Something special happens when you combine a subject to deal with a lease purchase. You get into a subject to deal for little or nothing down. You then almost immediately start generating income from a profitable lease purchase arrangement.
If that sounds intriguing, here are the details to get you started in creative real estate investing. The subject to deal is all about helping a motivated seller out of a bad situation. Motivated sellers aren’t always the easiest to find but they are out there and I’ll give you pointers on that in a future article.
The Subject to Deal
Subject to deals can be structured in many ways. In today’s market, pre-foreclosures are a great place to look for these deals to create a win-win scenario for both you and the seller. The seller is in a bind and is going to lose the house any way. You come in to offer him or her a solution they can’t find anywhere else.
You offer to take over the payments of their existing mortgage and in exchange, they keep the foreclosure off their credit report. In fact, if they are credit savvy, they can convince the lender to remove any late payments from their credit report in exchange for paying off the late payments and late fees.
Paying the missed payments and late fees is what you are offering for them to turn over title to the house. Nothing more. You want the seller to provide current documentation of exactly what is owed in late payments and fees. Most mortgage accounts have a telephone number that you can call to learn the balances. Ask the seller to provide you with this contact information and you can access the information directly.
Subject to deals bring in some nice houses
There is no reason an owner that is about to lose their house to foreclosure shouldn’t go along with a subject to deal. Sellers not in pre-foreclosure typically balk at the fact that a subject to deal puts them at risk because their name is still on the loan. If you fail to make the payments, it’s their credit that gets dinged. Once they are in pre-foreclosure, their credit is already in deep trouble. The risk goes away. In fact, you are giving them a way to clean up their credit.
Some people are concerned the mortgage will be called based on the "due on sale clause". No bank in their right mind is going to call a loan that was in pre-foreclosure and is now paid current. Besides, the loan is paying more interest than the lender can get anywhere else right now.
The Lease Purchase Is Your Next Move
Once you have control of the house, your next move is to start generating money with it. You can’t beat the lease purchase for generating the largest profit and building in your final exit strategy.
Just like there are foreclosures going on all around us, there are people wanting buy houses but unable to obtain a traditional loan. That makes your lease purchase very attractive. This is not a lease purchase option. The lease purchase is a signed contract for the buyers to complete the purchase within a specific period of time.
You are going to use the lease purchase to help them accumulate the down payment. At the same time, you help them repair their credit report. When you find a buyer with at least part of the down payment, you collect it to help offset your expense paying the late payments and fees that buying the house cost you.
You then set the rent at a point that part of the payment can be applied towards the down payment. You want the buyers to be able to qualify for a traditional loan in a few years. You can’t know the future but I don’t anticipate standards for borrowers is coming down any time soon. That means you need to plan to accumulate a 20% down payment.
On a $100,000 payment, the needed down payment will be $20,000. If they make an initial $5,000 down payment, the premium on the monthly rent needs to accumulate to another $15,000. Over a 3 year lease, that comes to about $416 each month.
The last step to the lease purchase math is knowing what the market rent is for the house and adding the premium. If similar houses are renting for $850, the total payment you collect each month is $1266. The premium goes towards the down payment. Now you have a nice investment that will repay your small cost for the house very quickly. And keep paying until your big pay check when the buyer takes out a loan to pay you in full.
Lease Purchase Reporting to Credit Bureaus
You want to make sure your buyers can qualify for that loan and you can help them do it by reporting their monthly on time payments to the credit bureaus.
This is easier than you might realize. Only legitimate business can report on a person’s credit so you’ll need to being collecting the rent in the name of a business. You go to the home page of each credit bureau to register. The bureaus provide you with the software to automatically submit the monthly information.
Another way to accomplish this is to have a property management company collect the payments and send the on time payment notice to the collection bureaus. You can take one more step to improve the probability that the purchase will go through by helping your renter/buyer enroll in a credit counseling program.
This may seem to be a huge amount of work to sell the house but it’s not compared to the pay out. Getting into a pre-foreclosure for the late payments and fees might cost you about $10,000. But you gained control of a $100,000 house. You will probably recover half the $10,000 with a small $5,000 down payment from the buyer.
The premium rent repays the rest of the down payment in slightly more than a year. After that it all becomes gravy including the $90,000 you receive when the buyers takes out a loan.
By Wendy Patton