Soft markets were defined in Part 1. In Part 2, we will talk about how to make a profit in soft markets.
Now, let's look at the last part of our WIN-WIN-WIN equation — the WIN for us, the investor. For us to WIN we need to make a profit. The profit comes both from the equity spread between your option price to the seller and the buyer's option price to you as well as any monthly cash flow in the rental payments. With lease options it pays to be creative. You'll find a lot more deals and be a lot more successful investing in real estate if you practice creativity in your structuring.
The most common motivated seller we encounter is the one who has little to no equity in his home. Too many sellers get calls from real estate investors that only care about “What's it worth?” and “What do you owe?” If the numbers are too close together, they say, “Sorry I can't help you.” Click.
What if you pursue it a little further with a creative mind? A good question to always ask is “What are your monthly payments?” If the payments are lower than rental rates you may be able to make some monthly cash flow.
Another good question to ask is, “How soon do you need to sell the house?” You may want to ask this question a couple of times while you are talking to them. You could be surprised to find that the number grows longer each time you ask. There aren't too many markets I can think of that stay down forever. Eventually the house should start appreciating again. If your option period to the seller is long enough you can capture appreciation to make your profit.
What about this – “Are you willing to bring money to closing to sell your house?” And if their monthly payment is higher than what you can rent the house for, “Are you willing to pay the difference between the rental amount and your monthly payment?” These two questions may seem brazen, but ask yourself, what have you got to lose? If the seller is fully leveraged on the house or their payment is higher than the rental rate you have nothing to lose, because if they aren't willing to make concessions then you can't help them! Certainly some of us feel awkward in asking these questions, but trust me, if you ask this question 30 times, no matter how embarrassed you might feel at the beginning, you will start to feel much more comfortable by the end.
These are just a few creative questions you might come up with to try to find terms that will allow you, as the investor, to make a profit, a WIN for you. When you add all of three of these together, meeting the seller's need, meeting the buyer's need and you making a profit, you have created a WIN-WIN-WIN. This is what you MUST do to be successful when investing in real estate with lease options.
Do you see how much BETTER it can be to find deals in down markets? Motivated Sellers are EVERYWHERE and there are FEWER investors competing with you. Combining these two factors allows you to choose your deals with greater care. Always “Cherry Pick” your deals in a soft market. This is why experienced investors, who have been in both up markets and down markets, prefer the down markets. Soft markets can provide some of the best deals when investing in real estate.