I have a great book on Lease Purchasing in a easy to read Adobe PDF format. Just go to my main web Page
http://www.claudediamond.com and you can get it emailed to you or you can download it.
Its called "Conversations with a Lease Purchase Mentor.
Here is a few pages to give you a taste.
CONVERSATIONS WITH A LEASE PURCHASE MENTOR
by Claude W. Diamond J.D.
Over the years I have had the pleasure of Mentoring select individuals from all over the world. They wanted to have the same success that I found with this wonderful (but seldom used and misunderstood) technique called Lease Purchasing. What you are about to read is an actual Mentoring session that I conducted and had transcribed verbatim. I believe that this is an extremely valuable section of my book. It contains so much hard information and includes so many excellent questions in a readable and hopefully entertaining and motivating format.
I hope you enjoy reading it.
Claude “The Mentor” Diamond
Claude: Good Morning! Let’s get started learning about The Best concept in real estate, Lease Purchasing. First a little background. When I got started in real estate many things that were true then are still true today. There is still a plethora of Guru’s selling books, tapes and seminars. They all seem to sing the same song , get rich quick purchasing foreclosure fixers, putting nothing down, using sweat equity and so on. I followed al this wonderful advise and for the most part had nothing to show, but thousands of dollars in debt, liability, negative cash flow, overhead like taxes, insurance, repairs, legal fees, principle and interest payments. The management of the tenants was no picnic either. I had very little control of them. They paid either late or in some cases not at all. There were constant evictions, attorneys, repairs and malicious damage. I had to work a second part time job just to keep up with all the debt.
Client: Wow, I would have quit at that point.
Claude: I was almost ready to quit, but then I heard of a man who was a self-made millionaire with an unusual technique. This concept would allow me to control good properties in good neighborhoods without the bank qualification, large down payments and would be profitable from the beginning right to the end. He was my Mentor, Max. He taught me some of the basic principles which I am going to share with you today. Max used to say
“Why own real estate when you can control it.”
I didn’t have a clue what he meant. He also used to say, “just let everyone else buy it, fix it and then we will control it.” You see Max came to this country with nothing. No credit, no money just knowledge of the principles of leverage and control which we are going to discuss today. The concept of Lease Purchasing!
Client: OK - OK!! Let’s get going here I’m biting at the bit.
Claude: All right. There are so many different kinds of lease purchases or option techniques so before we get into strategies let’s begin with a good foundation and start off this discussion with a good definition of a Lease Purchase.
A Lease Purchase is really two basic concepts in real estate; Leasing and Purchasing.
The first concept is the lease or as some would call it the rental. In a lease we obtain temporary possession of somebody else’s property. We do not own it and title has not changed, but yet we control it. We can rent anything in our society, cars, lawn mowers, motel rooms. We can rent any kind of real estate like mobile homes, condos, townhomes, single family residences, large estates you name it.
If we can rent somebody’s property and obtain possession, we can have partial control of it just as any other tenant does.
The second part of the definition is the option to purchase. Option to purchase means you have the right not the obligation to purchase somebody else’s property for a pre-negotiated price and terms. Or we can rent something; we can use it for our own needs and for others. We can pre-negotiate a possible purchase of this property for sometime in the future.
Now the one thing that is quite imperative in a lease purchase is getting the assignment clause negotiated into the contract if we want to personally control it. An assignment clause gives you the right to subtly, transfer and convey any rights which you have negotiated within the contract to a third or fourth party. If done correctly we can now control someone else’s home without the purchase, transfer of title or loan and our costs are fixed to just a simple monthly rent just like any tenant would pay.
The only thing you really have to understand about lease purchasing is that you can make more money by controlling other people’s real estate than you can by trying to go out and buy your own real estate all the time. For example, you go out and buy your own real estate; you have got to com up wit a lot of down payment, 10 to 30%. You have got to qualify for a loan, you have to pay taxes, insurance homeowners fees and all this stuff. You are responsible for the maintenance, if the roof leaks that¹s your problem. I think we have all been basically brainwashed that the only way we can be involved in real estate is by buying it all the time and that is simply not true.
We can control property by negotiating long-term leases with options or rights. A lease purchase from the investor’s view point is that we can control this property the same way a tenant can control it. We can put one or two months down for as long a lease as possible and then go just a it further and negotiate all the terms of the purchase. We don’t have to pay the axes, insurance and homeowners fees. We are not responsible for maintenance on the property if the heating system goes out or if the septic tank leaks.
We can have more control by optioning or leasing with optioning a property than you can by buying. This is what you must understand in order to succeed with this specialized knowledge.
Now I am going to break down my strategies into four different parts. I call them My Four C’s.
The First “C”
The first “C” stands for Control. I want to control other peoples’ properties. How do I get this control? Normally this involves some kind of motivated seller. What does every guru at every seminar say? They say find the motivated seller. Well, I have some shocking news for you, not everybody is highly motivated. (I know you knew this already). The beauty of lease purchasing is that we have a technique that can work with the non-motivated person, too. This technique is really not well known because it is a niche and it is often utilized by many. If it is presented to people and we educate them on its benefits and advantages we can work with the non-motivated person, too. We are going to start, however, with he motivated seller for this portion of the First “C”.
Who is the motivated seller? Did you ever get stuck with a property? We have all been there. We all know what it’s like when we want to get out of the property, when we have the tenants from hell or when real estate is going down in value. This could be a seller who is being transferred, moving, experiencing a family change, one who has built another home, has a new job, has no job, for many reasons. We just don’t want to buy it, we want to control it.
The control strategy involves two distinct techniques; Sandwich Leasing and Assigning. Let’s begin with the sandwich lease. This is essentially a home where I can negotiate a log term contract with the right of assignment. I like sandwich leasing because there are a multitude of profit centers within it. You were looking for good properties, in good neighborhoods, no more war zones and no more major fixer uppers.
Client: What is the difference between sublet and sublease?
Claude: Basically they are the same thing. I use the word interchangeably to mean renting a home with the right to purchase from Owner “A” and then turn around and rent it with an option to Tenant “B”.
Client: Exactly what kind do you mean?
Claude: My favorite phrase is as follows: “I like good properties in good neighborhoods.”
I don’t mind if they are blue-collar neighborhoods, middle/upper class, etc. I just don’t want to go into the war zones or deal with major fixer upper properties. "Been there, done that!" My Don Quixote days are over, thank goodness.
I am not going to get the type of option money I am looking for by trying to sell something to people they don’t want. Further, I don’t want to make capital improvements on properties I am only renting. Finally I want this property to turnover within 30 days or less. All this is common sense, yet it goes against all the conventional thinking propagated by your well-known gurus, writers and speakers. Gee I wonder why?
Client: Do you have a dollar limit here? What kind o repairs are we talking about?
Claude: I am talking about cosmetic repair. I don’t mind if a property needs a little paint or carpet cleaning, new toilet seats or minor things, that’s fine, but I don’t want to do the major renovation stuff. It’s too time, money and energy consuming. There are plenty of good homes in good neighborhoods without the hassles. I don’t want to do lease purchases on hard to move properties. Yes, I want it all and with Lease Purchasing I can have it.
People want to live in good areas with good schools and amenities. It doesn’t have to be the prettiest house in the neighborhood, but they want stable neighborhoods.
Client: How did you come to this philosophy?
Claude: When I started in real estate I thought that I was smarter than the marketplace. I got some of the worst properties in neighborhoods and even with generous rent credits they were sometimes very difficult to move. The tenants were less than motivated and the upkeep was costly I thought that I was getting a “steal of a deal” but in reality all I was getting was an alligator property and a constant headache. The way creative real estate is taught today by many is just going to result in frustration and burnout with loser properties.
Client: Claude, I recently heard a speaker who was preaching about his wonderful technique of going to the ugly properties and war zones, etc. We should pay 20 to 30 on the dollar for these properties and then flip them with creative financing. From what you’re saying this is not a viable method, is it?
Claude: Why would anyone want to own, much less control, homes in high crime areas or costly fix up properties when you can control much better homes with a Lease Purchase? It just doesn’t make sense. As I said my Don Quixote days are over. I am through fighting windmills or for that matter, hard to market properties. We don’t make any money when we are stuck with the monthly payments, high advertising costs and repairs. The bottom line is we lose money, don’t we?
Client: If we can’t feel safe when working on a property, then we don’t want the property under any condition, correct?
Claude: Exactly, and you know what I have discovered there’s just as many properties in these good neighborhoods. It’s just a matter of where we focus ourselves and our efforts.
Client: Now what kind of properties are we talking about here?
Claude: Condos and townhouse are fine; I have done a lot of them. Single family homes are excellent. I love those especially, the bread and butter 3 bedrooms/2 baths. I have even done mobile homes. Have you read a wonderful book on mobile homes by my friend, Lonnie Scruggs?
Client: I own mobile homes and I never heard of this book. How do I get it?
Claude: Just call Lonnie at (75) 436-2197. It costs around $30.00 which is a bargain. Best yet, Lonnie usually answers his own phone. I love mobile homes, I’ve made a lot of money and I’ve created a lot of paper with them after I read Lonnie’s book and I applied my lease purchase methods.
Client: What about the expensive homes, the high end stuff?
Claude: If you want to get into the high end real estate you can do that too, but of course you are not going to commit substantial funds to those kinds of deals. The last thing you want to do is get stuck with payments on a home that’s running a couple of grand a month. There are some Lease Purchase techniques we can use in these types of properties, too which I will discuss later. (See Cooperative Assignments ― the 2nd “C”).
Client: Alright, Claude one quick question. At a well known Guru’s seminar we were told to negotiate six month Lease Purchase leases only. Do you agree?
Claude: That strategy just doesn’t make any sense. It probably sounds real good during a seminar, but once you’re out there doing the work the NO’S are going to be a little motivating. Negotiation with an owner for six months at a time with a renewal clause is an unreasonable strategy and shows a lack of commitment. Only a few extremely motivated sellers will go for it. Who wants to worry about finding a new tenant every six months? My feeling is the longer the lease the better.
We want to control properties for as long as possible, the longer the better. We then want to sublet the home in one year increments or assign the lease to another person.
Client: Why a one year term?
Claude: The Tenant/Buyer in a sandwich lease will possibly renew for another year and we can receive additional option money and positive cash flow.
Client: What are your ideas on moving the home fast?
Claude: My success strategy is to give extremely good rent credit. I give 50 to 100% whether it’s someone else’s property or my own. The reason is that I want my phone ringing off the hook with potential Tenant/Buyers. Most sellers and landlords will not give that kind of rent credit up front, but if they did the math they’d realize that getting someone into the home fast is what it’s all about. When you compute how much money you lose by constantly advertising and making all the monthly payments you realize hat it’s better to turnover the home pronto-Tonto.
Client: I heard you on a TV show and you mentioned that rent credit is applied to the purchase price. Is this still true?
Claude: Yes! When you’re doing a rent to own, a sandwich lease, rent credit and option money go to the purchase price only. If you mistakenly tell the Tenant/Buyer or place within your contract that it is going to the down payment and that doesn’t occur, when they go for a loan, they have grounds for a potential lawsuit against you.
Client: Even the option money itself couldn’t be considered as part of the down payment?
Claude: I’ve got to tell you that 99% of the time it does go to the down payment, but I’m just worried about the one guy who goes to the one private lender who says none of the option money will go to the down payment. Why take a chance? I’m not going to stand in the way if they can get all the money towards the down payment.
Client: You just want to let them know before hand.
Claude: Definitely! There are three rules, disclose, disclose and disclose. Do your business honestly and upfront with people and you will find that your problems are minimized and your business will consistently grow as your reputation precedes you. It’s the best marketing of all!
To sum up, the Rent Credit and Option Money are applied to the purchase price only in my contracts. Depending on the lender many variables could occur in the Tenant/Buyer’s favor.
Client: The point is we would tell a buyer that the option consideration is usually taken off the price of the house.
Claude: This is the way I usually explain it to them. All your rent will be credited towards the purchase price and your option money usually goes to the down payment depending on what lender you go to.
Claude: Don’t use terms that are absolute because in the contracts, option money and rent credit should always go to the purchase price. It is usually not an issue with the tenant/buyers; they don’t differentiate between purchase price and down payment for the most part.
Excerpt of "Conversations of a Lease Purchase Mentor"
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