Lease Option Investing in Central PA Part 1
55Lease Option / Rent to Own Investing Part 1
by Zack Wiest
http://padeals.com/
Ok, so we’ve learned about Buy and Hold and Buy Fix and Sell and I hope you agree they’re both awesome money making strategies. From time to time though you’ll buy a property with the intention of using one of those strategies and for whatever reason it won’t quite work out. If you are faced with a situation such as that you do have a Plan B strategy and it’s called Rent to Own.
What is it?
The Rent to Own technique is a hybrid between the Buy and Hold technique and the Buy Fix and Sell technique. There are aspects of each strategy found in the Rent to Own technique. When using this technique you are simply leasing your property to an interested party and giving them the option to purchase the property from you sometime during the lease period. We call this interested party a tenant/buyer because they are a tenant today and hopefully, a buyer down the road. Don’t confuse option with obligation. When using this technique your tenant/buyer has no obligation to buy, but they do have the option of buying, if they so desire. The reverse is true for you. Should your tenant / buyer decide to exercise their option to buy you must sell the property to them. We call this a unilateral contract and you, as the landlord / seller are obligated to perform in the form of honoring your tenant / buyers option.
Who do we use this strategy with?
Your target market when selling properties on a rent to own agreement are hard working, honest people who for one reason or another have credit issues that are preventing them from obtaining a mortgage to buy a house the conventional way. Due to their credit issues they are willing to pay a premium to you in order to at least have a fighting chance of realizing their dream of homeownership. When screening a prospective tenant/buyer for one of your properties, you want to look for the following criteria:
a] Steady Employment – They will need a steady job that pays a decent salary in order to eventually qualify for a mortgage to buy your property. They should be at their job for at least a year, and / or at least in the same profession for a year or more.
b] Debt to Income Ratio - Their debt to income ratio, using their new monthly house payment should not exceed 50%. To figure out debt to income ratio add up all of their monthly payments that appear on their credit report and divide that number by their gross monthly income.
Example:
Monthly Expenses on Credit Report - $1,600
Gross Monthly Income - $3,000
$1,600 / $3,000 = .53 or 53% Debt to Income Ratio
This person would not qualify.
c] Active Checking Account – The ONLY way to collect monthly payments from your tenant/buyer is by check, whether it be a personal check, bank check, certified check - GET A CHECK, period!
DO NOT EVER ACCEPT CASH PAYMENTS
You can’t track cash and the name of the game when renting to own properties is creating a documented paper trail.
Collecting rents by check allows you to create a paper trail of on time rental payments which will come in handy when it comes time to get a mortgage for your tenant / buyer. Having 24 months of on time rent payments, verified with cancelled checks goes a long way with a lender and may be the sole reason your tenant/buyer is approved for a mortgage to buy your home.
d] Cash Reserves – You want to make sure they have enough money to satisfy your non refundable option deposit requirements. In addition to them being responsible for paying the non refundable option deposit they must have adequate money for any rent or pro rated rent that will be due, any utility deposits required and general moving expenses.
In most case your tenant / buyer will be giving most, if not all of their savings to you.
e] Credit History – All prospective tenant/buyers will have credit issues, that’s why they are renting to own and not buying. It is your job to find the ones that have a chance of eventually cleaning up their credit and obtaining a mortgage to buy your house. We suggest you not consider anyone who owes more than $10,000 in collections. Why? Well for the most part all collections will have to be paid off prior to them obtaining a mortgage. Knowing this, you want to make sure that it is realistic they be able to accomplish this. Also, we do not suggest approving people who have collection accounts with past landlords or management companies. If they didn’t pay their last landlord, what makes you any different? We also do not like to see more than $1,500 in back child support. If they don’t care enough about their own flesh and blood, they surely won’t care about you!
Why would you use the Rent to Own technique?
see Part 2 of this article for more awesome info!
To mkake money using the lease option technbique become a client of mine by logging onto http://padeals.com/
