In this article, our discussion will focus on the cooperative lease option assignment. This strategy involves much less risk than the sandwich lease option and it doesn’t involve managing the property. It also requires only a few dollars to put down to bind the agreements with the seller.
Presently, this is my favorite investing technique. I am able to help sellers get their property occupied with a qualified tenant/ buyer who has a good chance for loan qualification, and eventually buy the house. With no management responsibilities, low risk and a small binder deposit, the profit margin is very good for the effort I put into the deal.
Finding the Right House
What you want to look for are houses with at least 3 bedrooms and 1.5 baths, in a neighborhood that is safe and pleasant to live in. It should be in an area where there is ample shopping, good schools, recreation and other amenities that families look for. The houses should be priced in the middle to upper middle price range for your market.
Finding these houses should not be too difficult. You can begin by looking in your local newspaper under homes for sale and rent. Looking for homes for rent will usually produce better results, since the obstacle of the seller’s decision to rent the home has already been removed. So, you are already a head in your efforts even before you call.
If you have access to the internet, you can use a web site called craigslist to look for similar homes. These are free resources that can produce good results. As mentioned in a previous article, you can also send direct mail pieces to a targeted list of homeowners. New technology has brought about other possibilities in marking. You can now send sellers a voice blast and text messages to get their attention.
Talking to sellers
You have to remember that this process is a numbers game. The more people you contact the better your chances of putting a house under contract.
Once you find a property where the seller agrees to work with you, you will need to get a signed agreement with him. The agreement I use is an option to lease option the property. This agreement gives me the right to go out into the market place and find a third party tenant/buyer and assign this contract I have with the seller to him. In other words, the new tenant/buyer will take my place in the deal.
Screening the Tenant/Buyer
The perspective tenant/buyer must be thoroughly screened. Review and check his current and past rental and work history, references, credit and income. You could also do a criminal background check.
The best candidates should be able to qualify for a new loan in no more that 12 to 24 months. Once the candidate is selected, he should be placed in credit repair. This will give him the best chance to get his credit repaired and qualify for a loan and purchase the property.
Along with agreeing with the terms and conditions of the lease and option to purchase, he will need to pay a non-refundable option deposit. This can go toward to down payment. He will also be eligible to receive rent credits. I usually require that the tenant/buyer keep the maintenance up on the property and do the minor repairs to receive these rent credits.
I like to think of the tenant/buyer as a future homeowner in training. This is his chance to prove himself. After all, he has made a financial and written commitment stating so. At some point in the future, this house will be his, so he needs to begin taking care of it now.
Lease Term to Closing
Once the lease agreements are signed with the tenant/buyer, the investor will assign them back to the seller. At this point the seller takes the responsibility as landlord. This means he has the duties of property management. The investor will stay involved in a supporting role only.
His responsibilities will include monitoring the tenant/buyers progress in credit repair and be available if and when the seller needs assistance during the lease term.
If the tenant/buyer follows his credit improvement plan, pays the rent on time, maintains the property, and completes any minor repairs when needed, he will enjoy the fruits of his efforts. He will take ownership of the property. The seller will have his property sold and the investor will move on to the next deal. The cooperative assignment was the perfect choice.
In my next and final article in this series, I will be discussing the consulting lease option strategy. Please plan to join me.
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