Have you ever seen a “rent to own” store? Did you know you may walk into that store and buy a brand new big screen TV. All you need to do is make nice, easy monthly payments and in a few years, you will own that TV. Of course in the long run you will end up paying between two and three TIMES more for that TV than if you paid cash up front! How about the easiest way of getting a new car—leasing to own. You simply make a small down payment and then each month you make an easy lease payment. At the end of your lease period (usually three or five years), you have the option to buy that car with a portion of your monthly lease payments going toward the purchase of the car. Or you can simply hand back the keys and go find another car if you choose. Of course if you buy the car on this lease to own plan you will end up paying more for it than if you had purchased it for all cash up front.
Why would people pay more for something on a rent to own basis? Because they are paying a premium for the financing. And the best part for you is that you can do the exact same thing with real estate!
Just by taking a property and changing the terms with which you make it available to the buyer, you instantly increase the value of that property. Read that sentence again because this point is crucial to your bank account.
Just by taking a property and changing the terms with which you make it available to the buyer, you instantly increase the value of that property.
You are going to be using the rent to own concept, which has been around for many years, in a new way—with real estate. How?
You are going to be a matchmaker, matching up a motivated seller and a hungry tenant-buyer. And by helping both these people get what they want, you are going to get paid handsomely for your efforts.
A motivated seller is a property owner whose sole aim in life at that moment is to get rid of his piece of property. There are seven main causes of motivated sellers that you will be learning shortly, but for the moment what is important is that you understand that when you find and put together a deal with a motivated seller you are helping them win. Remember, for them their property is a problem, whether it’s because of debt or distance, and they need your help in fashioning a win-win solution.
Your hungry tenant-buyer is someone who desperately wants to own his or her own home, but for one reason or another can’t qualify to buy a home the traditional way. Remember those three things you need to buy a home traditionally: large down payment, good credit, and high monthly income? Well, your tenant-buyer is someone who is lacking in one of these key areas.
For example, your tenant-buyer may be someone who had a bankruptcy five years ago. As you know, it takes seven years for that to clear off his credit record. You are able to help him come into your property as a tenant-buyer—renting to own the property. After two or three years, your tenant-buyer can now qualify for a new loan and cash you out of the property.
Let’s walk through a simplified example of what we are talking about. Then we’ll cover how it is you find these motivated sellers and other ways you may be able to help them and make a large profit for yourself.
Simplified Example:
There are two steps to any deal. Step one is to find a motivated seller and create a win-win solution to their real estate problem. Step two is for you to find an end buyer for the property—your tenant-buyer.
Let’s start with step one—finding your motivated seller and creating a win-win solution to his real estate problem.
Randy is a motivated seller. He was offered a new job four months ago in a new city. The job is a great career move, with an increase in pay and prestige. The problem for Randy is that he hasn’t been able to sell his house yet. He tried listing it with a Real estate agent for three months and he just couldn’t sell. Now he is faced with his move in just three weeks.
His options are either to slash the price of the house for a quick sale, something he is hesitant to do. Or he can rent it out until he can find a buyer. (But then he would have to either manage the property and renter LONG DISTANCE or hire a PROPERTY MANAGER and pay them to manage the property—typically 10% of the monthly rent.)
That’s where you come in. As an investor, you are able to help solve Randy’s problem. You come in and agree to rent out Randy’s house for six years for the amount of his payments. At the same time, you agree upon a price at which you can buy the house at any time you choose over that six-year period. (This is called a “lease option” or a “lease purchase” and it is the foundational strategy of the purchase option system. You will learn about four other purchase option strategies later in this manual.)
Randy’s payments on the house are $1,400 a month (this includes principle, interest, taxes, and insurance.) You will cover this amount so that Randy will have no costs associated with his property over the period you control it before you purchase it. (You’ll learn how you will deal with the maintenance later.)
As for the price, to show you how you can give the seller full price and still make money for yourself, you have to agree to pay the seller full market value for the property. In this case, that is $200,000.
Using this strategy, you can offer the seller full price and still make a huge profit for yourself. Obviously if you are a good negotiator and are able to bring that price down, then you will end up making even more money.
What Does It Take Up-Front?
Now if you are like the students I work with across the country, then you will probably be able to complete step one without giving the seller any up-front money.
A few years ago, I did a real estate investing challenge with a couple other investor friends and we were able to lock up over $1.5 million dollars worth of real estate with only $37 in up-front money! We locked up ten separate properties ranging in value from $60,000 to $500,000 with only $37. And if we can do it, so can you.
But just like you would imagine, if you are able to give the seller up-front money then you are able to close more deals. In this example, you are going to give the seller $2,000.
Wait a second, you say… You haven’t got $2,000! Just hang in there because in a moment you are going to learn where you are going to find this money. (And here’s a hint for you—it won’t be from your wallet!)
Let’s get clear on exactly what you and Randy have agreed upon. You have agreed to rent out the property for six years for the amount of the payments ($1,400.) And you have also agreed on a price (in this case full market value of $200,000) at which you can buy the property at any point over the next six years. In essence you have negotiated a lease with the option to buy. (Note: we are using a sales price of $200,000—full market value—in order to show you how you can offer full price and still build in a healthy profit for yourself. Obviously if you are able to negotiate the price lower that means you will make even more money.)
As for the $2,000 of up-front money, you are going to tell your motivated seller, “Mr. Motivated Seller, I will give you the $2,000 as soon as I take occupancy of the property or find someone to take occupancy of the property.”
You’ll see in just a moment why it is critical for you to add this part into your agreement because it will be essential in your funding of this deal.
The Secret of Little to Nothing Down Deals Here is the secret to doing little to nothing down deals:
Nothing down does not mean ‘nothing’ to the seller. Nothing down means none of your money going to the seller.
The distinction is critical, as you’ll see. Your motivated seller may get money up-front… it just won’t be your money!
Now you’re ready to move on to step two—finding your hungry tenant-buyer. In this case, your tenant-buyers are the Smiths. The Smiths are a middle-aged couple who started their own business last year. They have good credit, but because they don’t have two to three years of tax returns and bank account records supporting their loan application, they can’t get a loan the traditional way… yet.
You are able to help the Smiths by letting them rent to own the house. This means that the Smiths will rent out the property from you with a price you have set in advance.
In this example, the Smiths are going to rent the property from you for three years. (There is a specific reason you always want a longer term with your motivated seller than with your tenant-buyer that you’ll learn in just a moment.) The market rent in the area is $1,700 but because the Smiths are coming into the property on a rent to own basis they willingly pay you above market rent! In this case, they pay you $1,800 rent.
You also agree with the Smiths on a price in which they can purchase the property at any point over the next three years. Because you want this to be a win for the Smiths too, you set the price at LESS than the house will be worth in three years time.
If the house appreciates at just 7 percent, then in one year it will be worth $214,000. We are leaving the money-making effects of compounding out of the equation to keep the concept simple. After three years, the house would be worth $242,000. You are going to let the Smiths have a purchase price of just $230,000! You can feel good that you are giving them a tremendous value.
Because of this value you are giving the Smiths, they will pay you 3-5% of the value of the property up front as a down payment (technically called an “option payment.”) In this case, you collect $10,000 from the Smiths up-front as their option payment on the property. This money gets credited off the purchase price and is NON-refundable in the event they choose not to buy the house.
After a year or two, the Smiths will be able to get a new loan from their mortgage lender and cash both you and the motivated seller out of the property. In essence, that’s how the system works.
Peter Conti, Real Estate Investing Author Peter Conti (Mentor Financial Group, LLC) went from auto-mechanic to real estate millionaire in 3 ½ years. For a limited time, you can access Peter’s best- selling ebook, ‘How to Create Multiple Streams of Income’ and get $429.56 worth of free investor tools. Go quickly to this page and download the free material- www.mentorfinancialgroup.com/mfg/freeresources.php
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