HOW DO LEASE OPTIONS WORK?
How do lease options work? They’re a great way to make even bigger profits. With a lease option, also called a rent-to-own, you don’t have to wholesale that property you got at the tax sale. You can sell it for 90% or even 100% of its value.
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I’ve been involved in tax liens and tax deeds for 25 years. Today I’m going to talk not only about tax liens and tax deeds, but I’m going to answer the question how do lease options work?
You’re going to see if you use a lease option to sell that you can generate some huge profits.
So I’ll give you some inside information on tax liens, and I’ll give you some great information on tax deeds.
Then before I finish, I want to talk about two big mistakes that I made at the auctions that you don’t want to make. So I’ll tell you about those mistakes because they’ll save you a ton of money.
How do lease options work? Well, investors really like the lease option once they’ve learned about it.
ABOUT TAX LIEN PROPERTIES
People that are buying tax lien properties are not buying “A” properties in a country club or even “B” properties. A lot of times they’re buying C’s and D’s. These properties are a little used and somewhat abused.
Those properties sell to fixer upper people. They sell to people that want to do lease options; they sell to people that might need installment payments.
So the tax lien and tax defaulted property business is easy to understand, but most people don’t realize how lucrative it is. I’m about to show you how lucrative it can be.
For those people that don’t know about it, tax liens and tax deeds have been around for 200 years.
This is the kind of business that you can do on a part-time basis, and you can earn full-time money. Many people that do this will be getting checks from 5, 7, even 10 different sources within their first two years of doing it.
So let me explain the business of tax lien certificates and tax deeds, and I can do that in a couple of sentences and do it relatively easily.
WHY COUNTIES SELL TAX LIENS AND DEEDS
To start out with, the local government must collect property tax, because the property tax pays all the bills or the majority of the bills for the county.
In order to collect those taxes, they have the sheriff along with the treasurer start levying tax on property. Then they go about the business of collecting. If they can’t collect it, they have a couple of options.
The number one option in half of the states is they will sell a tax lien certificate, and in the other half of the states, they will actually seize the property, confiscate it and then they’ll resell it at auction.
HOW DO LEASE OPTIONS WORK TO GET TOP DOLLAR?
How do lease options work to increase your profit margin? When it comes to lease options, what’s happening is people are buying at the tax defaulted auction for 10 and 20 cents on the dollar.
Then they sell it for very close to retail price – very close – but they get a higher than normal price, that’s for sure. Why do they get a higher than normal price? Because they’re going to offer financing.
That financing means installment payments and low down payments. Low down payments and installments are what people are looking for in lease options, at least in the tax lien and tax deed business.
Now the government, they’re collecting their money at the auction. Let’s set the government aside for a second because they’re going to be there; they’re going to carry on that business, and it’s going to go for years.
When I say it’s going to go for years, here’s what happens every year.
The appraiser and the assessor are out there valuing property. They figure out all the values, and then they send each one of the homeowners a bill for their share of all the bills at the county.
The county needs money. What do they do with that money? They’re going to pay for the school teachers, the police, and the fire departments.
So the county has a lot of bills to pay, everything from the court system to picking up the trash. Most property owners don’t understand that there are going to be a lot of bills for the county to pay.
SELLING TAX DEFAULTED PROPERTY
So in half of the states, they’ll sell a tax lien certificate. When they sell a tax lien certificate, you earn money on that. You can earn 16%, 18%, 24% up to 36%. Those are income vehicles, but you don’t get possession of the property.
What we’re going to talk about today is how you’re going to get possession of a property for 10, 20, 30 cents on the dollar, and you want to mark it up.
What I usually teach is mark it up so that if you got it for 20 cents in the dollar, then sell it for 40 or 50 cents, and collect some money.
Now, how do lease options work? This is a different way of doing business. With this, let’s see if we can get top dollar for the property and accept installment payments.
So the county auctions the property. Now they’re rid of it. Once they’re rid of it, they’re happy because they got the money. That’s all they wanted was their money.
What do you want? Well, if you buy at a tax deed auction, you want to get a great deal.
So try to buy it at 10, 20, 30 cents on the dollar, then you’re going to be happy. I’ve had clients buy for 6 and 7 cents on the dollar, but I’ve also been at auctions and watched people pay 95 cents on the dollar.
Do you want to be a bargain hunter? Then do your homework. Be a savvy investor. Buy properties for 10 and 20 cents on the dollar. However, you don’t necessarily have to sell them for 20 cents on the dollar.
HOW DO LEASE OPTIONS WORK TO GET INSTALLMENTS?
You can sell those properties for 75, 80 and 90 cents on the dollar by using what’s called a lease option, which is nothing more than selling the property with installments, small down payments and installments.
People that can make installment payments, they do it again and again and again, and they rarely lose the property, They make most of the payments. If they don’t continue paying, you just get the property back and do it again.
A simple lease option can be done on every property that is sold at a tax defaulted property auction.
HOW DO LEASE OPTIONS WORK? WHO BUYS?
Now, whom do you sell them to? The credit bureaus will tell you that 25%, even 35%, of all the buyers have low credit scores.
In other words, their credit ratings are low, so they can’t go to the bank. Well, they can go to the bank, but the bank will tell them no.
The lease option solves that problem. People that have a bad credit score can still buy, but they have to do it in a rent-to-own. So what they do is they give you a small down payment, and then they give you regular installments.
Keep in mind, at tax auctions, you’re going to buy “C” and “D” properties. You’re probably not going to get too many A’s. Now I wish you luck if you get an “A”. That’s great. More power to you.
What happens is people see the “A” properties, and they bid them up too high, making it very hard to make money.
Now, they might get an “A” property at a nice discount that they want to live in. There are thousands of properties that are going to be auctioned, so you’re going to get to pick and choose.
Nationwide there are 5,000 auctions every year. There’s going to be plenty of time to do that.
HOW DO LEASE OPTIONS WORK AS A STRUCTURE?
How do lease options work as a structure? The lease option is nothing more than a rental agreement, where the people are paying, except now they’re going to pay their own taxes, and they’ve got to pay their own upkeep.
So it’s going to be a little bit more than just a rental agreement.
This is pretty simple. People make a down payment, then they make installment payments. After a period of time, they will have purchased the property.
What happens to you? Well, number one, you’re going to make a great profit, If you bought at 20 cents on the dollar and can sell it for 80 cents on the dollar, you’re going to do quite well.
HOW DO LEASE OPTIONS WORK TO EARN INTEREST?
If you get payments, you’re going to get interest on your money. How do lease options work to earn interest, and how much interest are you going to get? Well, it can be a big number. At the banks, people are buying with 3% or 4% loans. You can easily rent at 9% and 10%.
You can rent your money. In other words, whatever the price of the property is, you can rent that money at 9% and 10%. So you’re going to make a lot more money.
It’s not unusual for people to make a 40%, 50%, 80% profit on the property and make a 100% on the financing itself.
So now you have a general idea of the answer to how do lease options work, and we certainly do have many clients that do it. In other articles, we go into it more in depth.
WITHOUT A LEASE OPTION – BUY LOW, SELL LOW
Are there other ways than using the lease option? Of course, you could just do an outright sale. But if you’re buying “B” and “C” properties, you might want to think who you’re going to sell it to.
You’re probably going to sell it to people who buy fixer uppers, people that can repair it. They’re going to ask for a little bit of discount.
In that case, what I do is I buy it low, say 20 cents on the dollar, and then I’ll sell it for 40 or 50 cents on the dollar just to move it out. Or if you want to fix up it and go all the way for the 100 cents on the dollar, you can do that.
What media should you use? I would immediately go to Craigslist; I would do eBay. I would go to all sites, including Facebook, to sell the property.
HOW DO LEASE OPTIONS WORK IF THE BUYER DOESN’T PAY?
So how do lease options work if the lease option buyer doesn’t pay? Well, they haven’t bought anything. They’re just doing a rent-to-own from you. That’s all they’re doing.
You don’t sign the property over to them. You own the property until they pay you. What they call that in the real estate world is a deed for contract or cash for contract.
So what they can do, you’re going to cash for deed even. They can give you cash when they’ve paid all the payments and fulfilled the contract after 5 or 10 years. Then they get the house, and they get the deed.
You never passed anything to them. If they don’t pay you, you just kick them out like you would in an ordinary rental agreement.
2 BIG MISTAKES YOU DON’T WANT TO MAKE
Let’s go on to those two big mistakes that people make at auctions.
Big mistake number one is people don’t look at the property. If you didn’t look at a property, you shouldn’t bid at the auction.
Why shouldn’t you bid? Well, I’m going to tell you right now. If you haven’t seen it, hadn’t had boots on the ground, you’ve got a big problem on your hands.
What if there was a hurricane last night? What if there was a big windstorm? What if there was a fire? Any of those things could happen, and the property could be destroyed.
Unfortunately for you, the county is selling as-is, and they might not give you your money back. So you don’t want to be one of those investors that hasn’t looked at the property. That’s a really big mistake.
Second biggest mistake is similar, except now people go to the auction and maybe someone got the property they wanted. So they’re going to pick another one they want.
Well, if you haven’t seen it, you don’t want to bid on that. You certainly don’t want to bid if you don’t have an exit strategy already planned.
People will start bidding to win because they’re anxious. They want something good to happen. But what if you bid too high? Well, you only know whether you bid too high if you have an exit strategy. So those are two big mistakes.
How do lease options work? A lease option, also called a rent-to-own, works a lot like a rental agreement.
You can receive a down payment and installment payments, and you can charge interest. If they don’t pay, then you can evict them like any other tenant.
A lease option is an excellent way to sell a property that you picked up at a tax sale for 10, 20, or 30 cents on the dollar at a much higher profit margin. You could receive as much as 100 cents on the dollar.
So how do lease options work to make you high profits? They work beautifully.
Hopefully you’ve learned a lot. If you have, I have more for you, a free gift that I’m going to pass on to you. It’s called Safe Haven. It’s a home study course, valued at $197, on tax liens and tax deeds, and it’s yours for FREE.
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