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Additional Revenue with Lease Option Programs
This is kind of a little secret that not too many real estate investors know about, but it’s a huge income potential for your business, especially if you do a lot of lease to own, rent to own properties. And that is having a down payment assistance program with your tenant buyers.
Now, what this down payment assistance program is, it’s simple. The people that are trying to lease option your property; they’re going to be giving you a non-refundable option fee. Usually that’s anywhere from 3% to 5%, it’s a couple thousand and upwards to maybe ten thousand, sometimes a lot more than that.
So, people are going to be giving you a non-refundable option fee, as well as determining their lease payment with you. But if you ask a simple question, which is this, “Mr. and Mrs. Tenant Buyer, if I could provide you with a program to help you build up your down payment so that way when you do go to the bank and get a loan, it shows that you’ve put in upwards of 10% to15%, rather than 3%, would you want to participate in that program? And it doesn’t cost you any interest or anything. It doesn’t cost you a dime to participate.” Of course, they’re going to say yes.
“Okay, great. Well, here’s what that program is. We have a down payment assistance program. We’ve already determined what your lease payment is going to be. Is there any way you can contribute money over and above your lease payment each month to apply 100% towards your down payment?”
And they’ll say, “Well, what do you mean?” “Well, here’s what I mean. What’s the most you think you could pay over and above your lease payment each month to apply 100% towards your down payment? This is money that you can pay in installments versus having to come up with a large down payment chunk at one time when you go to the lender.”
“So, whereas a lot of people have problems building up their 20% down payment, you can pay it in over time and you can hopefully get to the point where you want to get to in order to achieve your down payment level when you do go to try to qualify for a new loan.”
It’s nothing more for you, as a real estate investor, than trying to generate some additional cash flow. So, if somebody says, in fact, in my situation I’ve had people pay in close to $400 over their lease payment each and every month to apply towards their down payment.
The only thing that you need to do is you have to write it up in the lease option agreement and you’re going to collect two checks from them each month. One check will be the lease check and the second check will be the down payment assistance program check that you’re providing for them.
And this down payment assistance program check is also non-refundable. So, if they default, then they do not get that money back. If they do not exercise their option to buy, then they do not get that money back. It is non-refundable, just like the non-refundable option fee.
And believe me, I’ve had people that have paid in upwards of $400 a month in addition to the lease payment for over a year and then they’ve walked away for one reason or another.
So, here’s a way for you to establish additional income streams for your real estate portfolios that is simply free money if you ask for it. It’s a great program for the tenant buyer if they utilize it. If they don’t utilize it, it’s no real loss to them, but it’s a way that they could potentially be paying in more money, you could be getting additional cash flow and it’s a win/win all the way around. And it’s a great cash flow boost generator for your business as well.
So, try to incorporate a down payment assistance program into your lease option business if you feel that is appropriate for you.
There are numerous ways to make win-win situations for lease option buyers and yourself as the investor. Let me share with you all the potential programs you can offer.
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Selling Your Real Estate Investment Properties
It’s Friday and that means that whatever properties you are trying to sell right now, you need to have ready to show over the weekend. Both the properties that will benefit form a little staging and those ugly ones that need attention from investor buyers. Most real estate investors don’t get the house they are buying ready to sell. This is a mistake because it will delay finding a buyer and tie up your money longer.
Sometimes this just requires a little bit of cosmetic sprucing up or some staging in the property. You would be surprised how little things like that will do tremendous wonders to the home. You can go to Wal-Mart and spend one or two hundred bucks on some small items, some kitchen towels, some bathroom towels, some fake fruit baskets, some silk plants. I mean, you name it, some rugs, some curtains, stuff that makes it look like the house is lived in, a shower curtain in the bathroom, different things like that, little cosmetic toiletry things, nuances. It’s very important and you’d be surprised.
If the house looks like it’s already being lived in and it’s warm and inviting and comforting when people walk in to the property, they are going to want the house that much more than if they walk in the house and it’s a white tornado and it’s cold and it’s empty and it just looks like a vacant home, just like every other vacant home off the streets.
So, you want to do everything you can to try to make the home look inviting and warm. And another way to do that is get some air fresheners. Even if it doesn’t smell, get some plug in air fresheners or something in there so that way when they do walk in there it smells good. Because when people are buying, people are buying with all their senses, not just one or two.
So, do all you can. Sometimes it’s just the little things, a little bit of cosmetic stuff and a little bit of staging will do tremendous wonders to your properties when you go to sell or occupy these things. Trust me, it will help 110%.
If you have an ugly home for sale, make sure you are drawing attention to it by all kinds of for sale signs in the yard. Get pointer signs on nearby street corners. The more you can let buyers know how flexible you can be with selling this home, the better. Don’t be afraid to try an ad in the paper especially a couple days before a weekend when people are more likely to house shop.
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Real Estate Investors, Don’t Get Caught in the War Zones
When you are just starting out in investing there is one mistake that a lot of real estate investors make and it deters them from being able to ultimately grow their investing expertise. In the early days, most investors only focus on doing business in the low priced properties, in the low-end neighborhoods. What you and I may refer to as the war zones.
And the reason why I think people do this is because the numbers are smaller, there’re fewer zeros at the end of the property value. So, I think it makes you feel a little bit more comfortable in working in numbers that are not so big. But, to be honest, it takes a certain kind of person to be successful in doing business in these types of areas because it’s difficult to do business in these areas.
And if you think about it, it really is kind of common sense because if you’re going to buy a property and rehab it or lease it out or resell it or put tenant buyers in it or whatever, there are not a whole lot of people that actually want to live in these neighborhoods. So, these neighborhoods are for low-income families and most people who you’re going to want to sell to are not going to be low income families.
Because, whether you believe me or not right now, most of your problems in this real estate business are going to come from low-income properties. It’s going to come from the crap properties that you get because with, no disrespect, but with crap properties, the only people who want crap properties are crappy tenants.
And with crappy tenants comes crappy income. And with crappy income comes difficulty getting paid. So, if this is something you want to pursue, fine. Is it something that I would recommend you pursue? Absolutely not.
There are many, many other neighborhoods and properties out there to do business in and make good money at. So, don’t feel as though you have to start in the low end priced properties just because the numbers make you feel more comfortable because in the long run you’re going to find that there are more problems in these areas and these neighborhoods than you ever thought imaginable.
Yes, a higher priced home has more zeros to it’s value, but that doesn’t mean you will really approach the deal any differently than you would any other deal or buying a lower income property. Investing is still a numbers game and it comes down to the formula you use to determine your maximum allowable offer, taking into account the after repair value and the repair costs. Don’t let larger, higher valued homes intimidate you. If you do, then you will let just about any other person or deal do the same and your investing will not prosper.
So, with that said, really think twice about working in low priced properties because war zone homes and these types of tenants are not good tenants, in fact, they are the worst tenants that you could possibly find.
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Use Scripts for Real Estate Investing Phone Calls
Here’s a tip for all of you investors out there who may feel intimidated by getting on the phone and talking with buyers and sellers or anyone you may do real estate business with for that matter. USE SCRIPTS! A lot of real estate investors do feel intimidated initially and make the mistake of not working from scripts when they make phone calls.
It’s very important that you work from scripts, especially in the beginning because you don’t know everything. You don’t know always what to say when people say something. And you forget. And you get nervous. And you get scared.
You need to have a piece of paper with a prepared script on it in front of you when you’re at your desk and you pick up the phone to call somebody back about buying their property. If you have a script in front of you, which tells you what to say, it’s so much easier and builds much more confidence. And you don’t forget something that you wanted to say if you have it written down in front of you.
Something else you want to incorporate in your script is answers to questions that the buyer or seller may ask. Particularly, answers to questions posed in opposition to what you are proposing or discussing. If you are able to respond quickly and effectively to any challenges thrown your way, that’s an even better credibility boost for you. It shows that you have covered all your bases and just aren’t trying to BS your way through a deal. If you are going to become a credible, trustworthy investor who does what you say you will do, you better know your stuff and be able talk confidently to buyers and sellers.
This is a really simple tactic that a lot of people don’t utilize in their business. It’s okay to pick up the phone and have a script in front of you, so that way you don’t forget or say something stupid.
So, if you don’t already work from scripts, try it. Until you start to get good at being on the phone, asking the right questions, analyzing properties on the phone, speaking with buyers and sellers. Until you start to get really good at that, work from scripts.
Write down your script and utilize that on a regular basis when you negotiate buying and selling properties. It will make your life a lot easier. It will reduce the stress and it will make you sound more professional because you’re saying good things, you’re not starting to get diarrhea of the mouth when you talk, you’re keeping it simple, you’re getting right to the point, people will appreciate that.
And they won’t know for one second that you’re on the other end of the phone looking at a piece of paper hoping that you don’t slip up and forget what you’re going to say.
So, it’s okay to work from scripts. So, implement that in your business if you need it and utilize it on a regular basis. One more thing, the scripts you use are the result of knowing how to invest wisely. They are not meant to just get you through a phone call, you better understand what you are saying and back it up by closing the deal correctly.
Educate yourself wisely as well. Check out what I can provide and give it a test drive. If you don’t like what you see, give me a call; believe me when I say, I’ll know how to respond! J Go to: www.freemakemoneygift.com/Invitation.html
Real Estate Investors and Multitasking Skills – Explode Your Income
There are plenty of jobs and careers out there that require multi-tasking. Being an entrepreneur is no different and in fact I would venture to say that as an entrepreneur multi-tasking is a must and a skill you have to master (or delegate to an employed who has that gift). There are two different areas in real estate investing you should have multiple solutions for: getting stuck in one way of doing something for your business and being limited in your sources of income.
Too many times investors’ keep doing things the same way and wonder why it’s not working like it did when initially started. For example, whether it may be certain vendors they use, a marketing method, an employee, an income stream, and an exit strategy. What I mean by all that is, ask yourself this one thing - if one of these sources or one of these things that you are dependent on were eliminated or were taken away from you, would your business still survive on a regular basis?
For example, if you have only one marketing method to find properties and that’s putting out We Buy Houses signs and all of a sudden a new mayor comes in and gets elected and they crack down like you wouldn’t believe on illegal signs and bandit signs. If that were your only marketing method for finding leads, then what would happen to your business? Would you still survive? Would you still be able to get paid?
If the answer is no, then obviously here you need to find different methods for marketing your business. If you are relying on a certain vendor to print things for you or take calls for you, and if that vendor went out of business, what would you do? Do you have backups?
If you have one employee and that employee does everything for you, what would happen if that employee left and got a new job? If you have one income stream, one exit strategy and that’s retailing for cash and all of a sudden the market dries up and the economy goes south, which it is right now. Would you still be able to make money and survive in this business?
So, be smart about this. Do not become over dependent on any one thing. Analyze your business. And if you find that you are dependent on just one thing in your business whether it is any of the examples I just mentioned or other examples we have not talked about, you need to find backups and Plan Bs for all of those things in case something happens and you have to adjust.
So, be smart. Don’t become over dependent on any one thing in your business.
You also need to explore other sources of income. My friends, this tip is huge.
If you’re not looking for other sources of income other than what you’re doing every day, flipping houses or whatever, then you’re not maximizing yourself. You’re not maximizing your potential.
Perhaps you’re comfortable with where you’re at in your business and you don’t need extra income streams. Fine. But I would venture to say that most of you reading these posts are entrepreneurs and always looking to get to the next level, no matter where you’re at, whether you haven’t gotten to the first level yet or whether you’re seasoned and doing extremely well. You’re always looking for the edge. You’re always looking for something else. At least I am anyway.
So, it would be wise if you did explore other sources of income streams. For example, did you know that a lot of the leads that you generate in your business, (leads where people are looking to sell their house or leads that you generate where people are looking to buy a house) that you could potentially sell those leads to other people in your market niche who would pay for those leads? They would pay anywhere from $5 to $25 to maybe even $75 or more per name per lead? That’s huge information.
And that’s a perfect correlation to what you’re doing in your business everyday. Find ways to incorporate other methods of income streams into your real estate business. It doesn’t have to be real estate business, it could be any business.
Perhaps your core business, your real estate investing business is doing great. Maybe you should start to explore other things. Maybe you should start to explore coaching, consulting, partnering, different things like that.
So, don’t be over reliant on an income stream and explore other sources of this because this is where true wealth comes into play. Anybody’s who anybody out there who really makes money, who’s very super successful has multiple income streams. They begin to leverage their time and their money to develop multiple income streams. So that way, if any one-income stream fails, they have more income streams coming from a different angle to live off of. It’s simply smart business.
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Real Estate Investor Mistakes – Not Prescreening Leads or Getting Enough Option Money
Most real estate investors don’t know how to prescreen their incoming leads. You need to be able to quickly eliminate the suspects in this business and only deal with the prospects. You only want to work with people that want to do business with you, period.
You should be able to instantly look at the numbers and decide if this is a deal for you to pursue. Whether it is a seller or a buyer. The information you want from the seller is their asking price, their loan information, repairs on a property and what the seller thinks their house is worth, and know at a quick glance if this is a property that you want to work with or not. For a buyer, you want to know three main things: what’s the most they can afford to put down, what’s the most they can afford monthly and their credit standing. Of course this is simplified, but the point is prescreen and proceed.
You need to get really good at prescreening your deals, because if you try to over analyze something and you’re struggling to even know if a new lead that comes in is a deal for you, then you need to go back to the basics. You need to understand and get very good at prescreening your incoming leads. So, that way you can get rid of all the time wasters (suspects) and only focus on the prospects.
That leads to another mistake made by most real estate investors when it comes to buyer leads. The big oops is putting tenants into a house without collecting enough of an option fee. Boy oh boy, does this mistake ring a bell for me. Let me share. I had a house that I put a lease option tenant into the property. And it was a house that I had vacant for a little bit longer than normal and was starting to get a little bit antsy. I wanted to get that thing occupied. I was just tired of writing a check every month and not having a check coming in.
Well, stupid me, I go and I put a tenant into the property with pretty much no money from them. And I got sloppy and then I had to evict them. They didn’t make the first month’s rent payment. And frankly, it’s my own fault.
So, don’t make the same mistake that I did. If you’re going to put lease option tenants into your houses, make sure that you get at least 3% to 5% of the purchase price from them. That is the guidelines that I usually follow. I made an exception to the rule and I dealt with it, but that’s life. I made the decision and then I had to suffer the consequences.
So, for your sake, if you’re going to do lease option properties and you’re going to put tenants into these properties, please get as much of a down payment, a non-refundable option fee from them that you can. Do not put tenants in properties without collecting enough money from them.
If you put them in for just a few hundred dollars, I can virtually guarantee you that you’re going to be getting that house back a lot quicker than you thought. So, take my advice on this one. It’s not worth the headache.
Real Estate Investor Mistake: Not Preparing for Buyer and Seller Objections
Most real estate investors don’t know how to overcome the buyer and seller objections. Of course, as a real estate investor, you’re going to have to ask personal questions. You’re going to have to ask what people owe on a property. You’re going to have to ask if people are current or behind in payments.
You’re going to have to ask potential buyers what their income is. You’re going to have to ask them how much they can afford to pay monthly and what they can put as a down payment.
The more personal you get with a lot of your questions (even though you have to know the answers to these questions) the more objections and questions you’ll raise in your clients’ mind. The key is knowing how to overcome these objections.
Now, we could quite easily spend an entire hour talking about this topic and dissecting it from all types of different angles. But we don’t have that kind of time. So, what I’m going to do is give you two pointers to take away with you today.
Pointer #1 on how to overcome buyer and seller objections is, before you pick up the phone and call your buyer or seller, make a list of potential objections that you think might come up during the conversation. And have an answer to those objections before you speak with them.
Believe it or not, this is actually a more simple process for you to do than you would think. Simply put yourself in their shoes and raise some objections about your conversation. This is called preparation. And in fact, if you do this and then have the conversation with your client, you’ll be surprised. I would wager that less than half of the objections that you thought of were actually brought up by your client. So, a lot of the fears that you have in your mind are questions and objections that most likely won’t come up with the majority of the people that you speak with.
Point #2, and this may sound simple, but you have to have confidence. When you speak to these people on the other end of the phone or meet with them in person or whatever the case may be, you have to have confidence in yourself.
Self confidence will take you farther than you ever imagined possible. Develop your confidence and you’ll be able to overcome buyer and seller objections. It might help to verbally practice answering objections that you may potentially hear from a client. Don’t be self-conscious, just give it a try. Speakers all over the world have to practice speaking before they get on the stage, most ministers practice their sermons, it’s just good diligence on your part to be prepared.
Keep in mind that most buyers and sellers will have the same questions. As you gain experience and knowledge, objections get easier to answer. Also, continue learning yourself so you are up to speed with real estate changes in your area. I’m a firm believer that you learn from others’ mistakes, that’s why I share so many of mine. Now, some things you have to learn for yourself, but if you have a good mentor you can tackle these mistakes with ease. If you want to learn more about investing and have a desire to succeed, then I will jump-start your investing career with the following invitation. Go to:
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Private Lenders in Real Estate – My Last Thoughts
Key Point: When you work with private lenders always strive to under promise and over deliver.
The bottom line is to look at what you are offering from the lender’s perspective. What would you be looking for if you were going to loan money to a real estate investor? What security instruments would you want to see in place? What assurances on time would you find appropriate? How would you want them to handle challenges along the way? What would make you want to do it all over again? When you think like this, your pursuit of private lending will be much more productive, profitable, and repetitive.
The idea of using private lenders is nothing new in the world of real estate investing. Successful investors have been raising and using private capital for decades and it is only now starting to filter down to the novice investor as being something of great importance. Does this mean that it should be something you look at carefully? Absolutely. How fast do you want your business to grow? There’s the slow route and the progressive fast track and private lending can quickly put you on the fast track to success.
Like any business decision, the choice to pursue private lenders comes with its upsides and downsides. The upsides are pretty clear, as there is a virtually limitless supply of capital that is out there for the taking. The downsides are few but the use of private capital does usually require that your business be a little more organized to have the most success raising funds. For example, your credibility kit and business plan are of high importance to a potential private lender, even if they might not be as important to other clients.
As far as managing the funding you do secure, be bold but also be smart about it. When making offers, consider that the quality of the deal doesn’t just affect you. When you are setting a budget for the deal, it is good practice to imagine yourself in the shoes of the private lender that is funding your deal. I find that when you look at private money as if it were your own, your decisions remain on a better plane and you are less likely to take unnecessary risks. People get funny about money sometimes but don’t let that in any way discourage you. This is a wonderful resource to pursue, and when you pursue it intelligently, the sky’s the limit.
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Managing Relationships With Private Lenders
Like any situation where there is a capital investment, private lenders are going to have certain expectations of you as the source of their eventual returns. The first and best thing you can do is to structure your agreements correctly the first time around. What I mean here is that the majority of challenges that arise with private lending relationships involve too much ‘best case scenario’ and too little of the real world. This can apply to both the repayment terms and also the timing and is easy to avoid.
I need to elaborate just a little on what I mentioned in the previous paragraph. Many private lending relationships can proceed without incident and this is of course the idea. When problems do arise, they are usually because the borrower needs more money or because they need more time in which to pay the lender back. These situations, when they do occur, are often because the borrower is trying too hard to accommodate a lender and suggests they ‘probably’ only need so much capital or ’should’ be able to get a project done in so much time. It’s easy to see how this can happen and hopefully also why you want to avoid this.
My simple suggestions here are twofold. First, ask for more funding than you think you’ll need. If this means padding your budget a little bit, so be it. Extra expenses do come up with real estate projects and sometimes (in fact, all too often) they take longer than originally anticipated, increasing the necessary carrying costs. It’s always easier to ask for the extra funding up front, because the alternatives are either go back to the lender and ask for more money, or come up with it yourself. Neither situation is ideal, and asking for more money from a private lender on the same deal, could prove to be damaging to your relationship.
Timing is another issue to approach with caution when it comes to private lenders. Many will like the idea of getting a quick turnaround on their investment and may actually push for these short time frames (e.g. six months or less). It is tempting to go for this as an investor, thinking that a short time frame should work out OK. My suggestion is to stop right there and reconsider before going any further. Just like running out of money, having to approach your lenders to say you need more time could also be a relationship killer. However, let’s say that the worst did happen and you needed more time to pay back the lender. Put yourself in the private lenders shoes and determine how you would like to be treated. Consider drafting a formal business letter explaining the situation and respectfully requesting a restructure of the original note. I’ve had to do this before with one of my private lenders and it was surprisingly well received and accepted. I am now viewed with more professionalism and a greater sense of credibility because I was proactive and sought out a solution with plenty of time to spare on our original note agreement.
The solution here is simple. Anticipate as best you can, the realistic time frame you think will be necessary for your deal and then double it. Therefore, the likely worst-case scenario is that your project is completed (at least from your private lender’s point of view) on time, whereas the best-case scenario is that you’ll finish before a deadline.
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Securing Funds From Private Lenders for Real Estate Deals
Previously, I discussed being prepared to gain business capitol. The first step is to act like a person who is actively looking for it and constantly networking. Secondly, you should have a credibility kit assembled and ready to go; ready to hand out when the opportunity arises. That doesn’t mean leaving it sitting on a shelf at home or desk at work ready to send, but physically on you to offer immediately to a potential private lender. Timing can be critical.
Once you have your foot in the door, you’ll need to be ready to seal the deal with a prospective private lender. It is important that you capture their interest first, before ever putting a live deal in front of them. This is for two key reasons. First, you want them to see value in your business, not just a single deal, since this lends itself (no pun intended) to future deals beyond the first one. Second, and perhaps more importantly, capturing their interest before putting their funds into a specific deal keeps you in better compliance with securities laws. Hence, handing out the credibility kit and capturing their interest immediately.
OK, I know I just popped open can of worms there, didn’t I? Securities laws? Before you get nervous, let me give you the quick highlights. When you capture interest from a private lender, they’re only seeing value in a business model before committing any funds. They aren’t being presented with a specific opportunity until after they’ve agreed to provide some funding for your business. This means they haven’t been formally solicited for funding, which is more closely governed by the laws that concern investments. Just stay away from randomly soliciting funds for a specific deal and you should be OK. I of course may be missing a detail or two so be sure to run all this by your attorney to make sure you are doing everything correctly.
Now that I that have covered the bases, I will now discuss what you need to agree on with your lenders. Example terms for an agreement with a private lender include the following:
The length of the loan
The amount that is being borrowed
The return that is expected
The means by which the loan will be repaid (usually a fixed return rate or sometimes profit sharing)
Recourse if the loan is not paid back on time
Something to keep in mind when you outline the terms of the agreement is the ability to go back and renegotiate the terms at a later date. As I have pointed out before, Murphy’s Law is everywhere and it certainly doesn’t hurt to put in a safety net for all parties should something go awry. The private lender may also view this too as smart business on your part and respect your attention to details and keeping their best interest as well.
There may be some other agreed upon terms, too, but these are the main things you need to work out with a private lender. Ways to put all this to paper can vary and I highly suggest you work with your attorney to get it all put together because your lender will probably be having their attorney review it.
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