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Little Known Profit Centers With Lease Options
| | Thursday, February 10, 2005 @ 08:54 AM EST
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Contributed by: Randall Mixon
Randall Mixon Properties
Read more archived articles about Squeezing More Profit
There are some little-known ways to structure Lease Options that can create more profit for us as investors that the average Lease Option Entrepreneur overlooks. They are simple to structure and execute, and normally the only work involved is just in knowing how to use a persuasive technique known as Neuro-Linguistic Programming (NLP) to ask for the extra perks and/or in having the expertise to mold your Contracts to fit the different scenarios www.involved.Like most of the techniques in creative real estate, structuring these profit centers can be learned and even mastered. The negotiation, motivation, and persuasive skills required to effectively implement them can also be www.learned.I am sharing some of my trade secrets in this article--things that it took me years to develop, so read on. And enjoy!
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One of the most overlooked profit centers is probably simply obtaining rental credit from the Seller. We often are taught to give credit to our Tenant Buyers, but many of us overlook this as a way to make additional profit (or don't know how to effectively ask for it). Do keep in mind that if the Seller has little or no equity, he has nothing he can give you. Do not write in or ask for rental credit if the Seller has no equity; if he has to come out of pocket at closing, he will not be pleased (especially since he may not understand the Contract and your failure to disclose this fact). Here's how to get the Seller to agree to rental credit:"You and our company have a professional business relationship, and that involves a lot of things that we are discussing in this Contract, but to the IRS, it's as simple as this--you are the Landlord, and we are the Tenant. And this property we are discussing is now a rental property. Because it's now a rental property, you get certain benefits. The most important benefit is a tax deduction called depreciation (you may have to explain depreciation if the Seller looks confused). Because you now get depreciation on this property, you can afford to give us a little rental credit, right? We don't need much, not much at all. How about $200? That sounds fair, right?"Now, $200 may not sound like much, but in a year, that's $2,400, in two years, it's $4,800, and in three years (if it went that long before you sold it), it's an extra $4,800 that you get just for asking. It's as if the Seller is writing you a check for that amount. Remind the Seller that you only receive this when you actually close on the property and buy it (but I will show you later in this article how to actually crank that out in cash on a monthly basis--whether your Tenant Buyer buys or not). Intentionally keep the amount of rental credit that you ask for low, so that your Seller will not balk at it.Another profit center (a juicy one in some cases) is the loan paydown on the house. We all hear about the appreciated value of the house being our profit, but many investors completely overlook the loan paydown. Granted, if it's a new loan, that may not be much at all (almost all of each payment is interest), but if the loan has been seasoned for some time, it can amount to quite a hefty sum over a year or two or three. For example, let's say that you have a $1,000 a month mortgage payment to deal with, but the twenty-year loan is presently in year twelve. I am just plucking this figure from air for illustrative purposes (and I did not check an amortization schedule), but perhaps $600 of that payment is now going toward principal. That's $7,200 a year in instant equity that is created just by paying the monthly payments! Someone will get that equity--either us or the Seller. Your Contract should clearly (but inconspicuously) state that we get that equity. That's why having superlative Lease Option Contracts are a must in this business (and why most of the GURUs charge several hundred dollars just for their Contracts alone). Despite how it is worded, some Sellers will still notice that benefit in your Contract. If they do, you must know how to respond to that objection appropriately and diffuse that potentially volatile situation (and consequently, get the Seller to agree to it). Here is what you would say:"From the time you bought this house up until today, you've been making the mortgage payments and you've taken care of all the maintenance and repairs. So, you're entitled to the equity. And that's what we are discussing in this Contract--paying you the equity that you are lawfully entitled to. But from today onward, from this point forward, WE are making your mortgage payments, and we are guaranteeing all the maintenance and repairs. We are taking all the risks in this transaction and are virtually eliminating your risks entirely. We are fully insulating you from all headaches and worries. So, from this point forward, WE are entitled to the equity. And that's just one of the ways we get paid. You don't have a problem with us getting paid, do you?"Wasn't that sweet? By the way, if a Seller balks at you getting the appreciated value on their house, you just use the same exact speech. It works very well in both scenarios (the Seller will often feel guilty for even asking), but if the Seller doesn't bring up one of these objections first, don't mention them at all. Save this little nugget in your arsenal for when you really need it.Speaking of the rental credit you get from the Seller, you can use that to get the Tenant Buyer to pay you more in rent (higher than market rent). Let's say you are only making an extra $100 a month in positive cash flow on a property. That's not much for a monthly spread. You could increase that by finding a high-income Tenant Buyer (two-income couple), and make them an offer they can't refuse. In exchange for an extra $200 a month in rent, you will agree to give them $400 a month in rental credit. Where else are the Tenant Buyers going to make 100 percent (double) on their money every month? It's a terrific deal to a high-income Tenant Buyer who can afford the extra in rent. That's almost $5,000 just for paying their rent (like a forced savings plan). That substantially increases their chances for actually buying the house (which, after all, should be our main mission). I would gladly take $200 in my pocket now in exchange for $400 later that I may not even have to pay at all. Wouldn't you? It's called, "the time value of money." Still, doing so would cost me $2,400 a year, but it's well worth it for all the benefits I'd obtain.For example, the nonrefundable option consideration may make the Tenant Buyer feel like an Owner, but that wanes over time. The rental credit keeps that ownership feeling strong throughout the Lease (an increasing stake). Plus, lenders love high rent, so the higher the better. And the most important benefit of all--if the Tenant Buyers are late, they will lose the rental credit for that month. If our Tenant Buyer is a serious Buyer (which is the only type we should deal with), then that is a very real $400. We may not be able to charge a $400 late fee, but we can take away a future perceived benefit. For all these benefits, I would gladly pay the $2,400 a year, but I don't have to. If I get $200 a month in rental credit from the Seller, then it costs me nothing for all these benefits. It would be a wash. In this business, good Contracts and good negotiation skills go a long way, especially if you can anticipate potential Seller objections and be prepared in advance to answer them effectively.
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