We knew even back before the start of the pandemic that a recession was coming. We’d been predicting that within 12-18 months, we were going to see a slow down in the economy, but of course we could never have predicted 35 million people would be unemployed or that everything would seem to happen all at once. One of the consequences of having so many unemployed people is that because there’s a disruption in their employment they’ll have a harder time landing a bank loan when they start looking to buy a home after things stabilize for them.
In the last recession, my good friend Joe McCall from Real Estate Investing Mastery started using creative financing options to help more buyers and sellers get around common problems. He kept finding sellers who didn’t have enough equity to sell their house, but who desperately needed to sell before their credit was wrecked. That’s when he pivoted away from rehabs and completely embraced wholesaling lease options.
A lease option is an agreement to purchase a property in the future. Whether that means five year, ten years, or fifteen years in the future is entirely up to you and the seller. Once you have a lease option, you can then sell the option to buy to someone else. Finding the right seller and a qualified tenant buyer will put you within the three profit centers in lease options, and it’ll open an awesome world of possibilities for any possible buying and selling scenario.
Finding Sellers Who Have to Sell
Joe doesn’t even bother placing ads for sellers. He goes looking for For Sale By Owners or landlords on Zillow, Craigslist, Facebook Marketplace, or sometimes even Redfin. But his favorite website is by far Zillow. He simply has his VA call up the phone number on the listing and ask if the property is for sale. 20-30% of the time, Joe’s discovered that the rentals on Zillow aren’t listed as absentee owners on any of the lists investors might buy. These absentee landlords are flying under the radar of other real estate investors, so they haven’t been inundated with robocalls and text messages.
All of these Zillow rentals have one thing in common: they’re vacant. Finding a vacant property is like finding the Holy Grail in lease options because you never have to deal with a tenant and they’re immediately ready for a tenant buyer. Joe’s VA will just give the property a phone call, and if the landlord indicates that they’d be interested in selling it, Joe will follow up with a second call to see if they’ve ever thought of leasing the house instead of selling it outright.
Catching the Attention of Buyers
Signs in the front yard of the house continue to bring in potential buyers - even ugly bandit signs still work. Keeping it simple, Joe says just a phone number and a note that 3% down will move you in is all you need. More recently, Joe and his coaching students have found that Facebook Marketplace is a site that’s replacing Craigslist. Sometimes Joe’s students struggle to keep up with the messages that pour in when they advertise a house on Facebook Marketplace.
How to Structure a Lease Option Deal
Typically, what Joe likes to see is 10-15% equity and 20-25% of the rent for cash flow. He aims for those median-priced homes in good school districts that families want to live in. In an area like Missouri, that might look like a $200,000 home that he would purchase from a seller for $170,000. He can then rent that house to a tenant buyer for $1800 a month and pay the seller $1350 a month. That gives him $30,000 in equity and $350 a month in cash flow.
When he’s talking to a seller, this usually means that he needs to purchase the home at 60 or 70 cents on the dollar. For the right motivated seller who is more concerned with the price than the timeline, they’re happy to sign a lease that gets them the amount that they need. Then Joe would find a tenant buyer to sublease or assign out that contract to.
Three Ways to Profit in a Lease Option
Joe says that wholesaling lease options gives an investor three different profit centers. There’s cash now, cash flow, and cash later. The money the tenant buyers puts down is your cash now, the monthly rent is the cash flow, and the assignment fee you collect when the lease option is exercised is your cash later.
The most lease options Joe’s ever done were between 2008-2012 when the market was coming down. He thinks that having a glut of sellers who wanted to sell and buyers who couldn’t get financing made it easier for him to apply creative financing to these situations. Those are the same circumstances we’re moving into right now as we transition from a seller’s market to a buyer’s market. In fact, Joe’s already seeing old leads reactivate as sellers are reaching out to him with more motivation to sell their property as their circumstances have dramatically changed in the last year.
Joe thinks of himself as a transaction engineer instead of a real estate investor because he sees himself as the person who connects buyers and sellers with each other while making sure the transaction is successful. He originally wanted to stop throwing away his leads because of some snag in financing, but lease options have opened up more possibilities for him in the real estate world.
The double whammy of an overdue recession and a pandemic are definitely going to affect the situations of buyers and sellers, but for real estate investors who are prepared to flex with the market, there are opportunities coming.Be daring,