four reasons a rent to own home might be right for you
With the wrap pack system, once the basics are mastered and your confidence levels are high you can then start moving outside the system and introducing your own way of completing the deal without getting into trouble. People often ask me: What will happen if I start a deal in this way? It surprises me that many people invest in them selves and then ask to change the rules that work. Another question I often get asked is regarding property mark-up. For example: “How much is the mark up on the property supposed to be?” My personal criteria; I like to buy properties about 15% below the full retail value. I also know that when I vendor finance them on, I can easily vendor finance it about 105% above the full retail price of the property. I buy properties cheap, then make the available to the market for the normal retail price.On the other hand, I don’t go much higher then about 7% above the full retail price of the property. Some people may go a little bit more but I find there is about a 20% difference between my purchase price and my sales price and obviously that means the property is sold for 20% more than what I paid. I do go just a bit over the retail price, but the lesson here is feel that your offering great ’service’ and the built in price for that is well and truely the cost plus your profit. Who else is offering a house with terms in the street?If you are buying properties at the full retail price and then you try to add 20% to this price, then you may come up against some market resistance. The market is only prepared to pay so much above the retail price for the opportunity to vendor finance. So when people ask me: “How much do I mark-up?” It depends on how well I buy. Rent To Own AustraliaFor instance, if I buy 20% below retail price then I have a 25% profit. If I buy 30% below retail, which doesn’t happen that often, I have got a 35% profit or as some of you like to refer to it, a 35% marker. So I work on a 20% spread, I like to see about $20,000 profit in every $100,000 worth of house and it just depends on how well I buy it. For instance, I recently bought a house for $320,000, I sold it for $365,000 and I only made a $45,000 spread, when really, according to my formula I should have made approx $60,000. On another house I bought it for $286,000 and I sold it for $355,000, which is about 5% above market. So we are talking about an average here, and these are the sorts of averages that I try to work to. Other questions that I often get asked: “How much is the market price?” Do I mark-up the interest rate by 2%? What is the mark-up on the interest rate? Well, let’s keep things flexible, if you have more money coming in the front door then money going out the back door, it is profit. How great a profit you make depends on how good you are at your craft, and usually the profit increases based on your experience. There are a couple of variables here. Some people really like positive cash flow, so they may have a 2% or 3% interest rate spread between what they are charging their buyers and what they are paying back on the loan. So, if they are paying 6% on their loan, they may charge their buyers 8% or 9%. That is quite a good system that works well. But there are a lot of other things that could work. Here’s an example. If you only had a 1% difference, is that ok? If you’re paying 7% on your loan and the buyer is paying 8% on their loan that might only be a 1% spread. Tax Breaks? There are considerable tax differences between wrap (installment) contracts and ‘lease options’. The main difference is, with wrap contracts, you have actually passed ownership of the property on in the minds of the tax department. Under the lease option, you are still in the position of being the owner of the property and this is until someone has exercised the option. This is important because there could be all sorts of tax considerations here. At the end of the day, they are both strategies that create positive cash flow. For instance, when you sell a house using an installment contract, the person who enters into the contract has already made the emotional purchase of the house which normally means default rates are very low. Whereas when you are selling a house or offering a house with a ‘lease option’ it means the tenants are renting the house with the option to buy further on down the road if they wish. Whereas with lease-option tenants, they don’t believe they are rightful home owners until the time that they have exercised the option to buy. This is important, because what you are going to find is, depending on weather that option is one year away, two years, five years or 20 years away, you are going to get a much higher percentage of ‘lease option’ houses coming back to you as the tenants will often decide not to elect the option to purchase. They will pay the rent but when the time comes to make the emotional decision to purchase, they will find that the house is too big, too small, too green, too blue, or they don’t like the neighbors or the school.Many , many times my studenst and I get these houss back. Not because they are broken or that they are too small, its just that the tennant buyers are not emotionally attached to the house. They sweep it clean and send you the keys! They will find a whole host of reasons and will prefer to hand the house keys back but they will hand the house back in good condition, they’re not going to tear the house up, they simply aren’t going to take you up on the option to buy the house. This is a great strategy in a rising property market, as with lease options, a good percentage of the houses, say 50% - 60% will keep coming back to you and the houses continue to go up in value. Whereas if you had sold the house on an vendor finaced loan in a rising market, the figure agreed upon up front is fixed and the person who is buying the house gets to keep the accrued equity. Any future capital gain’s profit has gone forever. There are also differentincome tax consequences. For instance, people use lease options for tax strategies and buy properties and control properties as they can hide the house as an asset. This means lease optioned houses can be hidden to creditors. Also, people who have been bankrupt who can’t borrow money and can’t buy houses, they can acquire houses via lease options. So you can control lots and lots of properties and build a future with lease options and no one really knows that you have got them. Again, with rent to own contracts, it is a great strategy which moves properties fast. If a person can pay rent, I always say: “You have a choice here sir. You can pay me rent, or how do you feel about paying me rent if the rent goes towards the purchase of the property to make the house your own?” In my experience every time you allow people to pay rent and the rent goes towards the purchase of the property you have got two things: firstly you are targeting people from the rental pool, and secondly this strategy also allows you to target people who want to purchase a property. Now you have twice as many people coming to view your property. And as you’re offering a unique opportunity of home ownership then the value of your property is now worth considerably more. Lease Option Benefits to BuyerAlso, the great thing about a lease option from the buyer’s point of view is that there are no qualifying rules to pass. It is basically a residential lease with the option, if they wish, to buy the house. And at the time of the option, if they want to buy the house it may be a good time to convert them into a wrap contract.I have an example of this happening at the moment where a customer of mine is on a lease option and he has the choice to go into a wrap contract. Now the reason I didn’t give them a wrap contract or an installment contract up front is because I was concerned with their credit and their ability to make payments. When tenants can’t make their payments and the lease option expires, you don’t want to progress with them and you should simply inform them that the lease has expired. rent to own australiaI then have a choice to decide what strategy I will use to transfer the installment contract into and this gives me a bit more flexibility as the seller. One important thing I would like to say about lease options is the amount that the person can buy the house for, you must establish up front. You will never build a business if you have, what I call, ‘moving goal posts’ which means the lease option is: ‘You pay me so much a month, and you can buy the house down the road for say, $300,000 + 8% every year”. What happens is, if properties don’t go up 8% every year, more properties start dropping in value, then the person who is in the lease option can never buy the property, and it is not playing fair. I always establish up front the value of the lease option and ensure that everybody agrees to it and if it goes up in value then that’s even better. My business now takes me to four different countries every month, I’m rarely around to take calls from lease option tenants, so I find that if there is enough profit in the deal for the tenant then I get less problems and phone calls. As long as my buyers and my properties are making lots of money for all parties involved then I never get any management hassles. So, it is virtually an easy one. Case Study Here’s an example: you own a property and you are going to rent it to me and give me the option of buying it for $300,000. So the paperwork that needs to be completed is two documents: a legal agreement that you can be downloaded from the internet and as you have given me the option to buy it at $300,000 I can then turn around and let someone else rent it from me. If they wish to they could buy it from me at $340,000. If they elect to buy at $340,000, then I pay you your $300,000 and I make $40,000. If they elect not to buy it from me, then I can elect not to buy it from you and simply pay out my rental term. The strength and the strategy is that when people want to take this paperwork to see their lawyer, every lawyer will understand a lease and an option. Some lawyers aren’t as familiar with installment contracts and sometimes that can make your transactions a little bit more difficult to go through. You have got to educate the legal profession in what they are meant to sort of already know. The lease for the options is pretty easy. I do a lot of what I call payment options. Where I don’t actually have a lease in there, especially when I am taking over a home loan I will establish from the seller, that he is quite happy for me to write the cheque for the home loan every month. I will then create what I call a payment option and figure out what amount should be on that cheque to pay his mortgage every month. I will have an option on the property and the cost of that option is me making the home loan payment every month, so I will write that into the paperwork. I may or may not have to give him some money for his equity, maybe $20,000 or $30,000, if he had some equity in the transaction, and then I will make the payments on this option. Now, in the option itself, one of the things it gives me is possession of the property, so I don’t have a separate residential lease. I have an option which gets me possession of the option and control of the property and I am making all of the servicing payments to the loan. People need to realize that the legislation says this: ‘When you take out a bank loan, the bank does not dictate to you who must make that bank loan payment. It just dictates to you that payments must be made.’ Therefore I can make anybodies home loan payment if I want to. The bank does not dictate where the money must come from. So now I am in a situation where I am using a payment option and I am paying off someone else’s home loan, and now I turn around and make a profit on a lease option to someone else at a higher rate then what I am paying. Well I’m Rick Otton and I’ve bought a bunch of properties for $1 and I’d like to share with you why?I started buying my properties this way 22 years ago during the American Savings and Loans Financial Crisis in the late 80’s early 90’s in Texas.I was an unemployed Aussie who had no money and available credit was virtually impossible to get as many financial institutions had fallen over. I realized that I had to create new systems to manage the new problems as the old processes just wouldn’t work.When I moved back home to Australia in 1990, Aussies asked me to recreate the same systems I used in the U.S.A. for some of the Commonwealth countries. I researched and eventually designed all new systems for the speedy purchase and sale of properties in Australia, New Zealand and the United Kingdom.Now it seems history has repeated itself on a larger scale as the world economies appear to have walked off a cliff and it’s become obvious to more people now that we can’t solve today’s new problems with yesterday’s old thinking.rent to own australia
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