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Investing in Real Estate With Lease Options and "Subject-To" Deals : Powerful Strategies for Getting More When You Sell, and Paying Less When You Buy
With lease options and subject-to deals, investors can control properties worth much more than what they could normally afford to purchase. The potential for profit is great and the costs of getting started are low.
This book shows novice investors how author Wendy Patton and thousands of other Americans--including well-known real estate developers and business moguls--use lease options and subject-to deals to control valuable property without necessarily owning it. The cost of purchasing an option or subject-to deal is a fraction of what it costs to buy a home. That's why these kinds of deals are typically found in every serious investor's portfolio. Sharing the secrets and strategies investors use to profit from low- and no-money-down deals, Patton gives investors all the information they need to succeed.
"Finally, a book that explains lease option and subject-to deals in depth and detail. This book is essential for anyone who wants to make money in real estate without using a lot of cash or taking on a lot of risk. A gold mine of great information."
--Robert Shemin, New York Times bestselling author of Secrets of Buying and Selling Real Estate?Without Using Your Own Money!
"Few can rival Wendy's knowledge and experience with lease option and subject-to deals. This is a must-read for beginning and advanced investors and the real estate agents who serve them."
--Gary Keller, New York Times bestselling author of The Millionaire Real Estate Investor
"The techniques Patton teaches here are invaluable--especially for working with Realtors and still getting properties for little- or no-money-down. The detail in this book will make you want to read every page."
--Albert Lowry, PhD, New York Times bestselling author of How You Can Become Financially Independent by Investing in Real Estate
This book shows novice investors how author Wendy Patton and thousands of other Americans--including well-known real estate developers and business moguls--use lease options and subject-to deals to control valuable property without necessarily owning it. The cost of purchasing an option or subject-to deal is a fraction of what it costs to buy a home. That's why these kinds of deals are typically found in every serious investor's portfolio. Sharing the secrets and strategies investors use to profit from low- and no-money-down deals, Patton gives investors all the information they need to succeed.
"Finally, a book that explains lease option and subject-to deals in depth and detail. This book is essential for anyone who wants to make money in real estate without using a lot of cash or taking on a lot of risk. A gold mine of great information."
--Robert Shemin, New York Times bestselling author of Secrets of Buying and Selling Real Estate?Without Using Your Own Money!
"Few can rival Wendy's knowledge and experience with lease option and subject-to deals. This is a must-read for beginning and advanced investors and the real estate agents who serve them."
--Gary Keller, New York Times bestselling author of The Millionaire Real Estate Investor
"The techniques Patton teaches here are invaluable--especially for working with Realtors and still getting properties for little- or no-money-down. The detail in this book will make you want to read every page."
--Albert Lowry, PhD, New York Times bestselling author of How You Can Become Financially Independent by Investing in Real Estate
274 pages, Paperback
First published June 23, 2005
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May 4, 2024I put $5,000 down, which will come off the purchase price.
J.O.B. (Just Over Broke)
It is best to start this business while you are still employed at your current job
A lease option is a strategy that gives an investor the right to lease a home and also the right to purchase the home during or before the end of the lease period. An option is a contract that gives its purchaser the right to exercise a privilege.
It is a technique that involves gaining control of a property without the added burdens of ownership. All money made in real estate is made by controlling property.
John D. Rockefeller who shared his secret to achieving great wealth: “Control everything, own nothing.” All of the most successful real estate developers today utilize options.
A subject-to is a technique by which the investor gains the title to a property but doesn’t have to get a mortgage on the property he is about to control. The seller keeps the mortgage in his own name but deeds the property to the investor. It is deeded to a new owner “subject to” the existing mortgage, which stays in place with this technique. The mortgage company isn’t usually made aware of the change or asked about the change. The new owner just starts making the payments on the old owner’s loan.
Many times even experienced real estate investors don’t ask, “When does the seller need his cash?” They say “no” to a price without asking the seller when he needs the money.
If I can’t get a lease option or lease purchase from the seller, or if it doesn’t make sense from a business perspective, then a subject-to is another way to acquire the property. However, it is important to note that a subject-to is a buying strategy only.
an ad I had placed in a newspaper:
Company looking for 3-4 homes in this area, on long- term lease. Call 123-222-2222.
The option sale price I set for Roberta was $225,000. How did I get that figure? I put a 10 percent option premium on top of the retail price (see Chapter 5), plus I added an additional 6 to 7 percent appre- ciation rate at 18 months, which was approximately another $20,000. I then rounded it up a little to get to $225,000.
Here is the ad:
Tired of monthly payments? We can help. We will make your payments. Call today. Call 123-222-2222.
These people were also in a bad situation: They couldn’t refinance the property, even with their equity, because with the missed payments they no longer qualified financially for a mortgage; they had no one they could borrow from.
He also offered to make the three late pay- ments that would bring their mortgage current—a total of approxi- mately $6,300. From this point forward, he agreed to continue making their mortgage payments. This would prevent them from going into foreclosure. Their credit score would improve as he continued to make their house payments on time.
At this time, my average profit is $40,000 per lease option deal. Lease options typically turn over every 12 to 24 months. Depending on what part of the country you reside in, the profit range should vary from $20,000 to $150,000 (Midwest to northern California). Subject- to profit ranges should be equal to or greater than lease options, be- cause you are buying from distressed sellers and might be able to negotiate more on the price; however, you might also have to use more cash to purchase them.
They did such a great job that their buyer has bought additional properties from them and even sends them Christmas cards and cookies!
Because of the fast appreciation in this particular market, he negotiated a slice of that beyond the profit that he locked in at the time.
We will also receive 25 percent of anything above the $188,000 that the investor sells it for.
I have also placed ads in both the “for rent” section and the “for sale” sec- tion, depending on the ad.
SBOs (pronounced “fizz-bos”)
whether it is in a flood area, whether it has central air, whether it has ever had termites or been in a fire, how old the roof is
Hi, my name is ________. I’m calling about your home for rent. Can you tell me if it is still available?
When is it available?
Can you tell me a little about the home?
When was the home built?
Have the kitchen and bath(s) been updated since it was built?
Does it have a garage or basement?
Is the yard fenced?
Wow, this home sounds really nice, would you considering selling it?
Do you know how much you would want for the home?
When could I come and look at the home to see if I would be interested in it?
Two very popular zero-down approaches are lease options and subject-tos (also referred to as “getting the deed”).
A lease option is a technique that involves gaining control of a property, but not ownership—just the right to take responsibility for a property now and purchase that property at some future date with defined terms. A subject-to involves getting the deed to a property without taking on a new mortgage. Instead, the seller signs over the deed to his home “subject to” the existing mortgage.The buyer makes the mortgage payments on the seller’s existing loan but does not take out a new mortgage to acquire the home.
1. Sellers who have bad debt. Solution: Get the deed—no lease option.
2. Sellers who have good debt. Solution: lease option or get the deed.
Sellers who have bad debt are generally in trouble. They might be behind on a mortgage, out of a job, down with an illness, in the middle of a divorce.
Sellers who have good debt might be transferring to a new location for a promotion, getting married (each owning their own home), building a new home, burned out on being landlords.
Technically, you are not assuming the seller’s mortgage. You are just making the payments on their existing mortgage.
The biggest controversy for a subject-to is the violation of the due on sale clause. This clause is a provision in the mortgage documents that says if the home is sold or transferred, the mortgage will be paid in full or the lender could call the loan due in full.
you should be up-front with the lender and send them a certified letter stating that you are taking the property and making the payments on loan.
The lender generally won’t know about a deed transfer unless someone tells them, and the way they often find out is when the insurance carrier notifies them of the change in ownership. Therefore, many investors keep two policies in force: first, the old homeowner’s policy with the original seller, which really is not any good, since the seller no longer owns the home. Keeping this policy in place simply keeps that insurer from reporting a deed change. Second, the investor purchases a policy for himself
You can always find buyers for good deals at your local real estate meetings. Get a buyers list together if you want to wholesale your leads. I would tell an investor, “I have a lead, and for $XXX I will pass it on to you.”
Monthly payment amount (rent paid to owner) is significantly less than a mortgage payment. Typically, I like to get a rental payment for 0.5 to 0.6 percent of the value of the home per month. Non–owner occupied mortgage payments will be closer to 1 percent per month for the same property.
A lease option is control without ownership. Because the owner still holds the deed or title to the property, if they incur a finan- cial problem, there is a chance the title/deed could have a lien placed on it. A lien can usually be placed on a piece of real estate if a person owes someone money, when certain procedures are followed. This may cause a problem such that it may not be possible for the seller to sell the home easily. This would be horrible not only for you, the in- vestor, but also for your tenant-buyer.
make sure you record a memorandum of option. This is a document that gives the world notice that you have an interest in the property. Then the seller can’t refinance the home or sell it to someone else. focus on and pursue primarily the sellers with equity. If the seller has a lot of equity in their home, then even if something bad did hap- pen to them, they would have some cushion to fall on.
The worst thing I have ever had happen on a lease option deal was delinquent property taxes
Seasoning of title starts when you file a memorandum of option or lien of interest.
if the seller’s payment is too high or the mar- ket is slow, you might need to have the seller pay you to take the deed. Yes, there are sellers who will pay you to take the deed to their home. Think about it: If this seller sells conventionally—that is, through a Re- altor—he would have to pay up to $10,000 in commission to sell his home. Plus, he’ll have closing costs, transfer taxes, and will probably pay points or fees on behalf of his buyer. If he’s willing to pay all this money to an agent to sell the property—and wait 90 to 120 days to sell, too—why shouldn’t he just pay you to take over his payments now?
If the seller doesn’t have the cash to give you, an option would be your best strategy. This way, the seller can pay you the $10,000 over time, or you could arrange for the seller to pay part of the monthly payment during the option period. This way, if he stops paying his portion of the payments, you have the choice of surrendering your option and simply giving the property back to him. When you have the deed, you can’t do this.
you should not throw out numbers to the seller in the excitement of the moment. Even if you feel pressured, tell them you need to go back to your office and crunch the numbers.
price, payment, and length of time.
Too many calls? Your price might be too low. Too few? Your price might be too high. It’s a little like fish- ing—change the bait and see what happens.
Page 79 excel.
You can also ask for the equity buy-down of the mortgage dur- ing the option period. For example, if the seller owes $100,000 on the home at the start of this option and at the end they only owe $90,000, then you would receive the $10,000 of credit that was paid on the mortgage balance during the option period, because in effect you had been paying that mortgage payment during the option period.
There are always unexpected costs in any deal and,so,I like to make sure that I have extra profit built into any real estate transaction.Always plan for something that could go wrong—someone who won’t pay rent,a furnace that goes out,a roof that leaks,a septic field that fails,and so on.Plan for the worst and you will be safe.
This is an example of how to build rapport with a seller. People like to talk about what is important to them. It makes them feel more comfortable with you.
As I enter the house, I quickly look around for items connected to children or pets, or something of significance, like a hobby or a collection
Then I ask, “What is it that you’re trying to accomplish with the house as a result of my help?”
I usually include terms that will limit my risk. One approach is to include a clause that says my lease option can be terminated within 60 days with written notice to the owner. This provides an agreeable exit to problematic transactions.
Another method that I use even more frequently is to make the start of the lease option contract subject to finding a tenant-buyer. This significantly reduces your overall risk and avoids having to begin funding monthly payments before you have your own funding source in place.
Sometimes you will need to create multiple offers on the same property. Let’s say I make an offer of three years at $225,000 and pay the seller $1,000 per month. The seller then looks at appreciation rates and says they don’t want to lose out on all the appreciation that I will profit from in the next three years. So I then structure a second offer where I might offer to go five years and give them a little more on the sales price as well as a little more each month, but they have to agree to all five years. You might also want to do a step approach based on appreciation with a lower percentage than the market appreciation, so that you aren’t giving away the entire profit.
Find the seller’s key issues so that you know what terms are more flexible for them. Whenever you give up something, negotiate something back in return. With a seller, usually the first question they ask tells you the most important issue to them. If they mention two or three different issues, find out which is the most important.
It’s best to soft-pedal their rejection with a comment such as, “Well, things might change for you, so please give me a call somewhere down the line if you’re still interested.”
if a seller says, “Your offer isn’t enough!” I reply, “My offer isn’t enough?” and then look at them and don’t say another word. What I’m trying to do is see if the question is a smoke screen or if there is another objection.
Page 110. Option Checklist.
It is very important that you purchase the property from all its owners. Sometimes I have looked at title work and seen “Joe and Sally” on the title when Joe had said he owned the property. Joe forgot to mention that he had divorced Sally.
In many states a married man must have his wife sign the deed in order to transfer title, even if she is not on the title, because of her dower rights. However, I recommend that anyone who is married have their spouse sign the agreements.
Memorandum of Option. This is the document that gets recorded against the title of the property. It does two things. First, it gives the world notice that you have an interest in the property by “clouding” the title. When you cloud a title, the seller can’t refinance or sell the home to someone else and give clear title.
Secondly, it seasons the title. Seasoning is a term that is becoming more and more important to real estate investors. Mortgage underwriters are becoming very strict about the length of time investors or sellers must have owned properties before selling them. There has been so much mortgage fraud in the past few years. They make sure that the seller of a home has owned it in their name for 90, 120, even 360 days. Each lender has their own requirements for the number of days to season a title of a property.
Affidavit of Liens. This is a sworn statement, signed by the seller, that discloses all of the liens on the home. It also asks about liens that are not yet recorded but known about; for example, if the roof was replaced last month but the roofer has not been paid yet, this could become a lien. The seller must disclose it or be guilty of fraud.
Lead-Based Paint Disclosure. This disclosure is a federal requirement in the sale or rental of any home. Prior to 1978
I always recommend having a witness when you are signing a document, but a witness is not necessary to make it valid. Only the Memorandum of Option needs to be notarized so that it can be recorded
All repairs, both major and minor, are the responsibility of the tenant except during the first 60 days of the agreement—I leave that responsibility to the owner. Everything is negotiable, and while 60 days is my standard, it’s completely flexible. You can make it longer; you can also make the seller responsible for all repairs, for anything over $500, for anything under $500, for nothing at all.
When juggling the receiving of the rent from the tenant and the payment of the mortgage to the owner,you might want to stagger them a few days to give the tenant’s payment time to clear before you make a payment to the owner.
Order Pretitle Work. This can also be called a “commitment for title,” but it is not to be confused with title insurance.
Seller’s Acknowledgment. With this document the seller acknowledges important things about the sale of their home. This way they can’t come back later and say they didn’t understand what they were doing or didn’t realize they were really deeding their home to the investor.
The IRS has changed the capital gains on our personal residences to a rule that, in simplified terms, goes like this: Every two years you can sell your primary residence (yes, the one you live in, not your investment deals) and you can keep the profits of up to $250,000 if you are single and $500,000 if you are married, tax-free.
Approximately 80 to 90 percent of the nice homes on the market are listed with Realtors. There are also deals that never get to a Realtor—foreclosures, traditional for sale by owners, the homes investors find by driving by
The Realtor you will need to find for lease options will be a seller’s agent or what is called a listing agent, the one that lists the home for a seller.
“Realtor, if you don’t sell my home soon, I am going to have to rent it!” This word makes a Realtor cringe. The only thing you can say to a Realtor that’s worse is, “Take my home off the market.” If the home doesn’t sell soon, the Realtor won’t get any commission and has lost countless hours in showing the home as well as dollars in advertising and marketing.
In my area, when a Realtor hears the four-letter word rent, my phone rings
Take a Realtor out to lunch. Rent a conference room and invite Realtors to a wine and cheese party; then give them a presentation about lease options or lease purchases. Draw them in by focusing on what’s important to them: “Would you like to sell more listings and make more money this year? I can teach you for free!”
Page 155, letter.
When you attend a meeting, it is customary to bring donuts or bagels, so call first and ask the office manager or broker what the agents would like.
I don’t like to call Realtors during the day and interrupt them— or interrupt my own day. I prefer to call their offices late at night and leave a voice message. That way they can listen to it first thing in the morning—they start their day off with me reminding them of a creative way to do business.
I would recommend a reminder call no more than once a month, maybe even every other month, especially after you have the relationship established.
Real estate is a small world, and word gets around if you stiff a seller or walk away from a contract and tell them, “Go ahead and sue me.” Realtors find out, and, as previously mentioned, they control 80 to 90 percent of the homes on the market.
Sometimes a Realtor will call me about what I call a dumpy property. I look at it and know it is overpriced.
Sally, I looked at the home on 123 Main Street today. Boy, with what it needs, and what I think I can sell it for, and my carrying costs, the most I could offer would probably be an insult to the seller. I certainly don’t want to affect your relationship with the seller. I think I will have to pass on this one, unless you want me to still write it up. I will leave this up to you.
“Every month that you pay your rent on time you get a free pizza.” It’s amazing what people will do for a free pizza.
Page 177, advert examples.
write into the lease with that tenant a clause that allows you to put a sign out front to draw in tenants for other homes you have.
Offer your current tenant-buyers free rent or option credit if they refer a friend who lease options from you. I prefer the option credit, because it is not cash out of my pocket and it entices them to purchase the home. If they don’t purchase it costs me nothing; if they do, it comes out of my pocket later.
We should all screen people as if we were blind and deaf. Then we would screen them strictly on the facts and not our opinions or prejudices.
If you reject someone’s application, you have to tell them why you rejected them in writing, and there is no need to obscure your reasons. Let them know that if they can clean up some of their credit difficulties, you may be able to help them in the future.
I always pay the water bills myself, then bill the clients for them. This way I make sure they are paid on time. Otherwise the city could put a lien on the property if I left it up to the tenant and the tenant didn’t pay.
J.O.B. (Just Over Broke)
It is best to start this business while you are still employed at your current job
A lease option is a strategy that gives an investor the right to lease a home and also the right to purchase the home during or before the end of the lease period. An option is a contract that gives its purchaser the right to exercise a privilege.
It is a technique that involves gaining control of a property without the added burdens of ownership. All money made in real estate is made by controlling property.
John D. Rockefeller who shared his secret to achieving great wealth: “Control everything, own nothing.” All of the most successful real estate developers today utilize options.
A subject-to is a technique by which the investor gains the title to a property but doesn’t have to get a mortgage on the property he is about to control. The seller keeps the mortgage in his own name but deeds the property to the investor. It is deeded to a new owner “subject to” the existing mortgage, which stays in place with this technique. The mortgage company isn’t usually made aware of the change or asked about the change. The new owner just starts making the payments on the old owner’s loan.
Many times even experienced real estate investors don’t ask, “When does the seller need his cash?” They say “no” to a price without asking the seller when he needs the money.
If I can’t get a lease option or lease purchase from the seller, or if it doesn’t make sense from a business perspective, then a subject-to is another way to acquire the property. However, it is important to note that a subject-to is a buying strategy only.
an ad I had placed in a newspaper:
Company looking for 3-4 homes in this area, on long- term lease. Call 123-222-2222.
The option sale price I set for Roberta was $225,000. How did I get that figure? I put a 10 percent option premium on top of the retail price (see Chapter 5), plus I added an additional 6 to 7 percent appre- ciation rate at 18 months, which was approximately another $20,000. I then rounded it up a little to get to $225,000.
Here is the ad:
Tired of monthly payments? We can help. We will make your payments. Call today. Call 123-222-2222.
These people were also in a bad situation: They couldn’t refinance the property, even with their equity, because with the missed payments they no longer qualified financially for a mortgage; they had no one they could borrow from.
He also offered to make the three late pay- ments that would bring their mortgage current—a total of approxi- mately $6,300. From this point forward, he agreed to continue making their mortgage payments. This would prevent them from going into foreclosure. Their credit score would improve as he continued to make their house payments on time.
At this time, my average profit is $40,000 per lease option deal. Lease options typically turn over every 12 to 24 months. Depending on what part of the country you reside in, the profit range should vary from $20,000 to $150,000 (Midwest to northern California). Subject- to profit ranges should be equal to or greater than lease options, be- cause you are buying from distressed sellers and might be able to negotiate more on the price; however, you might also have to use more cash to purchase them.
They did such a great job that their buyer has bought additional properties from them and even sends them Christmas cards and cookies!
Because of the fast appreciation in this particular market, he negotiated a slice of that beyond the profit that he locked in at the time.
We will also receive 25 percent of anything above the $188,000 that the investor sells it for.
I have also placed ads in both the “for rent” section and the “for sale” sec- tion, depending on the ad.
SBOs (pronounced “fizz-bos”)
whether it is in a flood area, whether it has central air, whether it has ever had termites or been in a fire, how old the roof is
Hi, my name is ________. I’m calling about your home for rent. Can you tell me if it is still available?
When is it available?
Can you tell me a little about the home?
When was the home built?
Have the kitchen and bath(s) been updated since it was built?
Does it have a garage or basement?
Is the yard fenced?
Wow, this home sounds really nice, would you considering selling it?
Do you know how much you would want for the home?
When could I come and look at the home to see if I would be interested in it?
Two very popular zero-down approaches are lease options and subject-tos (also referred to as “getting the deed”).
A lease option is a technique that involves gaining control of a property, but not ownership—just the right to take responsibility for a property now and purchase that property at some future date with defined terms. A subject-to involves getting the deed to a property without taking on a new mortgage. Instead, the seller signs over the deed to his home “subject to” the existing mortgage.The buyer makes the mortgage payments on the seller’s existing loan but does not take out a new mortgage to acquire the home.
1. Sellers who have bad debt. Solution: Get the deed—no lease option.
2. Sellers who have good debt. Solution: lease option or get the deed.
Sellers who have bad debt are generally in trouble. They might be behind on a mortgage, out of a job, down with an illness, in the middle of a divorce.
Sellers who have good debt might be transferring to a new location for a promotion, getting married (each owning their own home), building a new home, burned out on being landlords.
Technically, you are not assuming the seller’s mortgage. You are just making the payments on their existing mortgage.
The biggest controversy for a subject-to is the violation of the due on sale clause. This clause is a provision in the mortgage documents that says if the home is sold or transferred, the mortgage will be paid in full or the lender could call the loan due in full.
you should be up-front with the lender and send them a certified letter stating that you are taking the property and making the payments on loan.
The lender generally won’t know about a deed transfer unless someone tells them, and the way they often find out is when the insurance carrier notifies them of the change in ownership. Therefore, many investors keep two policies in force: first, the old homeowner’s policy with the original seller, which really is not any good, since the seller no longer owns the home. Keeping this policy in place simply keeps that insurer from reporting a deed change. Second, the investor purchases a policy for himself
You can always find buyers for good deals at your local real estate meetings. Get a buyers list together if you want to wholesale your leads. I would tell an investor, “I have a lead, and for $XXX I will pass it on to you.”
Monthly payment amount (rent paid to owner) is significantly less than a mortgage payment. Typically, I like to get a rental payment for 0.5 to 0.6 percent of the value of the home per month. Non–owner occupied mortgage payments will be closer to 1 percent per month for the same property.
A lease option is control without ownership. Because the owner still holds the deed or title to the property, if they incur a finan- cial problem, there is a chance the title/deed could have a lien placed on it. A lien can usually be placed on a piece of real estate if a person owes someone money, when certain procedures are followed. This may cause a problem such that it may not be possible for the seller to sell the home easily. This would be horrible not only for you, the in- vestor, but also for your tenant-buyer.
make sure you record a memorandum of option. This is a document that gives the world notice that you have an interest in the property. Then the seller can’t refinance the home or sell it to someone else. focus on and pursue primarily the sellers with equity. If the seller has a lot of equity in their home, then even if something bad did hap- pen to them, they would have some cushion to fall on.
The worst thing I have ever had happen on a lease option deal was delinquent property taxes
Seasoning of title starts when you file a memorandum of option or lien of interest.
if the seller’s payment is too high or the mar- ket is slow, you might need to have the seller pay you to take the deed. Yes, there are sellers who will pay you to take the deed to their home. Think about it: If this seller sells conventionally—that is, through a Re- altor—he would have to pay up to $10,000 in commission to sell his home. Plus, he’ll have closing costs, transfer taxes, and will probably pay points or fees on behalf of his buyer. If he’s willing to pay all this money to an agent to sell the property—and wait 90 to 120 days to sell, too—why shouldn’t he just pay you to take over his payments now?
If the seller doesn’t have the cash to give you, an option would be your best strategy. This way, the seller can pay you the $10,000 over time, or you could arrange for the seller to pay part of the monthly payment during the option period. This way, if he stops paying his portion of the payments, you have the choice of surrendering your option and simply giving the property back to him. When you have the deed, you can’t do this.
you should not throw out numbers to the seller in the excitement of the moment. Even if you feel pressured, tell them you need to go back to your office and crunch the numbers.
price, payment, and length of time.
Too many calls? Your price might be too low. Too few? Your price might be too high. It’s a little like fish- ing—change the bait and see what happens.
Page 79 excel.
You can also ask for the equity buy-down of the mortgage dur- ing the option period. For example, if the seller owes $100,000 on the home at the start of this option and at the end they only owe $90,000, then you would receive the $10,000 of credit that was paid on the mortgage balance during the option period, because in effect you had been paying that mortgage payment during the option period.
There are always unexpected costs in any deal and,so,I like to make sure that I have extra profit built into any real estate transaction.Always plan for something that could go wrong—someone who won’t pay rent,a furnace that goes out,a roof that leaks,a septic field that fails,and so on.Plan for the worst and you will be safe.
This is an example of how to build rapport with a seller. People like to talk about what is important to them. It makes them feel more comfortable with you.
As I enter the house, I quickly look around for items connected to children or pets, or something of significance, like a hobby or a collection
Then I ask, “What is it that you’re trying to accomplish with the house as a result of my help?”
I usually include terms that will limit my risk. One approach is to include a clause that says my lease option can be terminated within 60 days with written notice to the owner. This provides an agreeable exit to problematic transactions.
Another method that I use even more frequently is to make the start of the lease option contract subject to finding a tenant-buyer. This significantly reduces your overall risk and avoids having to begin funding monthly payments before you have your own funding source in place.
Sometimes you will need to create multiple offers on the same property. Let’s say I make an offer of three years at $225,000 and pay the seller $1,000 per month. The seller then looks at appreciation rates and says they don’t want to lose out on all the appreciation that I will profit from in the next three years. So I then structure a second offer where I might offer to go five years and give them a little more on the sales price as well as a little more each month, but they have to agree to all five years. You might also want to do a step approach based on appreciation with a lower percentage than the market appreciation, so that you aren’t giving away the entire profit.
Find the seller’s key issues so that you know what terms are more flexible for them. Whenever you give up something, negotiate something back in return. With a seller, usually the first question they ask tells you the most important issue to them. If they mention two or three different issues, find out which is the most important.
It’s best to soft-pedal their rejection with a comment such as, “Well, things might change for you, so please give me a call somewhere down the line if you’re still interested.”
if a seller says, “Your offer isn’t enough!” I reply, “My offer isn’t enough?” and then look at them and don’t say another word. What I’m trying to do is see if the question is a smoke screen or if there is another objection.
Page 110. Option Checklist.
It is very important that you purchase the property from all its owners. Sometimes I have looked at title work and seen “Joe and Sally” on the title when Joe had said he owned the property. Joe forgot to mention that he had divorced Sally.
In many states a married man must have his wife sign the deed in order to transfer title, even if she is not on the title, because of her dower rights. However, I recommend that anyone who is married have their spouse sign the agreements.
Memorandum of Option. This is the document that gets recorded against the title of the property. It does two things. First, it gives the world notice that you have an interest in the property by “clouding” the title. When you cloud a title, the seller can’t refinance or sell the home to someone else and give clear title.
Secondly, it seasons the title. Seasoning is a term that is becoming more and more important to real estate investors. Mortgage underwriters are becoming very strict about the length of time investors or sellers must have owned properties before selling them. There has been so much mortgage fraud in the past few years. They make sure that the seller of a home has owned it in their name for 90, 120, even 360 days. Each lender has their own requirements for the number of days to season a title of a property.
Affidavit of Liens. This is a sworn statement, signed by the seller, that discloses all of the liens on the home. It also asks about liens that are not yet recorded but known about; for example, if the roof was replaced last month but the roofer has not been paid yet, this could become a lien. The seller must disclose it or be guilty of fraud.
Lead-Based Paint Disclosure. This disclosure is a federal requirement in the sale or rental of any home. Prior to 1978
I always recommend having a witness when you are signing a document, but a witness is not necessary to make it valid. Only the Memorandum of Option needs to be notarized so that it can be recorded
All repairs, both major and minor, are the responsibility of the tenant except during the first 60 days of the agreement—I leave that responsibility to the owner. Everything is negotiable, and while 60 days is my standard, it’s completely flexible. You can make it longer; you can also make the seller responsible for all repairs, for anything over $500, for anything under $500, for nothing at all.
When juggling the receiving of the rent from the tenant and the payment of the mortgage to the owner,you might want to stagger them a few days to give the tenant’s payment time to clear before you make a payment to the owner.
Order Pretitle Work. This can also be called a “commitment for title,” but it is not to be confused with title insurance.
Seller’s Acknowledgment. With this document the seller acknowledges important things about the sale of their home. This way they can’t come back later and say they didn’t understand what they were doing or didn’t realize they were really deeding their home to the investor.
The IRS has changed the capital gains on our personal residences to a rule that, in simplified terms, goes like this: Every two years you can sell your primary residence (yes, the one you live in, not your investment deals) and you can keep the profits of up to $250,000 if you are single and $500,000 if you are married, tax-free.
Approximately 80 to 90 percent of the nice homes on the market are listed with Realtors. There are also deals that never get to a Realtor—foreclosures, traditional for sale by owners, the homes investors find by driving by
The Realtor you will need to find for lease options will be a seller’s agent or what is called a listing agent, the one that lists the home for a seller.
“Realtor, if you don’t sell my home soon, I am going to have to rent it!” This word makes a Realtor cringe. The only thing you can say to a Realtor that’s worse is, “Take my home off the market.” If the home doesn’t sell soon, the Realtor won’t get any commission and has lost countless hours in showing the home as well as dollars in advertising and marketing.
In my area, when a Realtor hears the four-letter word rent, my phone rings
Take a Realtor out to lunch. Rent a conference room and invite Realtors to a wine and cheese party; then give them a presentation about lease options or lease purchases. Draw them in by focusing on what’s important to them: “Would you like to sell more listings and make more money this year? I can teach you for free!”
Page 155, letter.
When you attend a meeting, it is customary to bring donuts or bagels, so call first and ask the office manager or broker what the agents would like.
I don’t like to call Realtors during the day and interrupt them— or interrupt my own day. I prefer to call their offices late at night and leave a voice message. That way they can listen to it first thing in the morning—they start their day off with me reminding them of a creative way to do business.
I would recommend a reminder call no more than once a month, maybe even every other month, especially after you have the relationship established.
Real estate is a small world, and word gets around if you stiff a seller or walk away from a contract and tell them, “Go ahead and sue me.” Realtors find out, and, as previously mentioned, they control 80 to 90 percent of the homes on the market.
Sometimes a Realtor will call me about what I call a dumpy property. I look at it and know it is overpriced.
Sally, I looked at the home on 123 Main Street today. Boy, with what it needs, and what I think I can sell it for, and my carrying costs, the most I could offer would probably be an insult to the seller. I certainly don’t want to affect your relationship with the seller. I think I will have to pass on this one, unless you want me to still write it up. I will leave this up to you.
“Every month that you pay your rent on time you get a free pizza.” It’s amazing what people will do for a free pizza.
Page 177, advert examples.
write into the lease with that tenant a clause that allows you to put a sign out front to draw in tenants for other homes you have.
Offer your current tenant-buyers free rent or option credit if they refer a friend who lease options from you. I prefer the option credit, because it is not cash out of my pocket and it entices them to purchase the home. If they don’t purchase it costs me nothing; if they do, it comes out of my pocket later.
We should all screen people as if we were blind and deaf. Then we would screen them strictly on the facts and not our opinions or prejudices.
If you reject someone’s application, you have to tell them why you rejected them in writing, and there is no need to obscure your reasons. Let them know that if they can clean up some of their credit difficulties, you may be able to help them in the future.
I always pay the water bills myself, then bill the clients for them. This way I make sure they are paid on time. Otherwise the city could put a lien on the property if I left it up to the tenant and the tenant didn’t pay.
August 26, 2009
Wendy Patton is an awesome real estate investor. I cannot wait to meet her one day, her book is very informative and easy to read and follow along with! Highly recommended for the investor who wants to learn subject-to and lease options.
August 4, 2011
an awesome book to learn about creative financing real estate options. a great way to learn about lease options and subject-tos.
September 18, 2024
Listened via audible. I enjoyed Wendy’s insights and the additional information she added via audible.
November 21, 2025
Helpful.
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