Getting the Best Profits on a Real Estate Lease Option

Those who know how to achieve real estate investing success have many different strategies when it comes to lease options. Some simply use the lease period to fix up the home and check it out to ensure that it is structurally sound and a good investment. Others will rent it out and make some profit until they can exercise the option to buy, at which point they turn around and sell the house. Still there are others who get more creative and find other strategies that let them make a nice profit out of a real estate lease option situation.

Simple Methods

If you choose to fix up the house during the lease period then you will be taking a slight loss in the beginning. You will have to pay money each month on the lease while also paying out money to fix up the house. Some investors prefer this option, though, to simply buying a house and flipping it. It allows you to see everything wrong with the house. If you run across something that would be too costly to fix or something that is a deal breaker then you ride out the lease option contract and not buy in the end. If everything is fine then you can usually turn around and sell the house for a nice profit once your lease option ends and you buy the property.

Many people rent out a real estate lease option property. This will allow you to have renters who pay the monthly lease until you get the option to buy. You can do repairs or have your renters do repairs for a reduced rent cost. Like the first option you still get a chance to see what is really wrong with the house, but with this method you are not losing so much money on the deal in the beginning. You still get the chance to sell the house once your lease option contract is up and you buy the property. When you sell you can increase the price over what you paid due to the fact that you have done repairs and made improvements and make a nice profit.

Find a Buyer Early On

Some investors who achieve real estate investing success make sure their lease option will pay off. Instead of waiting to sell when their real estate lease option is up and they buy, the investor will start actively looking for buyers before their option of lease is up. This way they can find someone to buy the property instead of them once the option is up. To make this work you will set the price on the property for the buyer you find to a higher price than what you are supposed to pay.

There are many ways that you can make money off a lease option. Some who achieve real estate investing success just fail to see exactly what they need to do to make a profit on this type of deal so they walk away without ever giving it a try.

There is actually little to lose by just trying a real estate lease option. If you are a new investor or you are having trouble finding good properties to flip then a lease option may just be the best choice for you as you search for real estate investing success.

How to make money buying and selling foreclosed homes

One man's loss is another man's gain. Or so the saying goes.

The latest loser in this equation is not the person that was forced into selling off their timeshare, or their garaged '65 Corvette Coupe, it’s your neighborhood bank. After years of progressive gains, home prices have plunged in a nationwide trend that still is not over, opening up opportunities for even the most average entrepreneur to turn a tidy profit.

Home foreclosure rates have jumped close to 30% over the past few years, and banks are eager to trim these dead weight loans off their books. Buying and selling foreclosed homes is an attractive option, but what do you need to know?

You have seen the commercial spots for so-called private and government foreclosure listings that are suddenly made public and you are goosed up after watching yet another home makeover show, but you need to do a little homework before heading off to the auctioneer.

Gather Your Info

Buying a foreclosed home has some twists, but you should familiarize yourself with the nuts and bolts that govern any home purchase or sale. The Real Estate Settlement Procedures Act (RESPA) is a set of laws that regulate such transactions. Take time to review your rights as a buyer or as a seller.

RESPA requires that certain disclosures be made at various points during the transaction. Some of these disclosures specify various up-front costs. Others discuss options available from a lender and go over your escrow details. Since you will possibly be moving through this process absent a realtor, you need to be aware of the basics.

You also have the right to request a barrelful of information regarding any property you are interested in purchasing. Such things as the property's water supply, its building materials like the roofing and insulation, lead-based paint or other potential hazards, waste disposal, property taxes and average utility bills, can and should all be provided upon request.

It is your choice as to the inspector that you want to hire, and in most cases, it is the seller's job (or the banks) to pay for an outgoing inspection. Try to gather as much information on the property before going all in; there is no "lemon-law" in the housing market as there is with buying a vehicle.

Make sure you do some in-house legwork on the internet too. Various websites can help you to locate homes in foreclosure. Foreclosures.com is one such site. For a fee,Realtytrac.com will provide you with up to date properties that have gone into foreclosure as well.

Realtytrac also maintains a database of distressed properties, HUD homes and REOs (real estate owned homes - those for which the bank holds the deed). The site also monitors monthly and quarterly foreclosure rates, breaks foreclosures down by state, and is a helpful resource for those who may be close to foreclosure themselves, or for the potential foreclosure buyer.

According to recent tends reported by Realtytrac, the national average when buying a foreclosed home is about 25 percent below the full market value. That is some sweet action.

Get the skinny on Liens

Another possible hurdle that should be investigated is whether a lien has been filed against any potential property you are looking to purchase. A lien is a legal claim against real property. Since you are looking into buying property that someone else did not or could not fully pay off, there is a good chance that a lien was filed as collateral to secure the lender's interest in the loan.

Other liens may be filed by the state or county, perhaps for unpaid property or state taxes, or even by the IRS. If an individual owes more than five thousand to the IRS, a Notice of Federal Tax Lien may be filed on real property. If this is the case, the IRS may be willing to subordinate the lien, or discharge the parcel (the house and land) from the lien. See IRSPublications 783 and 784 for more information.

Contractors can also file Mechanic's Liens for unpaid work that they did on that property. If more than one lien is filed, they are called "competing" liens, and are subject to what is called "date priority." Simply stated, whatever agency or individual got their hand in the pot first by filing their lien will be paid first by any proceeds.

A Title Search would uncover any such liens, and you should be aware that liens on properties bought through foreclosure typically transfer with the sale and remain on the property. That means you may have to pay them off before the property is free and clear. If you do not get a title search done, that home you think you just paid off may suddenly resurface with another large debt that must now be satisfied before you can assume ownership.

Go for Broker?

Buying a home through the foreclosure process is oftentimes a less formal transaction, and a quicker one, than looking to purchase property through a real estate agent or agency. Real estate agents receive their commissions through the seller. For this reason, some agents steer clear from the foreclosure market, although most are willing to provide you with a listing of foreclosed homes in your area.

For the first time foreclosure buyer, you can probably forget about trying to buy the property directly from the bank. Sitting down at the table with a bank requires a certain understanding of legalese. Although buying from the bank affords a fair amount of surety, (you get to fully inspect the property, demand a clear title, etc.) it is probably the least financially rewarding option and requires quite a bit of know-how.

The same can be said for the auction format. Besides having certain credentials required by the state to buy and sell at auctions, this marketplace is fast moving and a little tricky if you do not know your stuff. Hiccup, and that shanty with the corrugated steel roof is suddenly yours.

If you do choose to go with the auction format, keep in mind that a full inspection likely will not be possible, and that you usually have to pay in full with cash or a cashier's check, or at least a present a pre-qualified loan letter from a bank or lender that specifies the funds they plan to lend you.

You are not left in the cold without any assistance however. Try using a broker. For a fee, typically less than what may be charged through a real estate agency, a broker acts on your behalf, negotiating contracts, purchases and or sales. Banks use brokers to sell most of their foreclosed properties, and once you have eyed a few properties that a bank holds outright title to, there is a good chance you can work with the broker to get the home for less than full market value.

Many banks will let foreclosed property go for less than what is owed. If a bank cannot recoup full payment on the loan, they will “short-sale” the property, and accept less than Fair Market Value. A good broker may be able to ‘sniff’ out these deals.

Know the Neighborhood

Of course, you are not buying a foreclosed home in the middle of nowhere. Be sure to check out the neighborhood to see if it is suitable to you and your (or any) family.

If you are going to be "flipping" the property after you have put some work into it, then consider what type of family may be interested in moving in. What is the crime rate? How are the local school systems?

Remember, foreclosed homes in some areas have the potential to appreciate more than others. That largely depends on such factors as what was already mentioned, as well as comparable sales (the price that other homes in the immediate neighborhood have sold for), the neighbors, the home's proximity to a nearby city or any attractions, ease of access, how the home is situated on the lot, street noise, etc.

Get to know everything about an area you are targeting, consider the above, and then look for foreclosed properties in those areas in order to maximize your earnings at sale.

Another suggestion is to verify with local lease agreement provisions whether foreclosures in their area require tenants to vacate the homes. Since many foreclosures may be set up as multiple family rental properties, you probably do not want to take on the role of Joe Pesci in the movie The Super. It is better if the lease requires tenants to leave; most do, but still a good thing to be sure of.

Pre-Foreclosure

A great way to get your hands on foreclosed properties before they are mired in legal muck is to look for homes that may be in pre-foreclosure.

Just as it sounds, pre-foreclosures are homes that are going, but have not yet fallen, into permanent default loan status. In this case, you may be able to buy the home directly from the homeowner. Pre-foreclosures require the least amount of capital going in. You also have the opportunity to thoroughly inspect the home and conduct a timely title search.

In a pre-foreclosure transaction, the homeowner agrees to sign the deed of the property over to you, and you then assume the existing mortgage and make the payments to the lender. This option is attractive to the owner as well, because it allows them to avoid foreclosure and the horrid credit impact it carries, as well as salvage some of the equity in the property. Once the loan has been satisfied, and if the owner has equity over and above any liens on the property, you and the owner will have to negotiate how that equity is to be split, if at all.

I know what you are thinking though. How do I find properties that are in pre-foreclosure?

For sure, there is a short window of opportunity to get your hands on these properties, so you will need to work diligently. Once a property hits pre-foreclosure, owners have about 2 to 3 months to bring themselves current. If the homeowner does not rectify the default condition, the lender may post a notice of sale, sometimes right at the local county courthouse. This is done at least 21 days prior to any auction. If homeowners find they cannot bring themselves current, or know that they will not be able to, that is your chance.

Again, go online. Many agencies and even web sites that FSBOs (For Sale by Owner's) advertise on may show homes in pre-foreclosure. Local newspapers also list notice of public default debts that have been secured by liens.

In various stages of the foreclosure, notices are recorded at your County Recorder's Office. This public information is available to anyone, and is free. Visit your county's office and do a search for a Notice of Default (NOD), Lis Pendens (a fancy term that means a lawsuit has been filed on assets), or for a Notice of Sale.

In pre-foreclosure, you, your broker or your real estate agent should contact the owner directly to inquire about the property. Make sure you are in a position to make immediate payments if need be. You may be referred by the homeowner to a trustee or to an attorney, especially if that property is subject to the terms of a bankruptcy. The trustee or attorney cannot release specific information to you regarding a bankruptcy filing, but they can confirm if the property is in full foreclosure or not.

Remember your manners when trying out this option. Making contact with a homeowner who is in a financial dilemma is inherently thorny. Know that the owner in default retains his or her ownership rights, and may very well be attempting to avoid foreclosure. Selling their home or turning it over to you may not be something they want to consider, at least not as of yet. If it is clear they are trying to keep hold of their home, then move on. Telephone contact with these individuals may be tricky. For this reason, it might be best to try a mass mailing of a professional looking postcard to properties of interest.

Closing the Deal

Buying a foreclosed or pre-foreclosed home probably means that there is some fixing up to take care of. Unfortunately, once a homeowner knows that the bank is going to take control of their property, maintenance and repair work drops to the bottom of their to-do list.

Be prepared for structural or electrical problems, roofs that leak, etc. Vandalism may also be something you have the regrettable responsibility to deal with. Not from the kid with the spray can, but from the irate householder who is about to lose everything. Repairs that were not immediately evident may suddenly eat away the amount you may have shaved off the top of the market value.

Whenever you buy a foreclosed home, your contract should always have some type of contingency clause that may allow you to back out of the sale. That way, you exercise control on the property, and can also exercise your option not to buy it based on the home's physical or financial condition, or if you find it is sitting on a hotbed of buried nuclear contaminates.

Since many owners do not have the money or do not feel the need to make extensive repairs, you will probably see the term "as-is" on some of the purchase agreement paperwork. These two little words carry a lot of influence. This means you have agreed to purchase the property in its current condition, and you waive any realistic ability to later make qualms over the fact that there is a rodent population that rivals a small city living in the floorboards. Again, make sure that your contingency clause is clearly stated in your contract.

Keep a track of all your estimated repair costs and capital investments, both for tax purposes and for estimating your asking price when the property goes on to the market. Your chances of realizing a nice profit and keeping you in the "black" will increase if you keep track of such expenditures.

If you and the owner agree to proceed with the sale or transfer of the property into your name, then you will have to negotiate the terms of the purchase, taking into consideration the factors already mentioned. The foreclosing lender, trustee, attorney, real estate agent or broker may need to be present or included in these talks.

Certain intangibles may come across the bargaining table. It is surprising how many little factors may come up. The owner may want to stay in a pre-foreclosed home until they find a place to live, for example. As far as purchasing agreements, if you are not familiar with how to draw one up, consult with a local real estate agent. They will help you with one for a small fee.

If you can assume the loan outright, as in the case of a pre-foreclosure deal, you may be able to easily take on the current terms of the loan. If not, the bank may allow you toreamortize, or change the terms of the loan, such as the payment amounts, length of the loan, interest rates, etc. Other lenders may require the full amount of the loan up front.

Tips and Hints

A few other tips to be mindful of – It may be a good idea to focus on homes that have only been lived in for perhaps 10 years or less. The longer someone has lived in his or her home, the greater the equity that has been built up. Dealing with the homeowner regarding this equity, especially in the case of a pre-foreclosure sale, may be problematic.

Too, remember that your target goal should be saving at least one fourth off the full market value. At the same time, this will be subject to the recent home recession trends. This means you may have to settle for making a little less than that, especially considering the way property values in some markets have nose-dived.

Many new foreclosures stem from problems in the sub-prime market, and people are losing their homes after being hit with huge jumps in their monthly payments, particularly in the case of adjustable rate mortgages. Because of this, the lender may likely be pursuing an amount that is close to the full market value of the property, or at a slight discount only.

To sum it all up, buying and selling a home in foreclosure is no doubt a gamble. As with any risky venture, you do not always win. Nevertheless, by doing your groundwork in advance, familiarizing yourself with your local state's foreclosure laws and sticking to a couple of necessary principles, buying a home that has been foreclosed on and then marketing it can be a profitable and rewarding endeavor.

Top 5 Must-Haves For Flipping Houses

By Glenn Curtis – Investopedia.com

Many people assume that they can simply 1) buy a house, 2) apply a fresh coat of paint, 3) trim some bushes, and then 4) resell the home at a profit. Unfortunately, this process, called “flipping” is not that easy. After all, if it were, everyone would be doing it.

There are several skills and people that every potential investor/flipper should have in place before even considering entering into a real estate transaction of this nature. In this article we’ll look at the top five “must-haves” you’ll need to succeed in this endeavor.
1. A Group of Experts

While a house flipper can certainly go it alone, it will certainly help to retain individuals that are familiar with the legal, accounting and construction ramifications of flipping houses.

Flippers typically work against the clock, so they must renovate a home on budget and then turn it around and sell it before the financing costs eat up their profits. In any case, a bevy of experts including a real estate agent, an attorney, a contractor or renovator, an accountant, a home inspector and an insurance agent can ensure that the work is completed in a timely and efficient manner.

2. A Handyman or Knack for Home Improvement

The house flippers that make the most money buying and selling homes tend to be handy people. That is, they have the ability to step in and lend a helping hand when time or money constraints kick in. Most flippers can do things like change a sink, install a countertop, do basic electrical or plumbing work, and/or shingle a roof.

Why is being handy so important?

The obvious answer is that if you can do the work yourself, you won’t have to pay someone to come in and do it. However, there are other advantages to being handy as well. For example, there are times when it will be impossible to get an electrician to install an attic fan on short notice. There are also times when a job must be completed without warning at the last second in order to obtain a certificate of occupancy. In these instances, having the ability to navigate your way around a tool box is very valuable.

3. A Good Lay of the Land

The buyer should know about the area in which they are buying property. A buyer should know, for example, what characteristics (acreage, number of rooms, type of home, etc) are the most desirable in the area in which they are looking to buy. Equally important is knowing what houses in the general vicinity have sold for and if there is likely to be any future development in the community (such as a new school, condominium or shopping center) as this could affect supply and demand.

4. A Good Estimator
By definition, house flippers attempt to buy a property and then resell it at a profit in relatively short order. In order to do this, however, the flipper must typically make some structural and/or cosmetic changes to make the property more appealing to the next buyer.

If the flipper underestimates the costs associated with the refurbishment he or she may be exposed to large monetary losses. Therefore, a flipper should be familiar with construction materials (their use and their cost), as well as local construction codes, the cost of local labor and the time it should take to do a given job.

This is no small feat. In fact, it takes even the most seasoned construction professional many years before he or she is aware of all the nuances that exist. In any case, before becoming involved in “flipping”, be certain of your abilities to estimate a job in terms of both cost and time.

5. A Dose of Patience

One of the biggest obstacles to making money in the real estate market is that buyers tend to overpay for a given property.

Why do buyers overpay?

Typically, buyers become emotionally attached to a property or develop some other bond with it, which in turn forces them to enter into a contract on less than favorable terms.

However, savvy flippers have the ability to avoid emotional purchases, and the desire to find diamonds in the rough and properties on the cheap. They also understand that if they aren’t buying a property at a favorable price and with favorable terms, it makes sense to simply move on to greener pastures.

The bad news is that patience is a difficult virtue to teach and hone. In general, either you have it or you’ll lose a lot of money trying to learn it. (To read more about choosing the right house, see Smart Real Estate Transactions and Investing In Real Estate.)
Bottom Line

While quitting your job and becoming a full-time house flipper may sound like an attractive proposition, be sure that you have these five “musts” before investing in a real estate project.

Whether buying or selling real estate, arm yourself with information - The Boston Globe

In the real estate world, there was one word — repeated three times — that used to be the cardinal rule: location, location, location. Just about anybody could buy a house in a good location and easily make money by flipping, selling, or refinancing the home.

The new cardinal rule of real estate is information, information, information.

“For decades, the real estate industry has operated under the principle that the less information buyers and sellers have, the better it is for agents, lenders, title companies, and all the other folks who eat from the trough,’’ writes Ilyce Glink in “Buy, Close, Move In: How to Navigate the New World of Real Estate — Safely and Profitably — and End Up with the Home of Your Dreams’’ (Harper Paperbacks, $14.99). “But the real estate tide seems to be turning, as the housing and credit crises of 2008 have heightened awareness in Washington, D.C., and on Wall Street about the catastrophic consequences of a closed information loop.’’

I have no doubt that many professionals in the real estate industry will take great exception to Glink’s observation. But the evidence is on her side. We ended up in one of the worst housing market collapses because far too many borrowers were uninformed, ill-prepared, and overly optimistic about potential gain because of bad information they received and gladly embraced.

Glink has spent years covering the real estate industry and that’s why for August, I’m recommending her book for the Color of Money Book Club.

Glink is also the best-selling author of “100 Questions Every First-Time Home Buyer Should Ask.’’ She coauthors a syndicated column, “Real Estate Matters.’’

In her new book, Glink looks back at what happened and then forward to what’s to come in the real estate market. As she reports, millions of people have seen their home values plummet. One group of economists has suggested that housing prices won’t recover until 2017.

But this book isn’t all pessimism. It’s also a guide to help buyers and sellers navigate the new world of real estate. Glink offers advice on what to do in a new era of declining home values, the changing role of Fannie Mae and Freddie Mac, fixing your credit, calculating what you can afford, and snagging a house through a short-sell or foreclosure. She even ventures to help those still interested in investment property.

I think you will find the section on the 10 things that have changed in real estate sobering. If you’ve been looking for a home, you know that number one is that you need a lot of cash. The industry has long known that the more money someone puts down on a property, the less likely the person will default. In this case, an old rule is the new rule.

This is the worst of times and the best of times for real estate. It’s up to you to determine if this will also be the age of wisdom or the age of continued foolishness.

Michelle Singletary is a columnist for The Washington Post. She can be reached at singletarym@washpost.com. 

How to Find Motivated Home Sellers When Flipping Houses

If you're going to ask a real estate investor what's the biggest challenge he has encountered while starting out in the business, you'll probably get this answer: finding leads to motivated sellers. Indeed, many investors are having a hard time finding homeowners who are willing to sell their properties at discounted prices.  But if you're going to let this particular challenge discourage you, you won't be able to reach your full potential as real estate investor.

For those who are having similar problems, here are some hints and tips that will help you find motivated home sellers when flipping houses:

• Look for FSBO (For Sale By Owner) signs. If you have lots of time to spare, you should drive around neighborhoods and look for FSBO signs. These signs are like an open invitation from motivated home sellers for you to buy their homes. Therefore, you shouldn't be afraid to talk to homeowners who have such signs on their lawn because these people are in dire need to sell their properties.
• Check out online classified ads. Online classified ads, such as Craigslist and Kijiji, are great sources of leads to lucrative real estate deals. As you may know, many people who want to get rid of their properties, including houses, post ads on these sites to find potential buyers. By taking a look at these sites, it would be easier for you to find homesellers who can provide you with profitable investment properties.
• Search for vacant houses. This is probably one of the lead generation strategies used by those who make money by flipping houses. To locate the owner of abandoned homes, write down the address of the vacant property that you want to invest in. Then, look up the names of the owner by checking out the office of public records. Once you've got the pertinent information, you should contact the homeowner and express your intent to buy the property.
• Send mail and tell people what you do. Although some people think that sending snail mail is a little bit old fashioned, many real estate investors agree that it is one of the most effective ways to find leads to motivated home sellers. So don't be afraid to mail those letters, especially the yellow ones, because it can help you secure a profitable investment property.

For more tips on flipping houses and making real estate investments, log on to www.RehabList.com.