$100 Nets $20,000 in Six Months
by Attorney William Bronchick
The headline is absolutely true! I made $20,000 cash in 6 months on one real estate deal with $100 down, no risk, no bank qualifying, no brokers, no risk and no liability. I have done (and I continue to do) many deals just like this one and so you can you!
We’ve all seen those “gurus” on late night TV. The announcer comes on. Some guy with big teeth live from Hawaii with a bright-colored shirt. He’s interviewing a couple from Dayton, Ohio who bought 26 properties with nothing down for $200,000 in “profit” and $68,000 cash in pocket. All you have to do is buy the home study course for $395 and you can be just like them!
You haven’t seen this commercial lately, have you? That’s because those turkeys made all the “profit” on paper. If they took out cash, it was because they refinanced properties for more than they were worth. When the real estate market went bust, the properties became vacant, they couldn’t pay the bank and the properties were all foreclosed. These “stars of success” ended up in bankruptcy court, and many of the promoters of these courses were indicted for fraud.
Let’s talk about another way of making money in real estate. Cash in your pocket. No risk. No banks. No credit. No personal liability. Very little cash out of pocket required. Private. Being done all over the country right now. Have I piqued your interest yet?
It’s no secret, it’s called “lease/purchase.” You control (not own) property using a lease/purchase agreement. The lease/purchase (or “lease/option”) agreement gives you the right to occupancy as well as the right (but not the obligation) to purchase the property at a pre-negotiated, fixed price. You don’t need credit, a loan from a bank or large sums of cash to engineer these deals. Once you have control of the property you can use some creative techniques to sublease, assign or sell your rights under the agreement. Let me tell you about one of the first deals I ever did using this method.
I sent about 3,000 postcards to owners of property in my city that lived out of state (by the way, one of the best ways to find motivated sellers). A guy called me from Texas. He owned a house in a fairly desirable area that he was renting to a couple of, um, well… “dirt-bags.” They hadn’t paid rent in 2 months. They trashed the place. They ruined the carpets. I could just smell the distress in the owner’s voice.
The house was worth about $75,000 in fixed-up condition. It needed about $5,000 in paint, carpeting, wallpaper, etc., mostly cosmetic stuff. He was renting the house for $600, which was quite low (I estimated that the house should rent for about $750). The balance of his mortgage was $55,000, with payments of $550/month PITI (principal + interest + taxes + insurance). Remember, he had just paid 2 mortgage payments to the bank without collecting a dime from the tenants.
I offered him a solution. I agreed to rent his house for $550/month for two years. This would cover his mortgage. I also agreed to evict his tenant for free. With my lease agreement, I also required that the owner give me an “option” to purchase for the balance of his mortgage, which was $55,000.
Let’s look at what I negotiated so far:
Lease term: 2 years
Monthly rent: $550
Purchase Option: $55,000
At face value, this would seem like a good deal, since I got the property tied up for two years, with less than market rent, with the right to buy it below market. However, I had two problems: (1) I inherited uncooperative tenants; and (2) The property needed repairs.
First, I dealt with the tenants. Most people think this is a nightmare, but it’s easier than you think, if you know the rule, that is, the “golden rule.” The easiest way to evict a tenant is with a bribe. Your problem tenants suddenly become a docile as a lamb when there’s $$CASH$$ on the table. In my case, I simply knocked on the door and asked them to leave. Would you know it, they did!
Second, I had to deal with the repairs. I had no money. I mean literally, I gave the last $100 I had in my checking account to the owner of the property to bind our agreement. A friend of mine, a very experienced real estate investor, suggested that I sublease the property to someone with handyman skills. She suggested that in exchange for the work performed on the property, I would give the tenant an option to buy the property from me (of course, after I purchase it from the owner). I thought it was a great idea, so I went with it.
I ran an ad in the FSBO and rental sections:
Low down. U-fix
I got almost 100 calls! I picked a real nice couple. They offered to do the work. I was looking for $1500 option (earnest) money and $750/month rent. I offered them a $200/month rent credit towards their down payment (plus the $1500 earnest money). I gave them the option to purchase the property for $75,000. They asked me if it was ok to pay me $3,500 now and pay $575/month rent. It took me about 3.3 seconds to make up my mind… Door #1: cash later, or Door #2: cash NOW. Which one do you think I took?
I had them in the house before I even made my first payment to the owner. They cleaned up the property and steam-cleaned the carpets. They actually liked the wallpaper (barf!) and they re-painted a few rooms, at their own expense.
So, far I was doing pretty good. I had paid $100 to the owner. I had $3500 in cash. I had the place rented for a $25/month cash flow. Life was good.
What about the option to purchase? Oh yes, back to that. The tenants had lousy credit, a bankruptcy and a few collections. I called up my local mortgage broker and asked about their chances of getting of loan. I really didn’t care, since their $3500 was NON-REFUNDABLE. It was Win/Win: I win if they buy and I win if they don’t. He reviewed their financial situation and said, “no problem.”
You see, if you know the rules of the game, you can learn how to play around them. I didn’t even know that someone could get a loan with a bankruptcy on their record! I worked hand-in-hand with the lender and the tenants for the next 6 months. It was painful. I made dozens of phone calls, bitching and screaming at everyone, from the lender to the title company to the tenants. I slammed my phone down and ripped it out of the wall.
Guess what? They got approved for the loan! I called the owner and told him to show up for closing. He did. He signed over the deed. The title company gave him a check for $55,000. Five minutes later, the tenants came to the closing table. I gave them a deed. The bank gave the title company a check for $71,500 ($75,000 purchase price less the $3500 the tenants already gave me). The title company handed me a check for $16,500 ($71,500-$55,000 money paid to the former owner of the property). I walked away from the deal with $20,000 net cash profit (yes, the $100 I put up was credited to me at closing).
Let me share with you the three lessons to be learned from this deal:
- DON’T FIX UP HOUSES, FIX UP THE FINANCING. In this story, I never picked up a paint brush or hammer. I created desirable terms for my tenants and solved their financial problems. In return they fixed up my house.
- DON’T BORROW MONEY FROM BANKS TO BUY HOUSES. If you borrow money you have to deal with banks. If you deal with banks, you jump through hoops. If you want to jump through hoops, join the circus.
- DON’T OWN PROPERTY, JUST CONTROL IT. Owning property was the way to do it in the 80’s. There were lots of “non-qualifying” FHA and VA loans. In the late 90’s and early 2000’s, banks handed out money to anybody. It was easy to buy, fixup and sell. The market has changed. Banks don’t want to lend money. Even if you have lots of cash, you’ll eventually run out.
This is an overview of the lease/option concept, a way to give you the “flavor” of how it works. As a beginning entrepreneur, you can see that it is an easy way to make $3,000 – $10,000 per month in no time, with no money, credit or experience.
Learn more about Lease/Options with William Bronchick’s new
GUIDE TO CREATIVE REAL ESTATE FINANCING