Real Estate Tip of The Month

Hello All:

Now is the time to get your properties sold! Why the hurry? The $8,000 home-buying incentive from the U.S. Government ends in December 2009, and if you are in a state that takes longer then 30 days to close – time to get those prospects!

Be well,

James Gage

Lease Option Question of The Week

I received a question from one of my mentoring students today, so I thought I would share my answer with you my faithful blog readers.

The question was this “can we, as lease purchase investors require our tenant/buyers to repair items that break or need maintenance during their option period?” The simple answer is Yes; if you structure it properly! The reason this question came up is that my student went to his local REIA club meeting, and heard an attorney say it was illegal to do so. It is only illegal if you include such language in the traditional residential lease, but since we are sandwiching the property, we always use 2 contracts – an option, and a residential lease. Within the confines of the option agreement we place language that states that repair/maintenance issues of x amount are the responsibility of the Optionee, and in order for them to be able to exercise their option down the road they must agree to the language of the contract. If they default they not only lose their option consideration, but they are on the hook for the repair and eviction procedures could follow.

I hope this was useful information.

James Gage

Would You Like To Know Why Lease Options, AKA Rent to Own Are Excellent For Real Estate Investing?

By James Gage

As the real estate market evolves and changes, there are fewer mortgage loans available and fewer people who qualify as the factors for qualification become more stringent. Having less than perfect credit puts, a cramp on the ability to obtain the necessary financing for a traditional home purchase, but that does not mean that fewer people want to settle into a home and become a homeowner. Real estate investors are learning that they can benefit from this situation and make a profit by offering nontraditional means of obtaining a home to those with credit that is not well established or is less than satisfactory to a mortgage lender.

Lease options, aka rent to own homes, are a great source of income for the creative real estate investor who wishes to make money while helping those who cannot get into a home with their own credit to realize their dreams of owning a home. Lease options work much like a leasing a vehicle, only on larger terms. It benefits the tenant buyer who cannot obtain a mortgage to purchase the home by offering them the opportunity to build their credit and make the choice to purchase later while also assisting the investor by maintaining an additional source of income for the duration of the lease period.

When a car is leased, there is a nonrefundable deposit paid to the dealership that equals a percentage of the car’s value. This is also done in a lease purchase or rent to own agreement and is referred to as the Nonrefundable Option Payment, securing the tenant buyer’s ability to choose whether or not to purchase the home at the end of the lease contract agreement. As with a vehicle, there is a lease contract signed in which the tenant buyer agrees to make a payment of a certain amount each month for a predetermined length of time, usually 12 months. This can be done in a manner that includes payments to be credited toward the purchase of the house or not, depending on how you want to set up the lease.

Finally, at the end of a car lease, the driver has the option to finance the remainder of the “balloon payment” owed on the vehicle in order to purchase it or to turn it back over to the dealership. In real estate, when working with a rent to own or lease option contract, this is referred to as the Option to Purchase contract, in which the tenant is given exclusive rights to purchase the real estate property without you offering it to the highest bidder first without obligating them to purchase when the lease is up.

If the option contract was signed so that the payments made during the lease period were credited toward the purchase of the home, the tenant buyer will need to obtain a mortgage loan equivalent to the remainder of the purchase price originally agreed upon. If there were no rental credits, the tenant buyer will need to obtain the entire purchase amount.

Lease options and rent to own housing are excellent ways for a real estate investor to make a lot of money because there are three different sources of money coming in, all of which add up to a sum greater than the original investment by far. You put little money into the purchase, and in exchange, you receive an up-front payment, monthly installments, and finally a purchase payment equal to an amount greater than you paid. I structure all of my deals so I get paid at the beginning of the deal, the middle of the deal, and at the end of the deal – what more could an investor want !

The Three Cardinal Rules of Negotiating Real Estate Transactions

By James A. Gage

You can find hundreds of books on the art of real estate negotiation . . . but pardon my frankness, many of these books offer stale strategies and tactics that just do not work.

For example, in many books you can find the ABC rule – “always be closing.” That is, you want to have a bunch of deals in the works and you want to get to “yes” as quickly as possible in order to close that deal.

However, getting to “yes” ASAP means you leave out a bunch of steps in the middle, such as carefully pre-qualifying your prospect by asking lots of questions. (I call this process “Getting to ‘no’ first – meaning, you weed out those who aren’t serious about a deal).  

It’s also why I’ve simplified negotiation down to three cardinal rules: the person who mentions price first loses, get to know your opponent before meeting with him or her, and always get your agreement in writing.

 Negotiation Cardinal Rule #1: The person who mentions price first loses

When I first started doing lease options, I had a woman call me to see if I had a specific type of property that she could then lease to own.  She had $8K put aside but unfortunately at the time, I didn’t have anything in inventory that met her requirements. A few weeks later I found a property and called her about it and said that if she liked what she saw after doing a drive by, we could do business that very day.

She ended up loving the property. We did the walk through and as she and I talked, I knew that $8K was sure money in my pocket.

“Jim,” she said. “I have a problem. Remember how I said I had $8K? The problem is I don’t have $8K.”

My heart fell clear to my stomach and my knees went soft. “Uh oh,” I thought.

She then went on to say, “I don’t have $8K, I have $10K. Is that ok?”

Now, I if had opened my big mouth and had said at the beginning of our negotiation talk, “I’ll need a check for $8K,” I would have never learned she had an additional $2K in her pocket. The moral being – never be the first person to talk about price.

Instead, ask lots of open-ended questions that will give you solid information in order to determine where people stand. For example, when I’m talking to a person who is looking for a house or a lease option, I ask questions such as, “It sounds like you’re living in a great place. Why do you want to move?” (What I’m really asking is, “Are you a deadbeat?”)

Or, if I’m sitting at someone’s kitchen table and he’s spilling his guts to me about his house going into foreclosure, I ask, “If you’re able to sell the property, what you would you be comfortable asking for it?” Having the property owner tell me first what he wants for the property is akin to him showing me his cards before he makes a bet. In other words, it gives me the advantage.

Negotiation Cardinal Rule #2: Learn about your opponent before meeting

One of the first things lawyers do when preparing to negotiate is consult a lawyer’s directory. They want to know which school the opposing lawyer attended, what firm they work for, if they’ve made partner, etc. And, if you’re the lawyer who works for a larger firm, you’ll have the opposing lawyer come to your office in order to intimidate him or her.  

The same principal – know you opponent — works in real estate negotiations. For example, if you’re working with a bank on a short sale, you’ll want to get to know the bank and its methods of operating and whether its personnel are “user friendly” or they’re a bunch of pit bulls. One bank I work with is very confrontational and negotiating with them is like pulling teeth. I learned very quickly that I have to have all my facts, comparables, etc. ready and at hand when dealing with them because if I screw up, I do not get a second bite at the apple.

Knowing your opponent also means learning what kind person he or she is. For example, analytical people or number crunchers will want you to substantiate and document everything. Touchy-feely people, on the other hand, will want to talk things out.

To learn more about your opponent, talk to people in your network, do some online research (i.e. do a Google search), and attend your local REIA meetings – people love to talk and by asking questions and being a good listener, you’re sure to pick up some good “off the record” data.

Negotiation Cardinal Rule #3: Always get everything in writing

Although we all want to believe other people are good and honest, the sad truth is that disagreements can and do occur in real estate negotiations, which is why you need to put all agreements in writing. This is especially important in Massachusetts, where verbal agreements are not enforceable.

If you do get a verbal agreement, at the very least follow it up with an email or letter outlining the conversation and what was agreed to by each of you. If you’re dealing with a bank regarding a short sale, send a quick fax to whomever you spoke with stating something like “These are the parameters of the deal and this is what we agreed on” and then list everything discussed in the conversation. Be sure to sign and date it and call the person to ensure he or she received your fax.

Developing your negotiation skills takes time but is well worth the effort. In order to negotiate your way to better profits, don’t blurt out a price first, get to know your opponent before you step into the negotiation arena, and always get everything in writing! 

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James A. Gage is a best-selling author and internationally known expert in Lease Purchase, AKA Rent To Own Real Estate Investing and Negotiating. He mentors one-on-one throughout the U.S. and across the world. Director of the Gage Consulting Group, LLC (www.jgage.com) in Holden, MA, James can be reached at (508) 595-9567 or coach@jgage.com.

Dave Ramsey Part 2 : Horrible Advice

Hello All:

I was hoping not to re-visit this subject again, however, I received a phone call from a fellow investor (Darlene M.) who received some real bad advice from Dave Ramsey’s radio program.

First, let me state I’m going by what she told me and I am basing my comments on the substance of the phone call to me, but I can tell you that I strongly disagree with what Mr. Ramsey teaches – more about that later.

Darlene explains that she called Dave’s  radio program to refute what he has been saying on his radio program about now is a “great time to buy a house”. She did get on the radio to ask the pointed question, but as soon as she asked the question, Mr. Ramsey became angry and coarse, and stated anyone with a half of brain can see what great opportunities are out there for home ownership! What a great posture for a national radio personality to take when the general public calls in with a request for help and clarification, Darlene said she decided to take Dave’s advice and by  a house (pre-foreclosure) 3 months ago, and since that time she has lost 5 % in value!

She read my back issues on my blog and noticed I was not a fan of Dave’s, and have clearly stated for the past 15 months that you should not be buying anything in this market, rather you should be using leveraged strategies such as lease options for investments and personal residences.

That being said, and being fair to Dave Ramsey, Darlene did not elaborate on the details of the deal that she did, so we can not bash Dave Ramsey if she got into a bad transaction on what she perceived to be his counsel. However, when it comes to the generic advice of “now is the time to buy real estate” – in the words of Dave Ramsey “have you been living under a rock”?

We have only seen 1/3 of the foreclosures that are going to happen according to financial pundits and Federal Reserve. In addition, these foreclosures have caused increased housing inventory forcing property values to sink 15-20% from all time highs. My question to Dave would be, what do you think is going to happen when the other 66% of people facing foreclosure comes into view? Can you say another 30% downward progression, and if you buy now as Dave suggests, you will be in a upside down property and be forced to stay in said property for the next 10- 15 years, while the market tries to gain value.

The other problem I have with Dave is on his investing advice! After becoming debt free, by the way this is the only thing I agree with him on, he encourages people to invest in mutual funds. Are you crazy Man!!! Have you seen how our dollar has been devalued? In 2002 the Euro was at .88 against the dollar, today the Euro is 1.51 against the dollar – you do the math!

Our country is being bought up by foreigners, who look at the US stock market as a flea market due to the strength of their currency; they are literally gobbling up everything in site. By the way many would say that a weak US dollar is good for our economy and will bring foreign investors in to buy our products, thus helping to stabilize our devastated economy. My question to those folks is – what products? Last time I checked the US didn’t make anything anymore; we have been referred to as a service based economy which subs everything out oversees.

OK, many would say that I’m jealous of Dave Ramsey because he has a successful radio program and I have a blog. Nothing could be farther from the truth. I just want people to stop drinking the cool aid and start listening to the voices of reason, whether that be me or someone else, who can document and substantiate what we preach!

So what’s my take? The only way you should be in the stock market is with stock options. If you’re stuck in the market due to company related 401 Ks, consider moving into a money market fund or precious metal fund – gold has tripled in the last 5 years and is almost $1,000 dollars an ounce.  Look into become a leveraged investor in the Forex trading market – leverage at it’s best if you do not have those restrictions mentioned above. And of course, become a short term investor through lease options, and assignments with short sales and probates.

In the words of Forrest Gump;” that’s all I have to say about that”.

Be well,

James Gage

Note: James Gage does not offer legal or stock market investing advice. James is rendering an opinion based on his experience; please consult a local professional before entering into a transaction

Is It Possible To Get Realtors to Bring You Lease Options?

by James Gage

There are two common questions that I get on a regular basis involving Realtors and investors: Should I become a Realtor? How can I work with Realtors?

How should you work with Realtors?

Many investors think that real estate agents don’t have the best deals or they have all been picked over by the time they actually hit the market. I believe that some of the sweetest deals are sitting on the market. We automatically think that Realtors or their clients will snatch up the best deals before they hit the market.

It is true that some of the best deals do get snatched up before they hit the market, but there are many other deals left behind that no one sees. The reason that no one sees them is because they are looking for “traditional” or “retail” homes, not “lease option” homes.

The retail market is about 90% of the inventory available in any given area. The lease option market takes up a portion of the remaining 10% of the market.

I look to work with Realtors who understand the concept of lease options and can help their sellers understand lease options. This understanding can take time. Your job is to assist Realtors to understand lease options.

Getting Realtors to understand what I do is key !

First, I have a letter that I send to a listing agent explaining the concept; second, I have a presentation that I do for local real estate offices; and third I network and continually tell Realtors what I do.

I hear investors tell me all the time that Realtors just don’t understand or don’t want to understand what they do. I can only say that patience and persistence pays off.

Realtors aren’t trained in unique selling techniques; they are trained in the “Retail Sales Marketing” which is 90% of what is out there. As investors, our job is to continue to help those around us understand what we do, so they know when and when not to call us.

The type of home I am looking for through a Realtor is one that the seller:

Doesn’t need their equity out

Doesn’t have any equity in their home

Is a Pre-Foreclosure

Job Relocation

When a Realtor hears a seller say, if my home doesn’t sell soon, I might have to rent it,” then the Realtor should think of you immediately.

All you need is two to four good listing Realtors. They work directly with the sellers and know which sellers are in trouble, which ones can rent, and which homes are vacant. Once a Realtor knows what you do and has a seller that can accept your terms – presto! You are the proud new owner of a lease option.

Realtors are just like everyone else and need to make a consistent living. One of the most important things for anyone is that they get paid for what they do. When I am taking on an option, I am asking the seller to wait two or three years to get cashed out. I don’t want to make the Realtor wait that long.

If I do, they won’t even tell the seller about what I can offer. Why should they? It might not do them any good. They are doing all the work now to get the deal done and want to get paid for it. So I give them the listing agent portion of the commission up front.

This is my option fee and is applied to the purchase price when I get my mortgage or when I sell the home. The agent is therefore paid on what they do just as if they sold it conventionally to another buyer. When you sell the home you will be asking for 2% to 5% down from your tenant/buyer. Therefore, you are still minimal or zero down/out-of-pocket.

If you aren’t a licensed agent/broker and entitled to half of the commission, then let the Realtor “Double Dip”; appeal to the greed factor! Remember, half of something, is better than nothing.

They can get the listing agent portion down up front from you and the selling agent portion when the home closes in two or three years. They will wait for the second half if the first half is paid up front. The second half would just be a bonus that most agents wouldn’t expect anyway.

My recommendation is to get licensed!

Investors tend to be adamant one way or the other about being a licensed Realtor. I am on the side of being licensed. Being licensed has been one of the best tools that I have as an investor. Being licensed allows you access to your database of “comps” or comparables via the MLS system. This is the data you need to buy and sell real estate, not to mention it’s a great resource for expired listings – which can be a gold mine.

If you have a great Realtor, and you don’t want to be licensed, fine. But I still think it is better to be licensed than not. Some investors say it gives you more liability to be licensed. I have two answers to that:

1. What are you doing to create liability?

2. Don’t you think a judge is going to know you are an “expert” anyway when they find that you do real estate investments?

Some investors say that sellers won’t sell to you if you are licensed. I find the opposite is true. Most sellers are happy that I am licensed and “know what I am doing.” However, you will decide on each deal which hat you will be wearing : investor, realtor or both.

http://www.jgage.com

Lease Options and Taxes

There are some interesting and lucrative advantages of using options as both an optionor and optionee of real estate. Generally speaking, option money is not taxable to the optionor until the option is exercised, expires or is abandoned. I.R.C. Section 1234 (subject to “dealer” rules, discussed below). If it expires or is abandoned, it is taxable to the seller as ordinary income at the time it expires or is abandoned.

A personal residence sold under lease/option may still qualify for capital gains exemption. Under the 1997 Tax Reform Act, gains from the sale of a personal residence seller are exempt so long as the gain is less than $250,000 ($500,000 for married couple). So long as the lease was incidental to the sale, court decisions have held that the property would still qualify as a personal residence and not a rental. See, Solaris v. Commissioner, 776 F.2d 1428 (9th Cir 1985).

The lease and option payments made by the tenant are not tax deductible if the property is used as a residence. If tenant purchases the property, his option payments (including monthly rent credits) become part of his tax basis in the property. The tenant’s option payments may be deductible as a capital loss if the buyer is an investor. For example if you lease/option a home to live in, consider using your LLC to take the lease/option, then sublease to yourself individually. If you don’t exercise the option from your corporation, have the corporation treat the option money it paid as a loss.

Take A Loss On Your Personal Residence

As you may know, you cannot take a loss on your personal residence if you sell it for less than your basis. You can, however, take a capital loss on an investment property.

Move out of your house and lease/option it to a tenant/buyer for a few years. Report it on your Federal income tax return as a rental on schedule “E.” You may now be able to take a loss when the tenant exercises his option to purchase.

Make certain that you make this transaction it look legitimate; the IRS is keenly aware that people in down real estate markets try to “fudge” rental agreements to accomplish a loss on their personal residences.

Watch Out For “Dealer” Classification

If you are an active real estate investor, you should be aware of what the IRS calls “dealer status.” If you also buy and sell real estate on a regular basis, you may be considered a “dealer” in real estate properties. A dealer is one who buys with the intent of reselling rather than for investment.

There is no magic formula for determining who is an investor and who is a dealer, but the IRS will balance a number of factors, such as the purpose for which the property was purchased, how long the property was held and how many deals the investor did in relation to other income. If you take option consideration on a “dealer” property, you cannot defer taxation of option consideration under Section 1234 of the Code.

IRS Reclassification

Occasionally, but rarely, the IRS will reclassify a lease/option as a disguised sale. This is more common with equipment leases where the lessee makes rental payments for a number of years then has the option to buy at the end of the term for a nominal amount, such as $1.

The IRS looks at the terms of the deal and the circumstances surrounding the deal to determine whether a sale was intended. For example, if the tenant is paying the taxes andinsurance, this looks more like a sale. If a substantial part of the payments on the lease are credited towards purchase, this also looks like a sale. If the option price declines each year rather than increases with the market. . . well, you get the idea – it if looks like a duck and it quacks like a duck, it’s a duck!

Most of the reported cases wherein the IRS reclassified a lease/option as a sale involved long-term leases. Thus, a lease/option of only a few years with your tenant is not likely to be re-characteriz

Lease Options: Preparing to Call Sellers

First you have to go through your newspapers, preferably 2 weeks old. Start with the houses for sale by owner, cross out any by Realtors (at least for now). Next go through the houses for rent. Go up on line to the major FSBO sites and pull down homes in your area. Remember, with some of the changes these sites have made, to save time, just take down the telephone number.

Now you are ready to organize your calling. Go through the above lists, be sure you don’t have any duplications.

Check your database to be sure there are no duplications. Now you are ready to call. Get your yellow pad and make up your headings of: telephone number, type of property, price, and notes. Pull out your telephone calling script and start calling. If you get an answering machine, leave your message script for the appropriate type of property. When you get to speak to the seller, ask all of the questions in the script. Remember, you want to build rapport with the seller.
In addition, by using your script you will get all your questions answered before you leave your home office to view the property. If not, you don’t leave your home office. Remember, your time, knowledge and energy are valuable commodities, you will not squander them.

Lease Options: Special Webinar on Short Sales/Lease Options

Hello All:

Just a quick reminder about tomorrow nights webinar on Short Sales; lines are filling up fast! We are down to 25 lines available – so don’t delay in signing up. I promise you that you marketing efforts will increase by 40% with just one of the secrets I will reveal!

I will be sharing real world short sale strategies and techniques such as :* Getting past the “Gate Keeper”.

* Getting the bank to say Yes!

* What needs to be in your short sale package to overcome the BPO.

and much more…

Below you will find the sign up information, register Now! Limited Lines Available…

I hope to meet you on line.

To your success,

James Gage

Thursday, July 26, 2007 – Special Webinar with Foreclosure.com

Time: 9:00PM EST

Topic: The Art of The Short Sale

Where : CLICK HERE TO REGISTER

* Only 25 lines remaining- Register NOW !

Foreclosures: More Bad News!

Hello All:

As I predicted over a year ago, this housing meltdown will spill over into the main stream America. This is why you should look into becoming a short term real estate investor. Look what the media and mortgage institutions are finally realizing; so with that being said, how long will it take to hit a bottom? My prediction is 24-28 months. I guess I should place an addendum on that statement; as long as we don’t have another 911, sustain a flu pandemic or if the dollar is not devalued even further against foreign currencies, then a rebound should happen.

Be well and may all your deals be profitable.

James Gage

Mortgage Fears
by Yahoo! Finance and The Week
Countrywide Financial says that the subprime mortgage has spread to borrowers with good credit.