probably a simple question, but difficult for a newbie.

Here is an example of how you could use a Lease-Option with a preforeclosure:

- You have a seller who is behind on their payments
- You find a buyer who has a down payment amount that is enough to cover all past payments and fees + some profit for you.
- Your new buyer's monthly payment will be enough to cover the previous owner's monthly payment + some profit for you.
- And, the new buyer's total purchase price is enough to cover the balance of the previous owner's balance + some profit for you.

Greg Murphy talks about doing this all the time in his small town.

i.e. Seller owes $2600 in back payments and fees. You require a down payment of $3000 ($2600 to catch up payments, and $400 for you). Seller's monthly payment is $800/mo, you charge new buyer $1000/mo ($800 to cover seller's monthly payment, and $200/mo for you). Seller's balance to pay off mortgage is $100,000, you have a final purchase price to buyer of $120,000 ($100K to pay off seller's mortgage, and $20K for you).

A couple of things to keep in mind:
- In some states, even catching up the back payments doesn't stop the foreclosure process. So, you would need to catch the seller BEFORE the ACTUAL foreclosure process begins.
- Usually, you would have a balloon payment for the balance with your buyer for 2-5 years from purchase date. The idea is that the buyer should be able to qualify to refinance the property. They pay you the balance that is owed on your $120K, and you pay off the balance that is owed on the seller's $100K.
- The Lien Holder on the seller's mortgage could call for the full balance of the mortgage to be paid. Many mortgage's have a "Due on Sale" clause. Which means that once the Seller sells the property to you, the entire balance of the mortgage is due. However, I've HEARD that many banks today aren't enforcing this because they have enough foreclosures in their inventory, and in this deal you've structured, they ARE receiving their monthly payment. So, why should they go through the expense of foreclosure when they are getting paid? But, they do have the RIGHT to do so, so it is a potential risk.

Hope this helps,

Don't forget contract assignment. This is a great no money down strategy to use on pre foreclosure properties that have equity.

Michael Mangham
Mentoring/Team Building Nationwide
MD Home Acquisitions LLC

I created a forum, they (the spammers) can put all their ads there if they want. That's the challenge for them. That way it will be easier to identify and report them! (I got tired of flagging each and everyone I see - they just repost after we flag them!) This might be a temporary fix:

http://www.deangraziosi.com/real-estate-forums/website-help-and-feedback...

Cris

Those were great posts, Michael & Stephan, thank you guys so much. I'm actually already on assigning a preforeclosure if the opportunity presents itself, but I was so curious about the other avenues to completing the deal. Plus with the public notices in our local newspaper here the properties seem to be upside down when I get all of the new numbers together. I just figured that a lease option or subject-to strategy would work best in an upside down type situation. But please correct me if I'm wrong...

To me an upside down property is a candidate for a short sale. Acquiring a property that is upside down on a subject to or L/O is a losing proposition. It is the ole trying to pound a round peg into a square hole and call it a deal. Now if it is a break even on a little better deal than I think those work for subject to or L/O. You need to make money on the front, in the middle and at the end. How do you make money in the end if the property is upside down? I would not count on appreciation of the property. That is called speculation. You buy and sell real estate based on TODAY'S numbers in my opinion.

Just my thoughts,

Michael Mangham
Mentoring/Team Building Nationwide
MD Home Acquisitions LLC

You only use the subject 2 On pre foreclosurer deals, To protect your self and the deal, by using the subject 2, when the home owner is debt trouble, you want the deed of the property in your name, if they they get into debt trouble atfer you have the deed, there creditors cant place a lein on the property. The Lease option is for used with home owners who dont have debt issues, they may not need to sell right away, for tax reason or what ever, they can get the price there asking, instead of waiting for long periods on the market with no offers or DOM, You are leasing the property from them, then you find a tenant buyer to lease to property from you you with the option to buy, the terms are very flexible in this arrangment, can range from 3-5 years to lease the property, if during that time you cant find a buyer to exercise there option to buy, at the end of the lease with the home owner, you can end you lease and walk away, and you want to return the property to the owner, in the same condition, less some wear, but in good condition, on the other hand a subject 2, is deed to you you own the property, you must make sure the payments are made on time etc, exit here is to resell the property, option rent 2 own or hold for rental and long term wealth, most time subject 2 deals the property is picked up for whats owned on the mort, where as L/O are generally close to retail. There both great ways to pick up property...John H

Subject to's are actually excellent to use with tired landlords that don't need to cash out and will take payments. Also, people that need to buy another home and don't need to cash out. Like they are moving out of state etc. For me personally I don't do these deals with the thought that "Gee I can just give this back to the seller if things don't work out". Most leases or subject tos have a balloon payment, when the purchase price of the house is due, it is not just a rental agreement.

Michael Mangham
Mentoring/Team Building Nationwide
MD Home Acquisitions LLC

Option is key here, believe it or not only 50 % of L/O ever close with the tenant buyer exercising the option to purhase, You make it sound like somebody's doing sometime wrong here, and that is not whats going on at all here.

A good souce of infomation for Subject 2 and Lease Options, is a book writen by Wendy Patton, Its very good and as powerful strategies for getting more when you buy, Dean has good info also, but this book is a must read also for the well rounded investor in todays market place.

Thanks Michaela &Stephan John. I hav e addeda that book on the list of literature to pick up and should have it shipped very soon, I was reading about it and it does sound good. Lease options seem to be less risky while subject-to deals, with the "due on sale" almost scares me away from this method... How would a deal be structured with the subject -to strategy? I mean, is it one of those types where we hold to rent or do we subject-to until we find a buyer?

In it she stresses to not screw around the seller by not performing when it comes time to exercise the option. She teaches how to make sure the tenant/buyer you put in place will be able to exercise the option within the agreed a pone time frame. It's not "Oh well I will just give it back to the seller". The reason why a large percentage of L/O tenant buyers don't exercise the option is because they were not screened properly in the first place. Some investor threw some one with a heart beat in the property that had an option payment and could make the monthly payments and that is all. No wonder!! The object is to have your tenant buyer exercise the option, not move out. Wendy's book is a must read for anyone looking to do L/O. It is a little more complicated than one might think.

If you don't approach this type of deal with the intention of having your tenant/buyer exercise the option you are going about this in the wrong way and mindset. This of course is just my opinion.

Alton, get and read Wendy's book, it will answer all your questions.

Michael Mangham
Mentoring/Team Building Nationwide
MD Home Acquisitions LLC

Thanks again, Michael fotr the insight. That book will be purchased in a matter of minutes. I do have one more question though... Is it true that with a lease optionmore the deposit is nonrefundable? It just seems almost unfair since i heard the deposit can be $5000, maybe even more. And what about rent credits... If a tenant decided to take advantage of rent credits, but never exercise the option is that nonrefundable as well?

Wendys books are good Go order them! There is not a set Plan on any Deal.
My Lease options I would as you said 5000.00 down that would come off of the purchase price owed at the END.
The rent credit would be put toward the closing cost. So they will have a portion of the closing cost come closing.
It is all about responsability for them managing money and the banks seeing that. So, you are actually holding money for them.
You need to make about 200.00 a month for you self for the work you will be doing.
For me everything is non refundable it states that right in the contract.
If they really want a house then they need to be responsable for it.

So like Mike said don't just throw any body in a House!

Jay

Thanks Jay. I think I can put it all together now. I planning to make an 800 line triguring renters in thethe future so I will be sure to screen properly. I think a good property management company could handle that as well, but I definitely want to experience it myself. Thanks again.

How would you know when to do a LO or subject-to? I mean, without the proper funds and bad credit, and wanting to start with wholesales, I don't want to have tunnel vision and make a wholesale deal, when I could have complete a LO or subject-to deal and possibly make more money.

Anybody...?

You have to make sure you have the end buyer in hand before doing this. It will make the decision process so much easier. If you have a buyer who is looking for a particular type of property and you find it (no matter how you found it) do the lease/ option if your buyers are qualified or capable of doing the amount you'll need to get to make a profit. If you have no money of your own, you may want to proceed cautiously with L/Os and Subject Tos. If your renter does not pay the bill, you will be responsible for the missing payment(s) in order to keep the house. The home owner will not look too kindly on you if you screw them out of a payment and jeopardize their mortgage. You should be looking at every deal with your buyer in mind. Have multiple exit strategies always working in your mind. Remember, the buyer tells you how you can proceed with what strategy.

Hope this helps...

Andy Sager
DG's AndyS

Thank you, Andy. To make sure I understand correctly, what you're saying would definitely apply to subject-to deals, but isn't that the purpose of lease-options?

A lease/ option is best for people who have the income to pay for a mortgage but they don't have the credit score to get approved for a mortgage. You are then leasing a house to them with an option to buy it at a later date and price. These are people who don't want to just rent, they want to own but can't at the moment. You will be getting a one time (yearly) "option payment" on top of their monthly rent which you will get to keep. At this point, you can be lease/optioning a property from someone (for example {using hypothetical numbers}: $100/ month rent with a buy price of 100K in 5 years) and lease option it to your buyer for say $150/ month with a buy price of 140K in 5 years. You don't own the house but you control it. If your tenant exercises their option, you go to the owner and exercise your option to buy. If they decide to not exercise their option, you have at least made that option money (Making sure that you have asked for more from your tenant than you had to pay the owner)+ the overage in rent. That's the very basic and simple form to the situation. You'll need to do some more research on the subject.

For Subject-Tos, you are assuming an owner's existing mortgage but keeping them on as the owner of the house. ( A good Buy & Hold strategy) You are paying what they are paying in order to get control of the house. There will be other agreements you'll need to have in place so that your position is secured.

The point I was making was that when you look at a property, look at it with multiple exit strategies in mind. If you have a wholesaler as a buyer, you will not be finding many Subject to properties that will have enough of a spread for them to buy. If you have credit challenged buyers, they may be good for subject to or lease options depending on their goals. As I mentioned, your buyer tells you what they need and you go find it. Multiple types of buyers = multiple types of situations. Be open to any situation (that fits) when you analyze a property. House #A could be good for Buyer1 but bad for Buyer2.
Again, these are simplistic examples and more research is required of you before taking on these methods. Greg Murphy is the DG King of Lease/ Optioning so you would be wise to look up his articles on the subject.

Hope this clarifies a bit more...

Andy Sager
DG's AndyS

Andy, thank you very much. Great post, very elaborate. I will be sure to look up Greg Murphy and hopefully I will receive Wendy Patton's book on the subject in the mail today. Definitely a lesson learned about keeping my options opened- I think I will be able to apply this to a deal I'm researching now, thanks again.

Keep us posted.

AndyS

(I got my copy of Wendy Patton's book in the mail on Sat. Can't wait to start reading it )