to get less phone calls from your tenant-buyer than your hard-core rentals. Lots got to do with the mindset of somebody who has given you lots of money and may be interested in buying the house from you compared to somebody who is given you little money (security deposit) and looks at your house as temporary residence.

I rented in my flat broke days and I cannot recall a time where I bought anything to make my apartment better. I do recall call the apartment management company couple of thousand times to complain about one thing or another.

Another way is to make a list of things you really don’t want to do – like cut grass, clean the gutters, get a roll of toilet paper their kids just tossed in the can out for them – and offer them an incentive for not calling you.

For example you can add a clause to the Lease Option contract that any repairs up to $50 will be handled by the tenant-buyer or they will do the work themselves, buy the materials up to $50 themselves and once they have given you proof of purchase via a receipt – you will credit $50 to their next month lease payment.

Off course, they can not do anything to the house without your prior written permission.

Trick is you gotta ASK. Most never do – hence they never get anything.

Posted by Mark Ijlal at 11:55 AM | Permalink

Disclaimer: This post is about (gulp!) the Internet. If even the idea of putting up a real estate website for lease options leads makes you sleepless then wait for the next post on Hotlines etc that don’t require you to even have a computer. :-)

How to use the Internet to attract buyers for your Lease Options:

There is a pretty big section in most newspapers, week after week, called Rent To Own in the Real Estate Section. Some newspapers call the section Lease Option also.

You will also see ads targeting to prospects with bad credit saying something to the effect that if you have been turned down by the mortgage companies – call us to get the home of your dream.

As a side note I am not a big fan of Land Contracts in Michigan. The foreclosure process that is required to kick out a non-paying Land Contract buyer who bought your home and then defaulted is long and governed by the same laws in Michigan that govern a bank foreclosures.

Although in certain circumstances (property being vacant) you can accelerate the eviction and some astute investors who play in the Land Contract world have told me that they add a eviction clause in their custom made Land Contracts – I have yet to see one contract in reality.

So some of the companies in Michigan who advertise and focus especially on bad credit / home ownership themes might be selling a 12 / 18 month Land Contract deal which gets the seller cashed out at a later date via a refinance. So keep that in mind when you are reading these ads.

Rent To Own Ads are pretty much 100% Lease Option ads and it is a good idea to check them out in your local newspaper before you do anything so to get a feel of the marketing.

Very very few real estate investors use the Internet to market their lease options which if you choose to do so does gives you a pretty good advantage over your competition in your local city. This is how it works:

1. Run advertisements consistently (more on classified ads later) in your local newspaper. I said “local” and “consistently” – two very important and precious words to keep in mind. Also you want to run these ads EVEN when you have NO house at the moment to Lease Option (more on that strategy later also).

2. Direct your prospects to your website.

3. Your website has pictures (lots of them), virtual tour if you want to really blow them away, description of the house with the list of all the upgrades you have done, any promotion you are running (free appliances, gift gas card etc), lease details such as monthly payments, Option number and finally the most important thing of all….

4. An invitation to join your Lease Option Buyer List. So lets say 10 people come to your website as a result of an ad that you ran in your local newspaper.

Well technically you can only sell your 1 home to one out of 10 but the other 9 are still in the market to buy something. May be they don’t like “that” house but who is to say that will not like the second house that you put up next month.

Entice them and ask them to join your Hot Lease Option Upcoming Houses Notification List so they get priority notification even before the house hits the classified section.

Sort of a Pocket Listing Invitation if you want to use the REO slang.

Understand that this strategy is advanced and mostly not used by anybody. Everybody wants to wait till they have a house or worse when the house is done.

The term you need to remember in real estate is Build To Suit – if you doing this, week in, week out your market will tell you what kind of houses you should be looking for.

This is the beauty of having a website and use it for more to tell you what the market wants in your local Michigan city instead of thinking about your website as something to sell that ONE house that you have right now.

I know it might sound hard to believe at first try but really most investors get so tied up in “doing” that deal that they have burning a hole in their head that they forget to build a business.

Nothing personal – just a fact of life. All entrepreneurs go through it. I did too in the beginning.

5. These are some of the things that you should be asking at your site from your site visitors – name, email, number of bedrooms in the house they want to get, basement preference, brick or frame, garage preference, city preference, if you are operating in a city which is comparatively big – it would help to ask a more specific question for example if you see Detroit ads they will mention something like East Side or West Side preference.

Where can you advertise on the Internet to get leads?

1. Detroit Craig’s List; at http://detroit.craigslist.org Free

2. Google Base: http://base.google.com Free

3. Google / Yahoo will be a pain the rear to do and get some leads because you are competing against everybody and their mother selling a $20 book on how to do lease options. Very hard to do Pay Per Click ads and get some leads out of there – not to mention expensive.

4. The thing that I am watching closely is the evolution of Google Local ads that will let you target and run really local ads on Google, which will be really effective for our kind of business.

5. For Sale By Owner sites: cheap prices for the most basic packages. Owners.com is a good example. The whole idea is to get people come to your Lease Option website.

6. EBay – will cost money to run - $150 at least. Plus my feelings about EBay are that it is more suited toward building an Investor List than attracting local homebuyers.

Where can you advertise offline to get Lease Option leads?

I am very old fashioned when it comes to real estate leads. May be the reasons that the damm $26 ads have made me so much money. Real estate is a Local game.

Seriously doubt that a guy in L.A. is thinking about buying a 3 bedroom in Redford. But there are renters in Redford with kids in Redford schools and mom & dad working in Dearborn and Sterling Heights.

They are reading the Sunday’s Free Press and Redford Observer – may be a small percentage looks on the net – may be it is a big percentage; there is a no hard data available anywhere that can pinpoint where most of the people are looking for Lease Option deals.

But I would suggest to you that do both – with 1-2 Knockout punch:

Punch #1: Use the free resources – Google Base; Detroit Craig’s List initially till you close on some deals, put some new money in your business checking account and then think about spending some money on the Internet. Since both of the above are free (at least for the time of writing this)

Punch #2: Spend you money where it will get you the biggest Return on your Advertising Dollars – your local newspapers. In the above example – run small ads driving people to your website in BOTH newspapers – Detroit News and Redford Observer – I repeat run ads in not one but both newspapers.

Sometime I get emailed about the cost of running these ads – well I worry about what comes back to my bank account and not too much on what I have to spend.

As long as coming in number is bigger than going out number – all is good. You can charge the advertising on your business credit card and pay it once the house is Lease Optioned off.

Or you can close one deal and take $500 off right from the top to spend it on advertising on your next deal. The real big mind shift that most entrepreneurs never make is not to think of advertising / marketing as an expense but as investment to build their business.

There are 2 big things in my business I spend money like it is going out of style – my education and my advertising. As long as I feed these two dragons, all is good in Planet Ijlal.

Website Domain Name Tips:

Spend some time thinking of a good and short domain name for your website. Rule of thumb is that keep it within 21 characters with the dot COM thing so it fit in one line.

Newspapers classified sections have a notorious tendency to break down the name in 2 lines if it is long and put a hyphen in the middle. I don’t have to tell you that that becomes a different name.

I had this experience personally one time when my ForeclosureTour.com ad became Foreclosure-Tour.com in two lines. Suffice to say that I did not get any leads that week.

So keep it within 20-21 characters and you will be in the limit. Also you don’t have to use www moniker anymore. I don’t use it anymore. www.MarkIjlal.com or MarkIjlal.com work the same way.

Also I hate long winded domain names – abcpropertyinvestmentsgroup.com is a great tribute to your LLC’s name but come on…. One of my coaching group member Lou Provanzano got a cool name recently for his Detroit deal – www.DetroitOnTheMove.com which gets full marks for originality and sounding good when you say it, print it and leave it on your voice mail.

And yes I am guilty of having long names in the past too – some of them are so crappy that I am actually embarrassed to share them here.

But the point is you want to have a good name; should spend some time on it, make a list of 10-20 names; ask your significant other, if you are in my coaching group, email me the names before you blow the insignificant amount of money needed to reserve them via Godaddy.com. Get a second opinion. This is how the world will see and your business. It is worth spending some time on.

How to get your Lease Option Website Designed:

This is the part where most will hesitate because they are still thinking big dollars when it comes to websites. In 2006, websites are so cheap that there is no excuse left for not to have one.

Where can you get a decent site made?

1. Do you have kids? Do you have neighbors who have kids? Do you have nieces, nephews, and little cousins? Know anybody who goes to a high school??? Every High School in America has a clique of geeks who can design a better-looking site than most web design firms out there.

I have personally hired 16 year olds – one time even flew one from Denver, CO to Michigan to work for two weeks on a business that I used to have. I had one 18 year old actually move to metro Detroit from U.P. to work on a project.

These kids were smarter, harder working and had a better work ethic than most grown ups I have worked with in the last 10 years. They get it. And they love doing this stuff and putting it for the world to see it.

I met an 18-year-old two years ago who was designing websites for Detroit Hip Hop acts – his sites could go heads up with a $50,000 site – he was doing this for $10 per hour.

Ask anybody who is going to high school and is between 14-18 in your life. They know a geek who can whip up a world class website for you in 7 days for probably pennies.

2. You can always go the outsourcing route and use a website a www.elance.com or www.rentacoder.com which will let you post up for free what you are looking for; bunch of companies (most of them in India / China and Eastern Europe) will put up competitive bids. They all have reviews on the previous work they have done; read them and give one the site to do.

If you are totally lazy and don’t want to do anything at all – then spend couple of hours trolling Google and Yahoo and find a website on lease options that you like and then tell whomever is doing your site to make your site look like them.

And for crying out aloud don’t copy blatantly but use it for inspiration and ideas. Most people like me use a copyright protection service that trolls the web looking for lift offs.

When we find somebody cutting and pasting our stuff – we get him or her shut down. I did that to bunch of bogs already that were just copying and pasting my content on their sites.

Next Part 5: How to figure out your Cashflow Payments, Exit Strategies that nobody wants to hear about but they sure do work, the absentee owner thing.

Posted by Mark Ijlal at 07:50 PM | Permalink | Comments (1)

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.

Posted by Mark Ijlal at 10:56 PM | Permalink

Two more reason that there is a market for people who will gladly and cheerfully pay you an big, fat non-refundable Option fee and lease option your house in Michigan:

1. They are not sure if themselves or their family will like the house or the school district or even like living in the house. So why are they not getting an apartment?

Well it is just hard to get an apartment with 2 kids, 1 dog and “stuff”. Most apartments are not build for families but rather couples with minimum belongings.

Believe me I lived in apartments for 6 years when I came to America. There is not too much space to put things out. They do have the option of renting a house but may be they want to live in a particular area and they can’t find a house they like.

2. Michigan area being the hub of automotive industry – lots and lots of people move in and out of Michigan every year. They get transferred for a projects, get hired by a consulting firm that might ship you to a different Michigan city for a year or three and so on.

Lots of these people don’t want to take a risk of buying a house in a city that they are not going to stay in forever. But if they have families and pets and stuff – they do have a housing requirement that most likely will not be fulfilled by an apartment.

3. Couples who are together but not sure if they want to buy a house together.

Why do you need to know the reasons on why people would do lease-options? Because that will help you understand where can you go and find them and more importantly where can you run advertisements to attract them.

How big is the lease-option market?

You just have to pick up your metro area newspaper in Michigan and check out the Rent to Own section to realize lots of lots of houses get sold that way.

If you have access to MLS then you can also run a Quick Search and see how many houses pull up on the first page where the owners are open to the idea of a lease option. .

And then off course you have the entire I Buy Houses For Cash crowd from several real estate gurus who teach “sandwich leases”. More on that later.

There are big name companies in the city of Detroit for an example who have built multi million dollar junker to lease option businesses by buying 2-3 bedroom junkers, fixing them, and lease optioning them to prospective homeowners for 12 / 18 months, get a payment history on record and then flipping the house over. They sell anywhere from 75 – 100 houses like this every year.

One of the big things everybody needs to really get about lease-options is that the differece between renting your house and selling it to a tenant-buyer.

It is the mindset.

Tenants have no stake in the house they are living in, apart from the measly security deposits they gave up front. Cabinets squeaking – they call the landlord. A tree has long branches scrapping the windows – they call the landlord. Kid threw a roll of toilet paper in the toilet and jammed it – they call the landlord.

And off course you will never see a tenant do home improvements in the house they live in. And why should they? They are just renting it!

The lease option buyer is a much more attractive alternative. Off course you want to sell your properties as fast as you can but sometime the capital gain is hefty and you want to wait at least 12 months to sell so you can save on the capital gains tax. Sometime you are having a hard time selling a house and you do want to cash out the hard money or private money lender out of your life.

Things happen and if the push comes to it and you have to make a decision between choosing a renter vs. a tenant-buyer; I am definitely prejudiced toward the later.

I have noticed a different mindset in the lease option buyers that I have done in the recent years. One they have a significant investment in the property in the shape of upfront Option payment – the lowest one I have seen is $3,500; the highest one I have seen is $11,500. That is by the way – non-refundable; meaning whether they choose to live there or not – at the end of the lease; that money is yours to keep.

And that changes a lot in the minds of the new tenant-buyer – they don’t call you when the grass is long and the branches of a tree scrap the windows at night – they cut the grass and chop off the branch. If the toilet clogs, they will go the Meijer and buy Liquid Plumber and pour it in before they call you. If the cabinets in the kitchen are squeaking – they will go buy a bottle of oil and pour it in to stop it.

It is the mindset that is very different that makes the lease-option mucho more attractive. Other than the money off course.

Next: How to get the maximum option payment and monthly lease.

Posted by Mark Ijlal at 01:06 PM | Permalink

This is part 1 of a series of posts on Lease Options for the first week of May 2006. Got bunch of email questions about them from various readers, this series would serve as an all-inclusive answer to most of these questions.

What is a Lease-Option?

Lease-Option, lease with option to purchase, tenant-buyer, rent to own – are all different names for the name animal. Basically it is an exit strategy for somebody to sell a house. But instead of selling to somebody who will go and get a mortgage and cash you out 100% - this is where you actually “lease” the home out to your buyer for 12 / 18 / 24 months or whatever term you decide to do this and then at the end of the term the buyer who has been leasing the house from you has an option to “buy” the house from you at a “pre-determined” price that you agreed upon when you did the contract 12 / 18 / 24 months ago.

The thing that makes this arrangement so different is two fold:

1. The buyer of your property has no obligation to buy the property from you at the end of the lease. They may or they may not.

2. The buyer of your property will typically gives you an upfront Option fee to lock the price of the property at the beginning of all this. That Option fee is non-refundable.

Why would somebody want to do a lease-option?

Well bunch of reasons and on top of the list imagine a person or a family who makes good money, just came out of a situation that has ruined their credit (business or personal bankruptcy / divorce / disease) and now they are back on their feet and making a decent living.

Actually they are making enough money to afford a monthly payment – the only problem is that their personal credit history especially the current parts of it makes it impossible to get a mortgage.

Now I know we all hear a lot about mortgage companies being aggressive and pretty much qualifying anybody who is breathing. Which to an extent is true – but there is bruised credit and there is bad credit and if you are in the business of buying, fixing and selling homes then obviously you want to make maximum profit on your deals.

If your buyers has less than perfect credit than their lender or bank will give them not the maximum amount via a mortgage. So lets say you are selling a house for $100,000 – your buyer has bad credit and their lender says that sure we can give you a mortgage – but for only $75,000 because of your credit and the rest – the $25,000 your buyers has to put down.

Now if they have $25,000 to put down then by all means, dance on the ceilings and once in a while you will get somebody like that but truth of the matter is that families or people who actually put money down when buying a house are RARE! We live in a culture of No Money Down Mortgages and nobody, repeat nobody is saving to put money down.

You may not like it but it is reality.

So coming back – you buyer cannot afford to put $25,000 down and you definitely want to leave $25,000 on the table because that is probably your profit to begin with.

What can you do?

Lease Option would be an alternative strategy here.

Part 2: More Reasons why people do lease options

Posted by Mark Ijlal at 08:53 PM | Permalink | Comments (1)