High Levarage without Financing: Leasing Option
Hinking about how to maximize leverage and reduce risk, I thinkLease-Option would be a better strategy than buying in traditional way:
1) Find pre-foreclosure owners to negotiate a Option price that would make themhappy when the option is exercised 2 years later. But this price is still about20-30% below current market. In other word, high enough to get the owner out ofdefault, low enough so that you may get a profit later.
2) Offer to lease (with option) from the owner for 1 year or 2 year for a goodrent rate. You would turn around to lease the property to a real tenant at amarket rent, hopefully getting positive cash flow. By the time the lease-optionis over, you can exercise the option at apre-set price. Hopefully, the marketwould also start to appreciate in price; you may be able to sell it at a muchhigher price then the option price.
What it really comes down to is using very small upfront cash to control the totalvalue of the property at a minimum risk. The beauty is NO FINANCING is involved,yet you reach close to 100% leverage. We can potentially control the price formultiple houses. If one of them doesn't work out, we simply walk way after thelease is over. The positive cash flow may be enough to compensate for the lostpremium. The option premium can also be very small, down to $1 per option, orwhichever amount to help the owner out of default.
Well, I think it may work better when the market is identified to be close to anew boom (this is in fact the hardest...). When the market is starting to move,it's also the time foreclosure rate rises to the peak. Thus, I think opportunitieswill abound.
Timing: They simplyreceived Notice of Default from their bank. I think the Bank give them onemonth to pay up or quick. After bank repurchased the house, the bank becomesthe new owner. You can't do lease-option with banks.
Who can help you make the deal:realtor can't wait 1 or 2 years for the deal to close. Realtor often becameroad block in getting the deal put together. Realtor is only after commission.Lease-option is not a sale, so realtor is useless. You need a title agent andreal estate attorney. That's all you need.
How to find deal: subscribeto www.foreclosures.com or going toyour district court to see when will the auction take place, then find outwho's the owner, go directly to the owner and nicely explain to him your planto save him. As soon as the lease is signed, the missed payment is paid, theauction will be canceled.
1) He avoids foreclosure and probably bankruptcy proceedings.
2) He may get back more equity from your higher option price (still lower thanthe market by 20%)
3) He may get back more equity from your sales because 10-15% profit will flowback to him.
Because 1), 2) and 3), the desparate owners may probably sign the lease withyou.
Why he wouldn't want to sell it himself? because after Notice of Default isreceived, Bank doesn't allow him enough time to sell. In this poor market, itcan take up to 8 month to sell. Owner is very afraid of that.
Of course, not every deal will work. Not every owner will be in despair. Butyou will find 1 out of 10 owners in pre-closure trouble to be MOTIVATED enoughto do a lease with you. That's all you need, 10% of chance is enough for you toaccumulate enough
