If you want to make more money and at the same time, invest less of your own money, you need to learn how to take control without ownership using lease options. There are many variations to taking control without ownership using lease options. The two methods I prefer the most are sandwich lease options and wholesaling flipping lease options.
Sandwich lease options are designed to maximize your profits by taking long term control without ownership using lease options.
The wholesale lease option typically doesn't allow for as much profit because you put a lease option deal in place and then flip it to another investor that wants to hold it for the long term profits. With wholesale lease options, you have to leave some meat on the bone to attract wholesale buyers.
In both situations, you will be best off when you have an end buyer in place before you enter into a lease option with the seller. That's not always possible so your fall back strategy should be developing a list of potential end buyers. Remember, you make your money when you first invest. It's vitally important having an exit strategy.
How Taking Control Without Ownership Using Lease Options Should Work
It's all in the way you write the contract with the seller or current owner of the property. What you are looking for is a win-win-win contract. An ideal contract is one that enables the seller to start generating cash from the property to make the mortgage payments and/or positive cash flow. You make some money in the middle. You leave some profit for the person you bring into the deal at the end such as a wholesaler buyer that holds the property for long term profits. Or a retail buyer that wants to start building equity today but needs a little time before he or she can qualify for financing.
Something to keep in mind is that the seller and end buyer probably don't understand how a lease option can work or the many variables that can go into a lease option contract. If you are flipping to a wholesaler, that person likely has at least a passing knowledge of lease options and probably a working knowledge. Helping others understand the process means one of your key roles is being able to fully explain it to them. That's why I offer several articles and videos that give you the detailed knowledge to confidently move into this role.
Nuts and Bolts of How to Take Control Without Ownership Using Lease Options
Let's say you find Sam the seller and he is opened minded to allowing you to take control without ownership using the lease option as long as his mortgage payment is covered and maybe he has a little positive cash flow into his bank account each month. The first thing you need to do is make sure you have a thorough understanding of the local market that the home is located in. Here are some sample terms that you could negotiate:
Down payment: $1,700 (first month's rent plus $1,000 option payment)
Rent: $700 per month
Term: 2 year
Sales price: $75,000
Your total out of pocket expense is $1,700 to take control without ownership using lease options. Better yet, you will quickly recover those expenses when you put an end buyer in place. Your next step is bringing in Bill the buyer who you have prequalified and he is excited about the opportunity to take control of the house through a sandwich lease until he can qualify to purchase within 18 months by taking out a mortgage. You need that 6 month cushion between your deal with the seller and your deal with the buyer so that you are still in control when the buyer makes the purchase. That is when the bulk of your profit is made. Your contract with the buyer might look something like:
Down payment: $3,800 (first month's rent plus $3,000 option payment)
Rent: $800 per month
Term: 18 months
Sales price: $89,000
You immediately recover your out of pocket expenses and make a small profit from the higher option payment and the slightly higher rent. You will also have a small but positive monthly cash flow from the deal that comes from the difference you are paying in rent and what you are collecting from the end buyer. Your biggest pay off comes from the difference you pay in the purchase price and what the end buyer pays when he finalizes the purchase.
Circumstances will change the final profit you make but in the arrangement above you should expect a total profit from the deal to be about $17,000. By taking control without ownership using lease options and putting one of these deals in place each month, you soon have a hefty double-digit income every month as more and more of these deals close.
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