Real Estate Investing with Brian Evans Jr.
"Finalizing the Commitment with a Lease Option or Terms Buyer"
Steps 3 and 4, Present Offers to Buyers and Get a Commitment from Buyers, should pretty much occur at the same time. It’s kind of a one-and-the-same step, but it’s a different step. No matter what type of buyer you are working with, unless you have a commitment from them, you have no buyer. Getting a commitment is getting a check.
If after reviewing the numbers, the monthly payment and down payment, on your lease optioin candidates application will work for you then you continue a conversation. You try and verbally finalize these numbers with them. So now, they’ve told you the numbers at the table, they’ve filled out the application. Now I come back in and let them know we need to finalize everything and put it in writing.
Some magic words are: “What’s the most you can put down for this house?” “Is that the best you can do?” Sound familiar? These magic words work which is why I will tell you numerous times to use them!
Answer a question with a question. Let them tell you. Let them get what they want there.
So you've determined the monthly amount, you've determined most down, you're not going to poke and pry as much here as you would when you're trying to buy. You can play with price as much as you want, but eventually there’s going to be a comfort level zone with this type of situation. They’re going to be upfront in the beginning and tell you what they can afford or not, but you can probably get them up a few hundred bucks with these magic words, and maybe a few thousand bucks. If you’re going to poke and pry anywhere it’s on the down payment. Poke and pry the down payment a lot. I don’t have any problem with that; $3 grand, $5 grand, that's good money. But I'm always going to say, “Is that the best you can do? Your down payment really doesn’t quite meet my criteria for a lease option. Is that the best you can do?”
When they respond you're going to get the truth. So then your next thing is going to lead to the last bullet here. “Well, since your down payment isn’t quite up to par with what we typically require, we also have what’s called a down payment assistance program, which allows you to put some additional money towards your down payment each month. This money will apply 100% towards your down payment. We don’t charge any fees or commissions or any funky stuff in order to do this. What’s the most you can afford to pay over and above your lease payment each month to apply towards your down payment? So we have the down payment assistance program. I want to try to help you put in more money down, so when you do exercise your option to buy and you're ready to go, you can show more money down to that lender, rather than having to come up with 20% on the front.”
This is a phenomenal program for them if they exercise, so we are trying to help them. So you simply ask them what is the most they can afford to pay each month over and above the lease payment that we can apply towards the down payment. I think the most we’ve had people pay upwards is $400 or more a month above, on top. That's $400 cash flow in your pocket. That's an additional $4,800 a year to your bottom line by asking those simple words.
Simple Math Reminders to Consider When Selling to Tenant Buyers
Never accept less than 3% of the purchase price as your down payment. There are two things. There is earnest money deposit, and then there’s down payment or non-refundable option deposit. Don’t confuse the deposit with the down payment.
Deposit is an earnest money trying to get an initial commitment, and that can be $500 to $1,000. The remaining down payment or non-refundable option deposit is the additional $4,000 that you're going to get from them at closing. So those are the two things. Don’t confuse them. I used to confuse them, for some reason, personally.
Here’s something else, is the buyer is really savvy? You'll get some savvy buyers in these situations. If they’ve got some money, they’re probably not too stupid. They’re semi-savvy, so they’re going to ask some questions, and they’re going to poke and pry you as well. Everybody is out for themselves, and that's great. That’s what makes America amazing. So you want to try and support yourself and stand up for yourself as best you can. If a buyer is really savvy they will try asking me what I need for a down payment instead of answering me when asked. We're playing the game of who’s going to say the number first. That's what we're playing.
If a buyer is really savvy, and if we ask the question and go back and forth, I'll probably just go ahead and just say outright, “If you really need to know something, our guidelines are anywhere from usually 10% to 20% down, and it depends.” So, I've given a large percentage to him, in his mind. And if he says, “Oh man, that's just way over, there’s nothing I can do,” well now I know. Now I've seen his cards. But if I have to show, I'm going to show, and I'm going to show on the conservative level, because I don’t want to leave money on the table that I could have gotten.
And here’s the thing, there is nothing wrong with trying to get as much as you possibly can, because that's the only skin in the game that you have from these people. And the way you’re structuring it and setting it up is all that money down goes towards their purchase price when they buy. And that's the way it should be. But if they don’t buy and you might have to fix up the home, and so forth, the bottom line is that’s their skin.
You want as much skin in the game as possible, and that's their skin. The lower their non-refundable option deposit, the less they have to risk, the easier it is for them to walk away, and the easier it is for them to trash the property; which doesn’t happen often, but every now and then it does. So that's why you want to get as much as you possibly can. I prefer you accept no less than 5%, and that's going to be a judgment factor for you, but please don’t go below 3%.
Be sure that the money they will pay you monthly will more than cover your underlying payment on the property, and you must get net cash flow profit at the end of the year on the property; otherwise, you did not do very good buying that property. And that means after insurance; you still have to pay insurance on the property, taxes, anything like that. That's net. So your cash flow should cover all of that net. So preferably, you want $200 net profit each month, net profit, on an annualized basis.
I know that we covered a lot of information on this, but this is the fun part of real estate investing. This is when you get to be creative and have a little fun. Just remember to be smart and follow my advice so you end up with great lease option buyers which in turn puts more money in your pockets!