Buying, fixing then selling a fixer-upper as one way to make money with houses. That’s a perfectly acceptable way to make money in real estate, but one should consider a couple of factors. Fixing up houses is a relatively slow process and it can consume a lot of up-front money. Very few people have been able to pyramid low sums of money into true financial independence through fixing up properties. Figure it out for yourself. If you can hire people to do maintenance and repairs and still make money buying, selling, exchanging and renting houses, doesn’t it make sense to concentrate on these as soon as you’ve learned enough to do it?
Admittedly, I started out doing a lot of things to raise money while I learned the business, but once I’d gotten my buying and negotiating technique down pat on cheaper and older homes, I graduated to buying houses which I could hold for the long term as rentals. When this consumed all my available cash, I started buying houses using ‘contingent contracts; with a 6-month closing date. With only a token $100 earnest money deposit, I was routinely able to tie a house up for a period long enough to sell or buy it.
I learned something along the way. While I usually only had enough cash to fix up one house at a time, I could Option a dozen houses with the same amount of money. And I could sell the houses or the Options much faster than I could fix up a house. Consequently, the profit I made over a year’s time using Options was far larger than any I’d been able to earn by fixing up houses. Furthermore, the variety of houses I could Option was expanded.
No longer need I concern myself with whether or not a house was feasibly financed or rentable for enough to make the payments. All I had to do was to tie a property up for a few months until I could sell it. Meanwhile, the owner stayed in the property, making the payments and doing the repairs, until it was sold. I soon migrated to Options on larger, more expensive houses that I found among the expired listings that the owners were vacating but which they hadn’t been able to sell. As Option consideration, I’d given the owner enough money to pay for moving expenses, and agree to pay the balance of the purchase price as soon as I could sell the house. When the banks got into trouble, interest rates drove potential buyers out of the market and my Option profits began to slow down.
LEASING FIXERS FOR INCOME AND PROFIT
When financing dried up and the market slowed, I found myself with an inventory of Options and no money, so I began to combine Options with leases under the terms of which, I had the right to sublease the property until it sold so long as I paid all property expenses and mortgage payments. Bear in mind that I did things differently from most people. Instead of leasing a property and then trying to negotiate an Option, I Optioned a property, then tried to negotiate a lease. This grew as a natural progression to my Options.
From time to time, when I agreed to make a departing owner’s payments, I was able to arrange to Lease/Option the properties. Some of my Options ran for as long as 7 years. During this period, my ‘spreads’ added hundreds of dollars to my income. Consequently, I was rarely in a hurry to sell. This had a beneficial side effect. From time to time an owner, in a hurry for cash, would discount his equity for me, or give me $2 credit against the purchase price for every $1 that I’d agree to pay him monthly out of my rental cash flows. I discovered that leasing could often be a lot smarter and profitable than owning.
Suppose you could buy a nice, modern, well located, attractive $100,000 house which would rent for $850 per month? Terms might be $10,000 down and payments at 8% per month, interest only. Would you consider that to be a good deal? Let’s see. You’d be paying 8% of $90,000, or $600 monthly. Let’s say taxes and insurance would add up to $1500. Hired management could cost 10% – or $1,000 over the year. If you had one month of vacancy each year and 5% of gross rental income for repairs and refurbishment that would cost $500.
These costs would reduce the $10,000 per year gross rental income to $7000. You’d be losing $200 per year even with these optimistic assumptions. DON’T BUY! Instead, offer to lease the property from the owner for $800 net after all commissions, if any, with the right to sub-lease or assign the lease. Offer to trade a commitment for a 5 year lease guaranteeing no vacancies or refurbishment costs during that time for $100 per month rental discount. In return for doing all minor maintenance up to $100 per month (NOT the first $100), try to negotiate an additional $25 discount.
Your lease period would commence as soon as you found a suitable tenant at $850. After all the discounts, this would leave your rents to the owner at $675 and give you a positive gross cash flow cushion of $175 per month. Surely you’ll have some extra costs, but over time – except in a fast rising real estate house market – you could come out way ahead on profit using a master lease rather than paying $10,000 for $200 a year negative cash flow. How can you do this?
You'll need two documents to make this transaction- (1) A simple lease under the terms of which you leased the property. (2) A comprehensive lease under the terms of which, your sub-tenant would be responsible for as many of the repairs and incidental costs as possible. Such a lease is beyond the scope of this book, but may be found in my book series called ‘Management Masters Collections’ which is available in our catalog.
A MASTER LEASE IS DECEPTIVELY SIMPLE!
Over the next 5 years, all your rent raises and increasing cash flow might make the owner envious. Leasing was a lot easier than you might suspect. Most owners saw me more as a responsible buyer willing to take over all responsibility for their property while I struggled to sell in a slow market than as a tenant. I found this approach generated lots of deals and created a positive income stream from the tenants I rented to. Had sellers seen me as a tenant, they might well have demanded that I pay market rents. My way was more profitable and easier to explain to sellers.
I convinced the sellers that I would make every effort to sell their house so long as I could net a 10% profit over the sale price after the costs of repairing, managing, selling and financing the property. Let’s see how this benefited me. As a 7% commission broker, with a $100,000 house, I’d usually have to split my commission with another broker, leaving me 3.5% of the total commission. That boils down to $3500 gross.
Of course, from this I’d have to subtract advertising costs, overhead, and time spent holding open houses. Occasionally, one of my salespeople would sell the house, and my commission would shrink to $1750 gross. A 10% commission amounted to the normal profit that I’d get on the sale of 4 houses. Options were multiplying my income/time ratio by 400%. It didn’t take me long to stop listing properties for sale for others. Sometimes I’d guarantee a sale within 6 months if they’d agree to reduce the price by 5% per month. At best, I sold the house swiftly and pocketed the profits. At worst, I would wind up buying a house 30% below market. When you deduct 30% from market value, this comes directly off the seller’s equity. It usually required very little cash to pay off the seller and to take over the existing loan payments. I would rent the house until it sold.
If you start the negotiation with sellers with an Option instead of a lease you will get more favorable terms.
Rents are going up nationwide. It’s a good time to acquire as many Options and Leases as you can.
You do NOT need to buy houses to lock in today’s prices with an Option. A long term lease will provide cash flow now and even more cash flow later.
Learn more about Creative Options Strategies at Peter Fortunato’s workshop in Costa Mesa California March 8th and 9th.
SEE DETAILS >>>> HERE
Real estate markets are changing. It is time you learn new techniques so you can change too!
