Many investors think that real estate agents don't have the best deals, or they have all been picked over by the time they actually hit the market. I believe that some of the sweetest deals are sitting on the market. We automatically think that Realtors, or their clients, will snatch up the best deals before they hit the market.
It is true that some of the best deals do get snatched up before they hit the market, but there are many other deals left behind that no one sees. The reason that no one sees them is because they are looking for “traditional” or what I call “retail” homes, not “lease option” homes.
Understanding the Lease Option Market
These are two very different markets. The retail market is what 90+% of the people and investors understand. The Lease Option market takes up a portion of the remaining 10% of the market.
I look to work with Realtors that understand the concept of Lease Options and can help their sellers understand lease options. This understanding can take time. Your job is to assist Realtors to understand lease options. I do this by using several techniques.
First, I have a letter that I send to a listing agent explaining the concept, second, I have a presentation that I do for my local real estate offices, and third I network and continually tell Realtors what I do. I hear investors tell me all the time that Realtors just don't understand or want to understand what they do.
I can only say that patience and persistence pays off. Realtors aren't trained in unique selling techniques; they are trained in the “Retail Market” which is 90+% of what is out there. As investors, it is our job to continue to help those around us understand what we do so they know when to call us.
The type of home I am looking for through a Realtor is one that the seller:
- Doesn't need their equity out
- Doesn't have any equity in their home
I prefer the first one as they are a safer seller for me and they usually have a lower mortgage payment, if at all.
When a Realtor hears a seller say, “If my home doesn't sell soon I might have to RENT it!”, then the Realtor should think of you. That is only assuming you have continued to remind them of what you do.
All you need is 2-4 good listing Realtors. Listing Realtors work directly with the sellers and know which sellers are in trouble, which ones can rent, and which homes are vacant. Once a Realtor knows what you do and has a seller that can accept your terms – wow! You are the proud new owner of a lease option home.
Agent Commissions on Lease Option Deals
One of the most important things for anyone is that they get paid for what they do. Realtors are just like everyone else in this regard. When I am taking on an option, I am asking the seller to wait 2-3 years to get cashed out.
I don't want to make the Realtor wait that long. If I do, they won't even tell the seller about what I can offer. Why should they? It might not do them any good. They are doing all the work now to get the deal done and want to get paid for it. So I give them the listing agent portion of the commission up front in a seller's market.
This is my option fee and is applied to the purchase price when I get my mortgage or when I sell the home. The agent is therefore paid on what they do just as if they sold the home conventionally to another buyer.
When you sell the home you will be asking for 3-5% down from your tenant/buyer (in a seller's market), therefore, you are still minimal or zero down/out-of-pocket. If you aren't a licensed agent/broker and entitled to 1/2 of the commission, then let the Realtor “Double-Dip”.
They can get the listing agent portion down upfront from you and the selling agent portion when the home closes in 2-3 years. They will wait for the second half if the first half is paid up front. The second half would just be a bonus that most agents wouldn't expect anyway.
NOTE: If you are in a buyer's market use 1% down for the agent to start the option. The tenant buyers in a buyer's market will only have 1-2% down as well. Therefore, in either market, a buyers or sellers, the amount you are giving to the Realtor will align with what you are receiving from the tenant buyer. In either market, however, the amount you are giving to the Realtor will be credited off of your purchase price when you close on the property using the HUD-1.
When you start to work with Realtors and they start to bring you their listings you will have more deals than you will know what to do with. Realtors will be “Begging you to Buy Their Listings”.