Lease option assignments

[Saim Chaudhry]

Hey all,

I have been looking into lease option assignments lately. It seems like an awesome, and profitable concept. I have a lot more research to do. Does anyone have any recommendations of podcasts, books, etc to read for this? There are a few things that I have not fully grasped onto yet. All the hour, 2 hour long youtube videos are informative, but still don't give out 100% of the information as they are just one long teaser for some guru promotion.

Also, would it be profitable and wise to incorporate yourself a profit in the backend of the L/O as well, as is done in a sandwich lease option, where you get paid when the option to buy is exercised at the end of the lease, or is it much wiser, less liability, and outweighs the risks to just collect your option assignment fee in the beginning and move on.

Thanks

[Brian Gibbons]

A primer in lease option assignments California

Let's get one thing straight: lease option assignments is where you:

Market for sellers that have a problem with their house

Market for renters and buyers that can't get a loan

Market for landlords that want less hassles

Market for FSBOs that want to sell quickly at top price

Now, realize that if you're not licensed as a Sales Agent, the Department of Real Estate in California or DRE will be watching what you doing. So if you want to do a lot of lease option assignments, in my humble opinion you should be licensed. If you're doing sandwich lease options, you still might want to be licensed in California.

So here we go:

Lease option assignments is has to do with helping the seller sell on terms. But don't be a one trick pony: also learn wraps AITDs, and installment sales. But the OP wants to learn lease option assignments so I will stay on track.

You marketing piece should be trying to attract low equity, because low equity has a problem: selling with an agent generally takes 9 to 14% of the value of the house, due to agents commissions, closing costs, sellers concessions, vacancy costs paying the PITI, improving the cosmetic look of the property to compete with all the other properties on the MLS, etc. so in California with everything being so expensive, say a $800,000 house, 10 percent being $80,000, 15% being $120,000, most people don't have that savings get rid of their house.

Renting out $800,000 house might bring $2500-$3500 a month in rent, but the PITI might be significantly higher, perhaps $5000 a month or more.

So what to do?

Here are the options as I said:

1. Pay the cost to sell and move on.
2. Rent it out, be a landlord, and pray for appreciation
3. So it on terms, whether it be subject to, lease option, wrap AITD, installment sale, etc.

Lawyers in California, they love lawsuits. It's important that you have a good lawyer that can protect your interests. And if you do not know what you're doing, you might get yourself in hot water in California.

I work with an attorney that specializes in seller financing, I also work with RMLO's in California that underwrite any seller financing buyer.

The landscape has changed for seller financing in California

On January 10, 2014, Dodd Frank went live. The bust/penalty for the home seller to not underwrite a seller financed buyer is severe: loosely it is 36 payments of the contract, down payment, court costs, and lawyers cost. 

As example, let's say that you didn't underwrite the buyer, and the buyer got an attorney, and the attorney brought you the seller to court and said that you didn't underwrite the buyer as per the ability to repay rule of the Dodd Frank. Do you want to be on the hook or do you want the seller to be on the hook for the 36 months of payments plus legal plus down payment penalty?

There's another problem with California. Most real estate brokers are gun shy of any liability. E and O or errors and omissions insurance is mandatory for employment, and many E and O companies do not cover seller financing problems, so it's important you have an intimate relationship with a real estate broker and an RMLO(Registered Mortgage Loan Originator) to be able to do these deals.

I'm not trying to discourage the OP from doing lease option assignments in California just understand that everybody is sue happy here.

That being said, is my advice to you:

Marketing:

Look for the following: expired listings and listed listings, landlords, FSBOs, and wholesalers.

Expired listings, they tried with an agent and looking for another way. Lease to own arrangement might be that way.

Listed listings, if you're not license go knock on their door and give them a "plan b" in case the house does not sell.

Landlords, many landlords are renting because they tried to sell their property first, , if you ask a landlord, 

if I gave you a 24 month lease and then bought the property at new appraisal, might be more money than you can get today, would you consider some lease to own arrangement? 

Some will, some won't, so what. 

Its a numbers game.

FSBOs, many FSBOs are trying to get the best possible price, without an agent's commission, Why? They have very little equity. 

Contact them and ask them to do a nonexclusive option, where they can sell it for cash and you can sell it on rent to own, and what is the best offer wins.

Wholesalers, many wholesalers have been leads with not a lot equity, and your job is to convince them to give you these leads they cannot do anything with, and pay them consignments fee, 1099.  I offer $500.

Negotiation tips with the seller

First thing never be eager to get the deal. Be the reluctant buyer, not the eager buyer.

Use an upfront agreement that basically says that at the end of the presentation if you Mr and Mrs Seller are a hundred percent happy with my solution, you both agree to move forward with the paperwork today. If there's anything that youre  not happy with it's a no go, with  no hard feelings. There are 20 million houses with very little equity in the United States. 

You are looking for a seller who will work with you and not be suspicious or  overly fearful.

I highly recommend that you use an attorney locally that would be able to notarize your lease with an option agreement with the seller. That way you have witnesses as per what they agreed to do in case you get sued.

My philosophy in this business is, 

trust in God but lock your car.

If you go to my file place you will find a huge amount of forms to use for the seller and the tenant buyer.

If you go to my blog you will find a huge amount of resources lease option assignments.

http://beta.biggerpockets.com/posts/user/REISkills

This is just the seller side and this took me an hour of my time to type out. 

My colleagues in this "Selling on Terms" alternatives are below.

@John Jackson  is an awesome resource, as is @Misty W. 
and @Michael Carbonare and @Doug Pretorius 

Happy Hunting.