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Therefore it is to your advantage to offer your Optionee incentives to be early.  Perhaps instead of the usual $100 per month credit toward the payoff of the Option Price, give them an extra $50 if they pay before the 1^st of the month.  What does that cost you when it’s all said and done – $600 a year?  That’s nothing compared to the payday you will receive when they exercise the option if you done your numbers correctly, and it ensures that you won’t lose out because they were thirty days late once in the past twelve months!

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In the last post, we suggested that you have your lease option tenant meet with a financial expert to make sure that the tenant can exercise the lease option in the future. Here is an example of why this is so critical.

Let’s say that you have a Lease Option Tenant named Sue and Joe.  They had some problems a few years ago when Joe had a heart attack. He needed emergency surgery and he was out of work for two years.  Sue had to go to part time work to care for Joe and they ended up losing their home to foreclosure. They defaulted on all of their credit cards, and then had to file bankruptcy.  (Tear jerker isn’t it?)

But now it’s been two years since the bankruptcy. Joe had multi-bypass surgery and is back working a better job than he had before. Susan is working full time and they have re-established credit since the bankruptcy was discharged one year ago.

They have five thousand dollars to put down and their current credit rating is a 620. The Lease Payment of $1400.00 a month is five hundred dollars less than what they were paying for their mortgage, and is $400 more per month than most rentals are going for in the area, which means better cash flow for you  Sounds like they would be the perfect couple to lease option in the next 24 months, don’t they?

But what you don’t know is if you really do want them to exercise the option in twenty four months they have no chance at all at getting financed.  Why?  Because it will only have been three years from the discharge of the bankruptcy, and you they not only had a bankruptcy but they also had the foreclosure. These are considered to be two “lifetime events” in the lending world, which means that they cannot get financed for at least seven years.

So even though Sue and Joe may be great possibilities, they are not the ones to place in the property unless you are going to be willing to wait until it is seven years after their bankruptcy. This means you will need to readjust the terms of the Lease Option if they are going to be in the home.

You might even have to move them to another property that you are willing to have a long term tenant so that way you don’t lose the opportunity. There is a slim chance you could get them done FHA, but not enough of chance that it would be worth the risk.

As you can see, it’s vitally important that you have your lease option tenants go through this process so you can be sure that the lease option can be exercised in the future.

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This is going to cost you an average of $200 to $300 for the service. It is critical that you do it! What we have most of our investors do is make this fee part of the Non Refundable Lease Option Fee, and pass it on to the tenant.

DON’T SKIP THIS STEP! Don’t get cheap at this point in the process. View this on the same level as getting a property inspection before you purchase a home. Sure you may get away with not having one, but the vast majority of times, it ends up costing you more money in the long run than if you had just spent the money for the inspection in the first place.

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Let the Optionee know that since in the end they will exercise the option, and get financed, you want to help ensure that they are not just throwing their hard earned money away. The best way to do that is to work on their credit report.  Show them the added benefits once they exercise the lease option.

Usually if you’ve priced it right then their new payment after the option is exercised will be lower than the lease price they will be paying you.  That gives them something to shoot for, because who doesn’t want to save money?!  Once they are enrolled in a credit repair program, follow up with them from time to time to make sure they are following the program and improving their credit.

Have them meet with your finance person or mortgage broker who will be able to guide them along with tips on how to improve their scores and what to do in order to lower outstanding debts.  If you don’t have someone you can refer them to then please send us an email to questions@thewayneturnergroup.com and we’ll help you out.

For properties that turn Average Joes into Real Estate Investing Pros, be sure to visit http://www.wholesalepropertypro.com.

Since lenders are always looking for anything fishy, eliminate the possibility by having a licensed (if your state requires it) and registered management company. The management company should have a real telephone (hard line, not just a cell phone) and office with a white or yellow page listing.

If you for some reason don’t want to spend the money to have a management company collect your payment for you, just send us an e-mail and we’ll walk you through how to get around this yourself. (questions@thewayneturnergroup.com). We also suggest not using any management company that doesn’t have at least fifty properties that they currently manage! In this case, the more experience the better.

For properties that turn Average Joes into Real Estate Investing Pros, be sure to visit http://www.wholesalepropertypro.com.

Now the requirement is kind of redundant as they are already requiring that you have twelve months canceled checks showing payments, and also the Lease Option recorded at least twelve months.

It’s just another hoop that you need to be aware of that you’ll have to jump through. Lenders are just trying to cover themselves. By putting a crazy stipulation such as this on Lease Options, they figure it prevents them from having to buy back a loan on Wall Street, and it makes them look like they were making sure the tenant was really living in the property.  The best way to handle it is just to prepare for it. Advise your lease option tenant to hold onto their utility bills that contains the address of the property.

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For example, if the beginning of the Lease Option the purchase price is 100k, then five, ten, or even twenty-five years from now the value of the property is 100k.

This is really stupid; however it is the way the trend is going in lending.  Unfortunately, this kills a great part of doing a Lease Options. One of the things you sell your tenant on is the fact that they can get appreciation and lock in their purchase price.

However, there is an easy way to get around this. You can set the lease option purchase price for at least ten percent higher than what you agreed to (I would suggest going with twenty percent myself). Then you can place contingencies within the Lease Option that gets the tenants to pay off back in line to where they would have been with the original price.

This is where you skills as a communicator are going to come in, because you MUST show the tenant how this works out better for them in the long run. This part can get tricky, so if you need help preparing the numbers correctly, be sure to have a professional look at it to make sure it will work!

For properties that turn Average Joes into Real Estate Investing Pros, be sure to visit http://www.wholesalepropertypro.com.

1. Check payments where the tenant receives the cancelled checks and keeps them.
2. Cashier’s check (with them down as the remitter and keep the receipt)
3. Lock box
4. Direct debit
5. Teller deposit into an account

Any of these options work instead of cash. These options are recommended because lenders require some sort of traceable way of proving the payments.  Since you must have at least the last twelve months of payments for most lenders, then you need to make sure that you and your Optionee are keeping records of the payments.

Here is where we see a lot of investors get cheap! Instead of spending a few extra dollars to have way to track the payments, they would rather save five or ten dollars a month that ends up costing the thousands in the end.  Do the math and you’ll realize the savings are not even close to the real cost of being cheap!

For properties that turn Average Joes into Real Estate Investing Pros, be sure to visit http://www.wholesalepropertypro.com.

Why? I have no idea! But you’re better safe than sorry. I think what they were trying to do was find a reason to decline the files (who actually keeps the original, right?).  But because we had the original, we’ve been able to eliminate this deal breaker multiple times.

For properties that turn Average Joes into Real Estate Investing Pros, be sure to visit http://www.wholesalepropertypro.com.