Increasing Cash Flow on Lease Options
by Lynn Hahn
Sometimes you will find that a great money making
idea is so easy that you just want to hit yourself in the head and say "DUH, how
did I miss this?" This is one of those ideas...
When selling on lease option it is common for the
seller to ask for 5% down. The problem is that many times a well qualified buyer
may not have the full 5%. Let’s use an example…
You have a $100K house and you want $5,000 down.
The property has been on the market for two months and you REALLY need to sell
it. You find a buyer who has a good job, good credit etc. who could easily
qualify if they had a decent down payment. Problem is that this buyer only has
$3,000 to put down today. What do you do?
A lot of investors in this situation would take
the $3,000 down and be glad that they have a good tenant-buyer and no mortgage
payment to cover next month. The issue here is that you are leaving $2,000 on
the table. This same buyer would more than likely be happy to give you $3,000
today and the balance of $2,000 in a promissory note. This promissory note can
be any terms that the two of you agree on. Sometimes the buyer will pay you in
one lump sum (for example, when their tax money comes in) other times they will
be happy to pay an additional $XXX dollars per month until the full amount is
paid. Regardless of the terms, you are getting $2,000 more than you had to start
with. Granted, if the buyer exercises their option you would eventually
get the $2,000 anyway, but that is IF they exercise the option to purchase.
Do The Math
If you do this with only five tenant-buyers a year then you will increase
your yearly income by $10,000 or more.
Tips
- Make the promissory note a complete separate
document so that it will be easier to enforce should the tenant buyer default
on your lease/option.
- Don’t extend the term beyond the original
lease term. The sooner you get your money the better and if they happen to
move out still owing you money on the promissory they will not likely pay it
back.
- There is at least one guru out their selling a
full course on this simple subject. Don't Buy It. It is probably
good material, but you really don't need it. Don't make it harder than
it is.
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