Follow Up and Close the Sale of a Lease Option or Owner Financing Deal

Posted on October 7, 2014 by

Okay, we’re almost at the end of our series of articles on how to get through the entire process of buying and selling on a lease purchase, ACTS or owner financing deal. The last two steps in our process are to follow up with your buyer to get them to the closing table, and set up the closing so you can actually get it down and collect the final check.

Alright, so let’s assume that to this point you have been out into the market place and attracted prospects to call you and have found one or more that have enough money to get your attention. Now, you’re ready to move forward. In our case, we try to find 2-3 prospects, and, of course, the ones with the most money rise to the top quickly. Unless they get screened out from something we discover about them, they usually win the battle.

Once they are located and they have seen the house, now it’s time to get an oral commitment from them that they want it. Then, it’s time to do your due diligence prior to setting a meeting. When we put a lease option tenant buyer in a house or sell it with owner financing, there are a few things we want to see in the form of a report. That list is a credit report, a Megan’s law report for sex offenders, a background check, a criminal check, a debt-ratio report, and proof of income.

Fortunately for you, I’ve made an arrangement with a gentleman in the credit repair business to do all of this for you for a measly $50 and send you the entire package. One of the things he does that I like so well is compute the debt-to-income ratio for you so you don’t have to try and figure it out on your own. Sometimes, that process is a little daunting for new students. His name is Paul Ritter and you can find him at ScreenTheTenant.com. He’s also in the credit repair business, and charges your customer $99 a month for 6 months to repair their credit. I’ve seen him raise credit scores as high as 100 points over that time, so you might want to strike up a relationship with Mr. Ritter.

Of course, I expect you to ask who pays the $50, and, in my case we pay it. If we don’t like the tenant we don’t try and get it back, we just eat it. It’s the cost of doing business. To me, it’s more of pain in the neck to collect it than it is to just pay it.

Once you have all these reports in your possession, usually it’s a rather easy decision as to whether you want to accept the tenant buyer or not. Sometimes we find something that really stands out that upsets us, but honestly most of the time we don’t. Yes, we put people in houses that have been foreclosed on and have even had evictions in the past, but please remember nobody gets in one of my houses unless they have several thousand dollars to put up for a non-refundable option deposit or a rather large down payment. To me, this overrides a lot of past sins. I set myself up to a position to where I can’t lose. If they pay as agreed, great, everybody’s happy. If they don’t, I’ll have to pull them out of the house, keep their money and move on to the next one. In my case, I’m not opposed to doing that, so how much screening you do will depend on the position you setup for yourself to remove risk and your own personal tolerance level.

Sometimes, debt-ratio will kill the deal because we do not want to set a buyer up for failure knowing full well they can’t afford the payment. For example, if you have a buyer who’s trying to obligate themselves to pay $1,500 a month and they only make $3,000 a month, you should know you have a problem and put the brakes on immediately, or try and put them in a less expensive house. The standard debt ratio approved by the government (not that it matters here) is 28% for their payment. That’s 28% of their total gross income for the family and 43% for a total debt which includes the new payment you’re putting on them with the house. Yes, I have exceeded 43% many times and even 28%, but now it comes down to common sense. Do you feel like they have enough income leftover to get by and live comfortably without having to struggle to make the monthly payment?

My favorite target is a tenant buyer with poor credit, lots of money and high income. I’d like to tell you that’s what we get every time, but again, I’d rather turn someone down than set them up to fail.

Okay, you’ve done your due diligence, and now it’s time set the meeting. Setting the meeting means you think you want them, they sound okay, your reports look alright, now it’s time to come face to face and discuss a few things before you’re ready to send it to the attorney to prepare and execute the closing documents.

Do not tell them you have accepted them prior to the meeting. Tell them they look good, but it will take a final meeting before we can approve them. If they feel like they have been accepted before they arrive, you have lost all your leverage.

Don’t forget to tell them to bring their check book because, if they’re accepted, they will need a sizeable deposit. In our case, when they ask how much I always say “we get it all” because, by this time, we have agreed upon a down payment. However, we will not accept less than $2,500 at the meeting. If you’re prospect can’t come up with the deposit then you immediately know they don’t have the rest of the down payment either, so it’s time to start asking some questions about whether they have the money or don’t have the money.

The meeting can take place at your office, at a McDonalds or at the house. Obviously if you have an office, it wins. Here’s a list of things we discuss at the meeting:

  1. The down payment. We always try to get more from them. If there’s any way they can come up with more, we want to know it right here.
  1. A monthly payment. Yes, we’ve had these discussions before the meeting, but this is the time to try and get more per month. My general question would be, “If we accepted you into this house, is ____ the most you can pay per month?” Again, they are trying to prove to you that they can qualify for the house and you’re the committee to decide. Now’s the time to get whatever you can get out of them.
  2. Repairs. My discussion is very simple: we’re not doing any! However, for the first 30 days if any of the systems fail, we’ll gladly replace them as per my lease option agreement, which you can find on the Gold Club. However, after that it is crystal clear that all repairs are at their cost, and I mean all of them.
  1. Late fee. I charge 10% after 5 days late, but make sure you check about laws in your state. I charge a pretty hefty fee and explain to them that it doesn’t matter why the rent is late, if it’s in on the 6th, make sure the late penalty is with it, otherwise it will be returned to you. We’re not mad at you, but we have a system; if the system says you’re late, you will owe the penalty.
  1. Attorney fee. Anytime I put someone in a house on a lease purchase or owner financing, they pay the attorney fees. Our attorney is currently charging $400 for most deals, and they are responsible for bringing that $400 to the closing along with the balance of their down payment.

If it’s an ACTS deal, this is the time to explain the assignment process, and that we have a contract on the house and will be assigning it to them. Frankly, up to this point, we don’t even disclose that it is an ACTS deal in most cases. We save that for the meeting.

Then, we talk about the process to close. We’re going to call the attorney right now to set up a time to close if you’ve accepted them at this point, and you give them the attorney’s address and remind them of how much money they need to take. Put them in touch with the attorney and put the attorney in touch with them so they can communicate before the meet to sign the documentation.

The only agreement we get signed at the meeting is the Application and Receipt Agreement. This is a document on the Gold Club and in your courses which is nothing more than a receipt for your deposit. I love this agreement because it does not take the house off the market. It simply gives them the receipt for their deposit and gives us the right to keep marketing their house, so if someone comes along with a lot more down, we have the option of taking it and telling the buyer “Sorry, we’ll try to find you something else.” This agreement does say that if you do not accept them, you must give them the money back. If you do accept them, it applies, and if you accept but they back out, it gives you the right to keep their deposit. That choice is entirely up to you.

That brings us down to the closing process which is actually pretty simple. We pull the Lease Option Agreement off the Gold Club site and fill in the blanks, because it’s just as easy for you to do that as it is to send the attorney the information and have them complete it. If it’s not a lease purchase, then you will have to do a Purchase and Sales Agreement and get it to your attorney, because your attorney can not prepare owner financing documents without the Purchase and Sales Agreement to determine what to put in the documents.

So at the meeting, I’m willing to sign a Purchase and Sales Agreement, but I might point out to you that when I sell with owner financing I get a substantial down payment, usually at least 20% and a great big chunk of it at the meeting so I’m not too concerned about taking it off the market. Especially since I know the closing is 1-2 days after the meeting. That’s the beautiful thing about selling houses on terms, there’s nothing stopping the closing from taking place except the time the attorney needs to do the documentation.

So we send all the documentation that we fill out to the attorney and ask them to send us back the complete package by email either the day before or the morning of the closing. Next, you take a look at it and check for mistakes. Then, there’s nothing left to do then but attend the closing and bring back the check. In our case, our attorney actually sets up the closing at our office because his office is in our same area.

Well, that’s it. That is the exact same process we use week-in and week-out to do 6-12 deals per month. If you still have questions, make sure to sign up as a Gold Club Member so you can submit your questions directly to me in our weekly “Ask Ron” segment. On Friday of each week, you’ll get an email with all your answers.

Ron LeGrandRon LeGrand is the world’s leading expert in residential quick turn real estate and a prominent commercial property developer. Ron has bought and sold over 2,000 single family homes over the past 30 years, and currently owns commercial developments in nine states ranging from retail, office, warehouse, residential subdivisions and resort

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