Choices for the Seller Create Win-Win Negotiations

More Tips and Secrets for Buying Real Estate with Lease Options 

Most real estate investors know that you make your profit on the buy-side of the investment deal. When it comes to buying real estate with lease options that means your profit is based on your negotiations with the seller. I strongly

believe that the entire sandwich lease option deal is a win-win-win for the seller, the investor, and the buyer. However, as the investor, you negotiate separately with the seller and the buyer. So, when I refer to this as a win-win it means you are only negotiating with the seller.

The full win-win-win is complete when you also have a deal with the seller.

Today’s blog picks up where the last blog left off (Expert Tips and Secrets About the Paperwork). That’s where I was sharing about how to put together an Option Memorandum and why you want to offer choices to your seller with different ways the deal can be put together.

Sellers Like Having Choices

We already know that real estate investing is about creativity and flexibility. Buying real estate with lease options certainly fits the bill. However, sellers are less sophisticated about creative options. For most sellers in traditional deals, the process is straightforward. All they need to do is hire an agent, show the house, and come to the closing table to collect their check. The truth is that sandwich lease options aren’t much more complicated for the seller but the creativity of the deal can cause them to have some skepticism. Fortunately, offering several choices to the seller about how the deal can be structured is an excellent way to overcome any skepticism by building confidence that the seller has full control over the deal.

Choices build seller confidence about having control of the sale.

The number of choices you can offer the seller is almost infinite when you consider the dollar values can easily be moved to fit individual situations. Still, you need to make a profit, which means the seller can’t just write the paperwork any way they want to. Even though you are giving multiple choices to the seller, you must know what your goal is from the beginning and what is important to you. This means you have already determined how much profit you will ultimately make.

Most of the flexibility involves how much the seller will be paid in each of the three phases of the process – 1. Option fee, 2. Monthly rent, 3. At closing. It’s between these phases where you can often move the money around easily to satisfy the seller. The option fee provides the seller with the money they need immediately. The monthly rent covers their mortgage payment and can give them some extra income for a year or two. In the end, most of the money usually comes at the closing table. The flexibility (seller’s choice) is how much of the total goes in each of the three buckets.

Always calculate your profit all of the way through the deal.

Three Choices for Buying Real Estate with Lease Options

Because there is so much flexibility, there is no way to show every possibility. However, here are three ways of looking at the most common possibilities.

1. You can give a larger option fee to the seller upfront and pay less to the seller at the closing table.
2. You can agree to a larger purchase price but pay little or no upfront option fee.
3. You take a middle road (most common) with a modest option fee that takes care of the seller’s immediate needs but reserves the bulk of the payment for the closing table.

Don’t get hung up thinking these are the only choices when buying real estate with lease options. Among other creative solutions are rent credits, paying higher rent in exchange for a lower sales price, repairs/maintenance, and many other variations.

Creativity….

More Creative Solutions for Buying Real Estate with Lease Options

There are very good reasons why you want to offer the seller multiple choices from the beginning when buying real estate with lease options. What creates value for you is that multiple choices help you understand what is really important to the seller. That way, you can address their pain and that increases your credibility with the seller – more trust.

Not only is the seller more likely to go through with the deal but they are also likely to reciprocate by giving you more of what you want – more profit. Usually, they want money now and will sell for less to get it. Providing choices and flexibility is also great for not needing a confrontational negotiation style. But one word of caution; don’t push for an instant decision from the seller. Being pushy can make the choices seem like a shell game where you are trying to slip something past them. Give them a day or two to look over the choices before getting back to you.

Having a few deals under your belt (and money in the bank) enables even more flexibility, which the seller might find appealing. By this time, you probably have a list of buyers and know exactly which two or three buyers will jump at a particular lease option deal. With money in your bank account, you can confidently offer to write the seller a check for $2,500 on the spot in exchange for some of the other numbers working favorably for you. This is a variation because it’s not usually recommended that the seller be paid until you have the other half of the sandwich lease option with the tenant/buyer.

Another version can happen if the seller is currently living in the house. You can offer to give them the option fee the day they move out and hand you the keys. Even if you don’t have a buyer’s list, you’ll have two or three weeks to find a tenant/buyer before the seller vacates the house. The option fee won’t come out of your pocket.

Don’t forget how powerful rent credits can be. During the entire lease period, you are paying the full rent to the seller every month. The seller may find that extra income very helpful. However, at the closing table, all of those credits come back to you. And the seller is still happy because he/she is getting another big check at the same time. Rent credits can substantially add to your total profit from the deal.

When buying real estate with lease options, the benefits of creativity, flexibility, and non-confrontational negotiating are extraordinary. It gives the seller a sense of regaining control at a time when they feel they have no control over their finances. They may want to move the numbers around a little differently but that is okay with you because that is what a win-win outcome is all about! When you can offer them what works best for them, they will recommend you to their friends and family. Everyone walks away happy!