Even though buying on a lease option isn’t my favorite thing – I do like selling on a lease option.

In other words, if I already have a house I’ve purchased, I can usually sell about ten percent ABOVE the market rate and earn a little extra money. Plus you can usually sell it very quickly.

But you need to keep your exit strategies in mind before you sell one of your rehabs on a lease option. If you have sunk all your money into a rehab – well, you can’t wait around for a year for someone to cash you out and give you back your seed money.

So you have to have an out whether you are going to refinance or whatever. I would probably talk with a good mortgage broker about your different options and what financing he or she could get you so you could pull all your money out before you lease option it.

Although, really, the best way is to have done your rehab with hard money and not your own, and avoid banks all together. That way, if you have used hard money, none of your money is tied up.

Plan ahead, you don’t want to do a lease option and not have a plan. What I mean, if you have a one-year hard money loan – and you put a person in your house for one year – what happens if they don’t purchase it in one year? You always have to have a back up plan.

I think back on a few of my very first lease options and they were really horrendous.

One time I gave someone like four years to purchase the house, and gave them four hundred dollars a month credit towards the purchase. It was really really unrealistic – definitely in their favor.

Absolutely ridiculous!

My average one now – I give the tenant, on the average, about $150 per month credit towards the purchase. And I only give it if they pay on time. I’m really strict about late payments – it will cost them dearly if they don’t pay on time.

I also do require a down payment from the tenant. My tenants – what I charge my tenants – is relatively low – compared to what other people are charging – around the states.

I generally charge about two thousand option money, maybe three, for a hundred thousand dollar house. It is very hard for me to get much more in my area.

My understanding is in most of the US you can get much more than that. Maybe three or four thousand, five thousand.

There are several companies who build cheap houses in my area – and they charge almost nothing for the option money – so I am competing a bit with them.

There are a lot of investors who will disagree with me here – so take it for what it’s worth and get what you can in your area. I just prefer not to have my houses sitting vacant for a month or two.

There were a few houses which were rehabs which I only accepted one thousand – but my average is two thousand or a little over.

I usually only give the tenant twelve months to purchase the house. I’m not that strict if I can see they are going through with the purchase. If it take them an additional thirty days to wrap up the loan I will still honor the contract even though it’s technically expired.

But if I don’t see it moving, then I will ask them to leave.

Because I don’t want to just rent the house – I want it to go to someone who is going to buy it.

I would say about 30 to 35% of the houses cash out. It’s not a real high number. But it doesn’t bother me much. You collect their option money – so if they back out – you get to keep it. And do it all over again.

It’s just extra money in my opinion. If they put two, three, four thousand dollars down. Explain to the tenant that they are not obligated to buy the house, but the option is not refundable. In fact, you should make this clear to them when they originally signed your contract.

I always go over a contract verbally as well as having them sign. I want to make sure they understand.

I have had only one tenant worked up in a lather over losing their option money. Almost all, as long as they are aware before they sign – and you spell it out clearly to them – will not ask for their option money back.

I just explain to them that the money is for the time lost – we could have sold the house instead of leasing to them – and of course there is advertising and holding costs finding a new tenant. So they shouldn’t expect their money back.

So when you get a new tenant you are going to collect another two, three, four thousand dollars from them. So of course that’s just a little extra bonus for you.

The next area I’m going to cover is Foreclosures, or I should say, Preforeclosures.

This is probably one of the areas I like the most.

When you think of foreclosures, you probably think of the actual foreclosing – like the auctions. But there is a whole market prior to that called "Preforeclosure".

Which is the area I like to concentrate on. When you get into the actual foreclosures, you’re dealing with a lot of competition. In my opinion there is more money to be had in the preforeclosures.

In the preforeclosures, this is a person who has fallen behind on their payments and the bank is threatening to foreclose. It doesn’t even have to get there far actually. An owner may be aware that they are going to fall behind; maybe they just lost their job and maybe they just don’t foresee making the next few payments.

Or maybe a couple is heading for divorce, and neither one wants, or can afford the house separately. So this is a possibility.

There are a couple ways I advertise for them. I do have an ad in the yellow pages as well as the paper.

I have done the radio. However, I don’t recommend that for the beginner. It does get quit expensive if you can’t move quickly – and it helps to know many different angles of real estate investing before using radio.

I know quit a few people who use "I buy Houses" signs. So any of those will work. I don’t use the signs personally, but that doesn’t mean it won’t work for you.

When you have a prospect – you are looking for someone who wants to move – someone who doesn’t want to stay in the house. I don’t allow them to stay in the house. I make sure they know that up front. I generally don’t want them as tenants – they need to go somewhere else and clean up their credit – or whatever.

I don’t let them stay for many reasons – one is because I don’t want someone in the house who feels the house is already theirs – if I had to evict them, I just don’t want that situation. And most importantly, they already had a financial problem that put them in that situation. I don’t want it to become my problem.

What I do on preforeclosures is what’s called a short sale.

This is how it works. I have a potential seller – I meet with them and explain what I can do for them.

What I do is I explain to them that I am making an offer to their bank for less than what they owe. It’s called a short sale. One of the reasons they will agree to a short sale is that it will prevent a foreclosure on their record.

So most of them are amenable to it just for that reason.

I don’t pay them at all. In fact, most institutions will require that the seller get NO money as a condition to their agreeing to sell it to you.

So I call up the bank – well first – I get some information from the seller – I get a release form so I can talk with the bank.

If I called them up without it they are not going to talk with me. They are not going to talk about some ones financial situation with you unless they have the sellers permission in writing – or at least they shouldn’t.

I get the account number and the balance and telephone number from the seller, and then I call the bank. Usually what they’ll do is bounce me to several different people until I get to the right person in loss mitigation.

And then I will ask them if they will accept a short sale.

Some will say yes, some will say no. Some will say submit something in writing. Most will say submit something in writing.

I write up an offer. I usually start very low. Most of the time they will ask me for some additional information. They’ll ask for a letter of explanation from you – in other words, your intent. Then, obviously, they want that release form giving you permission to talk with them.

Then, most will have a financial form of sort they want the seller to fill out, plus, a hard ship letter explaining their financial situation and how it came to be.

And finally, they will request a purchase and sales agreement– it’s just the standard purchase and sales agreement.

Then they will want a hud 1. A hud 1, remember, is that form filled out by the escrow company, giving a break down of money being distributed.

They want this because they want to evaluate exactly how much is going to them. They want to know how much they are going to pay in taxes, county liens, and the transfer fees and closing fees.

Once you’ve done that –and supplied them with other information, sometimes they will call you back- and say well – we’ll need this additional information.

Once you’ve handed all the documents that the company requires usually they’ll say "yes", or "no".

If they say "no", then you can up the price. But don’t go over the price you set – before you go through the process you need to know what is the max you will offer.

Just because they will sell to you doesn’t mean it is a good deal – you need to do some research and come up with the he maximum you can offer and still make money.

I usually start with about 60% to 70% of the market value and then work from there if it still seems profitable to me. At the very most, on say a hundred thousand dollar house – I might pay eighty thousand – because, you’re going to have closing costs in addition to the purchase price. And that’s if it is in perfect condition – I don’t have to do any repairs.

When I do a short sale, my intention is to cash the bank out, and then put a lease option tenant in there to buy the house. So I can up it another ten percent. So on a house worth a hundred thousand, I can sell it for one thousand ten, and if I buy it for eighty, plus have five thousand closing costs – my income would be twenty five thousand. Well... then from that you would have to take your closing costs for closing with the tenant buyer. So you could earn anywhere from twenty to twenty five thousand in this easy example.

I give them a year to purchase.

Just a side note to purchasing on short sales – it isn’t alwasy a fast process. What I found is that a lot of loss mitigation departments don’t always answer their phones – they just let it go to their voice mail.

I had one example where I worked on a short sale from July until the following February. It was very drawn out. I’d leave a message, they’d call me back a week later – then we’d play phone tag. We would talk about every other week. It got to be very drawn out this way.

You just have to be persistent – aggressive but nice, I guess.

One of the tricks I did was I got a list of phone number extensions to the people working around the person I wanted to talk to.

Then I’d call and say "I’m trying to get a hold of Larry – can you slip a note on his desk to tell him that I’m trying to reach him?"

Some times it worked, some times it didn’t.

In most cases the loss mitigation departments are extremely big – or at least I think they are – I’ve never worked at one. But the impression I’ve gotten is that I’ll get a new person answering the phone every time I call.

Another thing - get their email or fax – that seems to work a little better than trying to reach them on the phone.

They must have a zillion foreclosures for each to work on. You’re just a one in a zillion calls they get each week.

Friendly persistence pays off.

A word of caution when dealing with financial institutions. There not always – I’m not saying they’re dishonest – but they don’t alway do what they say they’re going to do.

I think it has a lot to do with so many people having their hand in the mix. For example – there was a short sale I was going to make.

They agreed on my offer under one stipulation – they wanted all the back payments caught up. Which was about ten thousand dollars.

And they agreed that this ten thousand would be applied towards my purchase price. And it was still a very good deal – I would have at least thirty thousand in equity.

Even taken in to account the ten thousand. It was a good deal. Now someone had even cautioned me that I should get everything in writing. So I did, obviously, I wanted to make sure I was covered. I didn’t want to just send in my ten thousand dollars.

So I had it in writing and the stipulation was that if I didn’t close on it they wouldn’t refund the ten thousand. And that part really wasn’t an issue – I was pretty comfortable with that.

I already had my financing lined up. So I gave them my ten thousand – only they changed their mind. They decided they didn't want to sell it so cheap. I had it in writing. The didn’t want to refund my ten thousand either. So even though I had it in writing, the only way I was able to close on this was I threatened them with a law suit.

So just a word of caution, never give money out to a financial institution to make a short sale work. At least not more than you are willing to lose.

The funny thing about this was, I had actually been warned by a fellow real estate investor. He had lost two thousand dollars this way. I thought I was being pretty cautious, I had everything in writing.

This guy had given a bank two thousand dollars – and in the end they decided not to do the deal and kept his two thousand. So, and I thought his was just an isolated incident - and then or course, it happened to me.

So it made me a believer; to be very careful. One of the things that kept happening to me on this deal was – that I kept getting bounced around and bounced around to different people. And so, even though I had it in writing, they seemed to interpret the deal a little different than the original person I was working with.

Just be cautious, I don’t recommend you putting any money down – just take this info for what it’s worth.

One of the hard parts about a short sale has to do with the timing. And it depends on the financing company. Some of them will give you 30 days to close – and others won’t. They expect you to have the cash on hand.

So what I do is when I submit the first letter explaining what I want do, I will say that I can close in 30 days. If you have a good money source and can close sooner, by all means, let them know that.

In this original letter, I tell the owner the bad points about the house. You know, it’s next door to rentals, the roof needs repairs, paint - things like that. You want to let them know up front all the negatives about the house; and you should let it to be known up front how long it will take for closing. This, then, prepares the seller for the transaction by viewing the property through your eyes. And, it makes the option palatable.

Brandy Eismon