How Much Of The Monthly Payment Applies To Purchase Price In A Lease Option Deal

Joe: Hey, it’s Joe. Another question here. Doesn’t have a name on it. “Thank you so much for allowing us to ask you questions and for everything that you do helping everyone. It’s out of this world and you give so much for so little.” Thank you. “The helpfulness is lifechanging. I got the Amazon book Automated Real Estate Investing,” which is three bucks on amazon, by the way, a little poke there, “and I’m trying to sell my first home. But where in the For Rent Method resident document contract does it specify how much of each month’s rent goes towards the purchase price? Also, is renting for more than I’m offering it – I’m renting it for more than I’m offering it so I don’t think the prices is the problem. But it’s taking more than five months now. Please advise. Thank you again tremendously. God bless you and the family.”

Joe: All right. Thank you. The, first of all, in most For Rent Method deals we don’t apply any of the Monthly Payment towards the purchase price. If you want to create, those are called rent credits. If you want to create rent credits and apply them to the purchase price, you can do that. But normally the way you would do that, let’s say you wanted to, say $200 a month out of your $1,000 a month payment is going towards your purchase price. So if you do that, you’ve got to figure out how much that’s going to be. So, $200 a month over a three-[year] period is about $7,200. So, what I would do is add $7,200 onto the purchase price in order to pay for that. So as they pay it down, they’ll eventually get it down to the price that you’re seller originally wanted for that deal. That’s how you don’t have to back and renegotiate with the seller.

Joe: Otherwise, you have go negotiate with the seller, say, “Would you give them a rent credit?” And if they will, great. But we normally don’t do rent credits. Now, we do credit the amount that they pay for the down payment. So, let’s say somebody comes along and they have $250K property. We raise the price to $270K. We get $20,000 for a down payment, $10,000 in cash and $10,000 as a promissory note that they’re making payments on over the next three years.

Joe: So, once they put that $20,000 down, they’re going to owe $250K to the seller, which is what the seller wanted in the first place. So they’re going to get that amount. If I wanted to also add rent credits to that, then I’d have to raise that price above that $270K in order to do that. Now, people, buyers of lease option properties aren’t typically sensitive of the purchase price. Purchase price I can push a little bit. If I get too far out of hand, it gets crazy, although we’ve sold properties for more than $100K over market value. When the market crashed back in California, we just made the lease options longer. But the seller was so upside down on a property you know, they’d bought it for $600K and it was now worth $350K, and they owed $450K on it, and so we put it on the market for $450K on a lease option even though it was only worth $350K and it worked. We were still able to sell it. We made it a five-year lease option.

Joe: And the reason it worked is because we sold it, the monthly payment was at market rent. The market rent on that one I believe was $2,000. The payment that had was $3,000, so he had $1,000 a month negative cash flow on a property like that, which made more sense than going into foreclosure for him. He wanted to protect his credit and $1,000 a month made more sense and he could afford to do it. So, that’s the way we did it with that lease option buyer and we made it work for him and for the buyer because they were able to get into it at a payment that would have been less than if they had purchased the property even at that time. So that ended up working out with that type of thing.

Joe: Also, the other question here has to do with not getting it sold in five months. If it’s not sold in thirty days and you’re using the techniques that I give you in order to sell a property as a lease option, every one of them should sell within thirty days if you structured the deal properly. If you didn’t structure the deal properly, then they’re not going to sell ever. Doesn’t matter whether you wait four or five months. You’re not going to sell them. So, what you want to do, the most important thing is that monthly payment must be at market rent or below. If you try to put it on the market and you think, “Oh, I think market rent is at this point,” and it doesn’t sell in thirty days and you’ve put it on craigslist, you’ve used, you know, you’ve used Zillow, you’ve used a sign in the yard, you’ve used Facebook, you’ve used the techniques that I’ve taught you and you’re still not sold within thirty days, nine times out of ten the problem is that you overpriced the monthly payment.

Joe: So I would immediately suggest that you drop that monthly payment to a point where you can get it sold. And you don’t give me what the numbers are on here, but I’m guessing that you’ve got your monthly payment on your rent is too high. So make sure you get that in place. You need to get the other things in place, too.

Joe: You want to try to get as close as you can on the purchase price. You know, don’t go overboard if you can avoid it. But if you have to, that’s something that you can usually sell, whereas the monthly payment, that’s not something you can sell. I rarely see people pay more than market rent for a lease option, so don’t do that. Switch that around and my guess is if you use the techniques that I’m teaching you to sell these properties you’ll get it sold within thirty days.

Joe: All right. Good luck with it.