Guest blogger Jim Aydelotte: Why Lease Options are Great for Beginners
With increased confidence in the housing market (but still-limited financing available), lease/options and land contracts have come roaring back as and easy and profitable way to buy and sell properties. Jim Aydelotte is an expert in the latter, having completed deals on over $5 million in properties since retiring from his ‘real job’ in 2006. Best of all, he’s a full-time pastor and only works his lease/option business 3-5 hours a week. He’s another featured speaker at the 2017 OREIA National Real Estate Summit, so I hope you’re registered! If not, do it at www.OREIAConvention.com
Sometimes I would love to go back in time, just to get a chance to do a few things differently than what I actually did…or didn’t do – of course, hind sight is 20/20 right?
That hindsight, and all the things I did BEFORE I discovered lease/options that I wish I’d just skipped, is why I now stress to everyone who wants to start making money in real estate to consider lease/options FIRST. Please understand that this is not a suggestion based on selfish motives, it is based purely on experience.
And the reason why I believe, and am convicted of the fact, that lease option strategies are the absolute best strategies in all of real estate investing for every beginning and seasoned investor to get involved with, is because it takes no capital, very little time, and minimal training, to start getting paid quickly in real estate investing.
If you were to purchase an average rental property, in a typical neighborhood (let’s say for example a 3 bed, 1.5 bath home rents for $1,200, with a cost of $80,000), and assuming you did not use a private lender (most beginning real estate students do not have those) the monthly payment with a bank using your own credit on a typical commercial loan will cost you about $575/month, plus, let’s say, $200/month for taxes and insurance is a total payout of $775/month.
Now, that payment has to begin whether you have a tenant lined up or not! But for sake of our example, let’s just say that everything goes as perfectly as possible, and you have a tenant lined up right away. What’s your cash flow in this example?
Rent at $1,200/mo – $800/mo in expenses = $400/month profit (again, nothing breaks or requires repairs at all in this example).
That is an annual profit of $4,800 the first 12 months you have a tenant.
Ok, you get the picture – $4,800 in the first 12 months in profit in our example.
Let me give you another example. Let’s learn how to locate, talk to, and put a property under contract to control a property.
Now, finding a seller who is motivated is one thing, but finding a seller who is motivated and getting them full retail price for their property is another! This is the strategy we employ called a ‘Cooperative Lease Option’.
Putting a property under contract for full asking price, with no additional fees to the seller, while placing a tenant/buyer in the property will yield a typical payday of $5,000-$10,000 in the form of an option fee in a very short period of time.
I have a student who had no background in sales, marketing, or real-estate for that matter, and when he followed the steps I gave him, was paid $6,000 from the day he found and talked to the seller, and 20 days later when the tenant/buyer was placed in the property – and this was starting from scratch with no experience – 20 days for a $6k payday!
But let’s say you need more time to learn these strategies, and to find a property with a seller who is willing to sell their property on contract…and it took you 90 days.
That’s still more profit, in a quarter of the time as the previous example, on a home you didn’t take title to, or use any money or credit to purchase, and did not have to take time to do any rehab on it.
This is a strategy that anyone can utilize, and the profits can be so much better, with such little risk, and far less time than the type of real estate deal that most people are familiar with.
Now you can see exactly why I believe lease options are the absolute best model that anyone can utilize, especially those who do not have the resources necessary to do a ‘traditional’ type of real estate model.
I look forward to helping you get started and succeed at the OREIA Summit. I’ll share more about how these deals work and why you should have them in your real estate strategies toolbag there.
The lease option process sounds very easy but finding a seller willing to sell on lease option then finding a buyer who has $5k-$10k in cash but is unable to get financed by a normal bank seems more like finding a unicorn than hunting for abundant game … the process seems easy enough but finding these folks the guru’s never really tell you about that step other than a 20 second blurp on craigslist … so whats the catch?
Lease/option assignments aren’t something I do myself; I did one and it failed catastrophically when the lease/option buyer who was going to put $8k down checked with his bank, found out he could qualify for a loan after all, and just bought the house outright. I still make $18k, tho.
my PREFERRED strategy is to get the deed–get a subject to or owner financing, or if i can get the property cheap enough a private lender. I then lease/option or land contract the property, so i have some experience (like doing over 150 deals in this category) with “those” buyers.
The 2 keys, not speaking for Jim here but in my experience, are:
1. The seller has to be motivated by more than just “I wanna sell my house”. the last 5 sub to/owner finance deals I’ve done were: Seller needed to move bc she couldn’t use the stairs; had already tried listing and property didn’t sell. Out of town landlord with tenant who wasn’t paying. Guy who bought the house, couldn’t afford it, moved out and moved tenants in, tenants weren’t paying. out of town landlord who was being ripped off by his management company. Guy who inherited 2 houses and didn’t want to landlord either of them but also didn’t want my low cash offer.
2. The higher the price of the house the more likely you are to get 10% down. The last 5 houses I SOLD creatively were a $42k house with $3400 down, a $79K house with $5000 down, a $119k house with $8,000 down, a $38k house with $2500 down, and a $120k house with $8k down. these are all at or below the median house price for my area. The ones people talk about getting $20k down on are like $200k+ houses.