Did you know that due to the financial crisis in 2007, an estimated 80% of the current buyer’s pool can’t qualify for a mortgage? And unfortunately, most traditional investors and agents are missing out on this unfulfilled market need. However, Jimmy Vreedland and Bob Scott identified this need and tapped into that 80% by following the lease-option strategy. In our recent conversation, Jimmy and Bob explained how they were able to acquire over 100 properties in the last 24 months utilizing lease-options.
What is a Lease-Option?
According to Wikipedia, in a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property. The lease-option best serves that 80% of individuals that cannot qualify for a traditional mortgage loan. The main two reasons why they are unable to qualify for a loan are due to (1) low credit score or (2) not receiving a w2 paycheck. Jimmy and Bob stated that most of their lease-option tenants have more than enough monthly income to qualify for a loan, but they are just lacking in the credit or paperwork department. These are individuals that have the ownership mentality – they want to be a homeowner – and by giving them the lease-option, Jimmy and Bob are providing them with an avenue to do so.
How to Find Tenant-Buyers?
Jimmy and Bob find their tenant-buyers by posting open listings in three main ways:
vFlyer is a syndication site that automatically blasts out listings to over 20 different websites, including Zillow, Trulia, and Yahoo Real Estate, which is a huge time saver.
They find that Craigslist is still a great source to find tenant-buyers.
They put up simple Facebook ads and their phones ring off the hook! The marketing message is simple – “Lease-option, rent-to-own, bad credit is okay, no banks required.” When a potential tenant-buyer clicks on the Facebook ad, it sends them to a simple, clean, no distraction landing page, which has a two-step opt-in form, requiring their name and email. In the second step, the tenant-buyer will provide how much they can put down, how much they can afford monthly, and the type of property they want.
How Long are Lease-Option Contracts?
Jimmy and Bob’s typical lease-option is 12 or 24 months. Most people’s credit situations can be corrected in that time. On day one, after signing up, the tenant-buyer meets the mortgage broker and credit repairperson that they will be working with. The goal is to have the tenant-buyer hit “The Four Pillars of Improving Credit” so that they can qualify for a mortgage loan and exercise their option to purchase at the conclusion of the contract.
The Four Pillars are:
- Cleaning up past credit issues
- Getting a checking account
- Getting a secured credit card
- Reporting the tenant-buyer’s on-time rent payments to the Credit Bureau for them, using a service called Rental Karma
If the tenant-buyer hits those Four Pillars, they should be able to qualify for a loan within a year.
Example Lease-Option Scenario
Jimmy and Bob recently purchased a property for a total investment of $60,000. Four days later, they had a tenant in the property. The tenant signed a 12-month contract that required them to put down an $8,000 nonrefundable option deposit and to pay $1,500 per month in rent.
Based on this example, here are the 3 main benefits of lease-options over traditional landlord:
- Nonrefundable Deposit
If Jimmy and Bob would have gone the traditional landlord route, they may have gotten a refundable $1,200 security deposit, instead of the $8,000 nonrefundable deposit. Receiving $8,000 day one on a $60,000 investment means they’ve already achieved a 13% return!
The nonrefundable deposit serves as the tenants “skin in the game.” It incentivizes them to pay their rent on time and to honor the contract. Also, if the tenant does walk away or needs to be evicted, the higher nonrefundable deposit cushions Jimmy and Bob against those, or similar situations.
- Demand Above Market Rents
If Jimmy and Bob would have gone the traditional landlord route, they may have only gotten $1,200 per month, instead of the $1,500 a month. Since they are targeting that 80% of the market that very few real estate investors are talking to, they are able to get above market rents. The difference between $1,200 and $1,500 a month is $3,600 a year in additional income.
- Tenants Responsible for Ongoing repairs
In a lease-option situation, the tenant-buyer is responsible for ongoing repairs and maintenance. This not only increases the cash flow, but also benefits Jimmy and Bob from a time management perspective. If something goes wrong in a traditional rental, you have to field that call from the tenant, figure out the issue, coordinate to send a handyman or contractor out to the property. Many times, the tenants miss the appointment, so you have to coordinate with the handyman for a second time to come out. Then, you get a call back from the handyman telling you the issue and the cost. However, Jimmy and Bob eliminate that entire time consuming process by having the maintenance and repairs be the tenant-buyers responsibility.
Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click APARTMENT SYNDICATION MASTERY to learn how to get started today.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.