Cash Flows From Financing Activities Include Which Of The Following Lease-Option and Rent-To-Own Properties – 11 Ways to Find Them When They’re Not on the MLS

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Lease-Option and Rent-To-Own Properties – 11 Ways to Find Them When They’re Not on the MLS

Leasehold options (also known as lease-to-own and similar to land leases and purchase agreements) are a good way to find properties to buy when you can’t buy the traditional way. You may have bad credit or no down payment. Or maybe you’re unsure about a new neighborhood and want to rent before buying. The problem is that rental options are hard to come by. Many are not listed as “rental options” on the MLS (“Multiple Listing Service” – a real estate database used by brokers), and others are not on the MLS at all. Here are some little-known ways to find a rental if it’s not listed on the MLS.

But first the basics:

A lease option combines renting a property with the option to purchase the property at some point in the future. There is no one “standard” lease. But the lease may be specific to your area. (The secret to this technique is in the options.) The lease agreement says that the tenant has the right to occupy the property for 12 (or 24, or whatever you choose) months and pay $x monthly rent. It contains the same basic provisions as any lease: keep the property clean, free of illegal activities, pay rent on time, etc. There is nothing unusual about renting.

The magic is in the possibilities. An option gives a tenant-buyer (a tenant who can become an owner) the right to purchase the property for a specified amount within a specified time frame, as long as they comply with the terms of the lease.

So those are the basics. The problem is: How do you find them? If you go to a realtor, they won’t find much – if anything – on the MLS. But don’t let that stop you. There are many, many of them out there. You just have to know where to look.

No MLS rental

Many rental properties – single-family homes, townhouses and apartments – are rented directly by the property owner. Remember, as we pointed out above, that many landlords are “reluctant landlords”. All of the points above apply to non-listed tenants. In addition, these owners face problems caused by calls from many “stress” and less serious calls. So many quickly become disappointed.

And the person looking for a rental option has another advantage: the possibility of talking directly with the owner. Now, technically, even if the property is listed with an agent, you can speak directly to the owner. However, the owner decided to use an estate agent in part to avoid all these problems. Negotiating directly with a seller when that seller is represented by a real estate agent is bad form and usually not a good idea. In the case of unlisted rents, there is no such buffer. You can call and in most cases speak directly to the owner.

There may be another advantage: you don’t have to deal with a real estate agent who doesn’t understand rental options, doesn’t “believe in” them, or thinks he’s protecting the owners’ interests by misrepresenting your offer to the owners.

You can find these properties in the classifieds sections of newspapers. You can also find them on online services like Craigslist. You can find them on notice boards in your local supermarket or other locations. And if you can’t find enough by searching, place your ads in the paper, on Craigslist, and on bulletin boards.

Here are some pointers on properties that could work as rental options:

For Sale Property (FSBO).

These are properties that the owners are trying to sell themselves. People often try to sell real estate on their own for two reasons: In a seller’s market—when there is more demand than supply—FSBOs believe that the house will mostly sell no matter who the agent is, how much marketing is used, or even the price of the house. So why, FSBOs ask, should they pay an agent 4%, 5%, 6% or even more when just a “For Sale” sign is enough. It can be very difficult to find rental properties in a seller’s market, especially among FSBOs.

The picture changes dramatically in a buyer’s market – when there is more supply than demand. In a slow market, some sellers think they can’t afford to pay an agent’s commission. They think they will have more money in their pockets if they sell the home themselves. They are often wrong, but that is their strategy.

Another thing to keep in mind with FSBOs: their house is much more likely to be overpriced than underpriced or even priced right. In part, they don’t have access to all the tools that a real estate agent has. They are partly emotionally attached to their homes.

Sometimes they have had their property appraised for one purpose, such as a refinance or home equity line of credit (appraisals are usually high in these cases) and think the appraisal was an accurate reflection of the resale value. It’s not true. And sometimes they used one of the many online services like Zillow to price their homes. These services are sometimes relatively accurate. Often they are not.

So, in any market, hot or cold, FSBOs are likely to be overpriced. And in a slow market, that means most will sit there and just not sell. That’s why you, the buyer, should have a real estate agent on your “Dream Team” even if you plan to look for the property yourself. Your agent can quickly tell you if the seller’s asking price is reasonable.

When dealing with a FSBO, a buyer with a lease option can offer closer to what the FSBO actually wants. The catch, of course, is that the sale will happen a year or more in the future, not today. If the FSBO needs all of their equity from the property, this strategy will not work. But if the FSBO can wait a year or two, there are golden opportunities for a buyer with a lease option. The tenant-buyer explains to the FSBO that he can pay what the FSBO asks (or about what the FSBO asks). Just not right away. This is the same basic strategy used above for homes that are for sale. Now you can contact the seller directly.

Rental options advertised by the owner

Sometimes owners will advertise rental opportunities. They realize the benefits of the rental option for them—instant cash flow, often at above-market rents, and a good opportunity to sell their homes—and decide to try it themselves. You can find them wherever owners advertise – local papers, bulletin boards, Craigslist, etc. View both properties for rent and properties for sale in structured formats like newspapers and Craigslist.

Advertised by owner: other late purchases

Make sure your agent is also searching with other terms that describe similar structures. These terms include “lease-purchase”, “lease to own”, “lease to buy”, “land contract” and “deed contract”. In any case, the owner indicates that he wants to sell, but is willing to wait until a sale occurs. Some of these techniques and some of these terms are more commonly used in certain areas of the country than in others. So find them all.

Equity financing

Find properties for which the owner is willing to finance. This means that the owner is ready to act as a bank. He doesn’t need all the money at closing. He is willing to take payments over time while the tenant lives in the house. And many landlords don’t have as strict or inflexible loan criteria as the big banks.

But don’t stop there. Remember: a lease option combines a lease with an option to buy. So find owners who are trying to rent their properties but are willing to sell, or owners who are trying to sell but are willing to rent.

Properties for rent and sale

The first step is to find properties for rent and sale. Even if they are not listed as “rental options”, the owners are willing to rent and sell. All you ask is that they rent now and sell later.

Formerly “For Sale” properties are now listed for rent

These can be properties that have been listed with a realtor or properties that the owner has tried to sell on their own. Does not matter. But the house was not sold and is now rented. These are properties that the owners would really like to sell. But they couldn’t do that, so they’re willing to hire him. Again, you are offering a solution to their problem. You are ready to rent now and maybe buy later.

Previous rentals now for sale

In the same vein, look for properties that were first listed as rentals but are now for sale. There will probably be fewer of these than the first sold, now rented ones, but it never hurts to look. These are also properties that the owner is willing to rent and sell.

So far we have identified properties that we know the owners were willing to both rent and sell. We will now move on to owner occupiers who may be willing to rent and sell.

Vacant houses for sale

Start with owners who are trying to sell and whose house is empty. These owners may have bought a new home and not yet sold the old one. They are paying two mortgages – usually an unpleasant situation. You can help by providing quick income – your rent payments – while offering the possibility of selling in the future. If you can, target properties that have been on the market the longest.

Loans

You will find more options among owners who rent out their homes. It may be their previous primary residence and they have moved to a new home. Or it could be a property that they had for a while as an investment property. It is important to remember that many landlords are “reluctant landlords”. Their original purpose was not to rent out property. They don’t particularly enjoy the whole rental process and don’t like problems with tenants. But somehow they have become landlords and are trying to make the most of it.

For these owners, the solution you offer is immediate lease fulfillment and a longer-term sale option. It may help if the property is vacant, but even reluctant landlords whose tenants have terminated their leases on time and have not moved out may be anxious to end their landlord problems.

Investors

Some investors put together rental options and then market the rental options to the renter-buyer at a markup. These are called “sandwich lease options” because the structure is similar to a sandwich: the owner on one side (one slice of bread in the “sandwich”) leases the property to an investor; the investor in the middle (the meat in the sandwich), and the tenant-buyer on the other side (the second slice of bread in the “sandwich”).

So that’s a lot of ways you can find a home to rent or lease, even if the property may not be listed on the multiple listing service. And a point worth repeating is: some homes will be “advertised” as a rental option. Many will not. You will reduce or eliminate your competition by looking where others are not looking.

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