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I get asked all the time about wholesaling lease options. These are also known as cooperative assignments or arbitrage lease options. Simply put, this is when you get a lease option agreement and then sign that agreement over to somebody else.

Lease options are best for sellers who don’t have enough equity. Maybe they owe too much on the property, or they don’t have the money to fix it up to sell. I used to throw those leads away, but one day I thought, what if I did a lease option on these properties?

I stumbled my way through the process at first, and did too much work for not enough money. Then I discovered a forum on naked-investor.com where people were using lease options to flip houses remotely. One guy was living in India and wholesaling lease options in Chicago, and making good money doing it. That was when I learned the right way to go about this whole process.

Find a motivated seller who is willing to do a lease option. Then, find a tenant buyer, someone in what I like to call the “penalty box:” they are maybe six months to a year away from qualifying for a mortgage. Their credit isn’t perfect, but they have a good reason for the bad credit. Set the deal up so that you get the deposit as your fee, and everyone wins. You get paid, the seller gets rent money while the house is still on the market, and the tenants get to lease a home with the option to buy it at the end of the agreement.

There’s more to it than that, obviously, but I’ll go over it all in detail. And to learn more, get my free book over on WLObook.com.

Listen and learn:

What’s inside:

  • Everything you need to know about lease option agreements.
  • What properties should you do a lease option on?
  • How to get a better commission from lease options.
  • Present the deal to the seller as a partnership.
  • “Penalty box” tenants.

Mentioned in this episode:


Download episode transcript in PDF format here…

Welcome. This is the Real Estate Investing Mastery podcast.

Hey, what's up, guys, Joe here, real estate investing Mastery podcast, how are you doing? This is actually my REI In Your Car series, I'm starting to do more of these now, it's kind of fun. I'm just driving around, drop my daughter off at gymnastics early this morning. I'm super proud of her getting up early, going to gymnastics practice three days a week, like four hours each practice, which is a lot for a 10-year-old. But that's still compared to other gyms, not not as much as some other gyms. It's crazy. These girls, anyway, she's super competitive, very athletic, very strong, super proud of her and all my kids.

Anyway, I wanted to talk about something that's a common question that I get. And I thought it would be good to touch on. You know, I've done episodes on this before, but here's what I want to talk about. I want to talk about how to do a wholesaling lease option. Deal. All right. Some people call it a lease option assignment. Some people call it cooperative assignments. Some people call it. I've heard it called team work assignments. I've heard it called arbitrage assignments or arbitrage lease options. So there's a lot of different things to call it. But what it is, it's simply getting a lease option agreement and then a signing that agreement to somebody else. All right.

So let me kind of give you the back story of how I discovered it. And I didn't invent it, but something that I kind of I don't know. I don't want to give myself more credit than I need or deserve or do. But I kind of made it. I made the phrase wholesaling lease options kind of well known anyway. So this is where you find a property of the seller who doesn't have enough equity. Maybe they just want to they just want to sell it, but maybe they can't. They owe too much. They they don't have the money to put it in to the property to get it fixed up. And they they have a mortgage payment to mortgage payments and they're stressed out and they don't know how they're going to do it. And they don't want to be a landlord. So they want to sell it. They can't they don't want to rent it because they don't want to be a landlord or it needs too much work or whatever. And so maybe not have enough equity either. And so any wholesaler, another investor would pass up on the deal or their cash offer is way too low. And so I used to throw those leads away. Right. There wasn't enough equity, not enough motivation. I would throw that lead away because there was nothing I could do with it. So I thought, well, what if I did a lease option on these things?

Right. But there's not enough cash flow in and I don't want to stay in the middle. There's not enough equity either. I don't want to stay in the middle. So what do I do? So I was a big fan. I was starting to do some wholesaling at the time. This is two thousand, eight and nine. And I started doing some wholesaling, but it was a lot of work. I was spending a lot of money on marketing, throwing away a lot of leads, didn't have enough equity, didn't fit in this little pop, but this little box of high equity, high motivation. And I was competing against so many other investors, it was frustrating. I couldn't I didn't I couldn't go see the houses and look at them, you know, because I was working my full time job. And so I thought, what if I did a lease option on these things? What if I sealed a lease option? And I thought, this is interesting. I started thinking about it and I started doing it and then I started stumbling my way through it.

I didn't know anybody else was really doing it right. I would get a property first. What I started doing is I just started networking at the local real estate clubs and I would tell other investors, hey, if you have a lease option, property or property, want to do lease option, let me know and I'll do the marketing and I'll find a tenant buyer for you and you just pay me a thousand bucks. In fact, I think my first time it was five hundred dollars. Just pay me five hundred dollars and you know, a couple of guys said, OK, and I made five hundred bucks and I realized, oh my gosh, that's a lot of work for just five hundred dollars. Then I got a thousand dollars and I thought this is crazy. It's a lot of work for just a thousand dollars. And I thought, well maybe I could just I find instead of finding the investors with properties, I'll find a homeowner and maybe I'll get fifteen hundred dollars. So I found a home. One of them was willing to do lease option and I told him, right, I'm not going to stay in the middle, I'm just going to sell my lease option to somebody else and I'll take half of the rent or one month's rent is what it was at the time. I just take one month's rent and I did that a few times. And this is frustrating because I'm not making much money. And the way I was doing it, I should you know, I was I was not licensed at the time, I don't think. But what I was doing should have been I should have been licensed. It is kind of licensed activity if you're not doing it the right way.

So anyway, I started finding other people that were doing this at one time. There's a there's a forum online and I think it's still there. It's called The Naked Investor, and it's not naked as in nudity. I don't think the guy who created it is a chef and he's really good. Michael Carbonari. I think his name is. And he had a website, naked-investor.com, and all had to do with like naked ingredients means like pure fresh ingredients. So it's a it's an active forum. And there are a lot of people on there that were doing cooperative assignments. And so I started getting into that form and stuff. And then I found a guy who was doing lease option flips or assignments from India in the from the country of India in Chicago. And he was doing these deals from Chicago. He was used to live. There is a US citizen used to live in Chicago. When did you not you went to college in the United States, got frustrated with the pace of life here, and got frustrated with climbing the corporate ladder, wanting to work for himself. But so he decided to move to India, back to his home country, to be with his family. And then he still continued doing this lease option. Flip's here in Chicago and doing four or five a month from India. That's amazing.

And then I met another guy who was doing lease option flips in Atlanta from his beach condo in Florida. Wow. And then I started talking to these people and I found out they were making a lot more than just fifteen hundred dollars doing this. They were requiring three percent, three to five percent down from the tenant buyer. And we're keeping the entire option money. So if let's say just simple round numbers, let's say it's one hundred. Let's say it's a two hundred thousand dollar house. You're going to get, let's say three percent. That's six grand. OK, these investors that were flipping these lease options were keeping the entire six grand as their assignment fee. And then I started learning the right way to do it through lease option assignments and not the kind of weird way I was doing it.

So I started I started expecting and asking for more so I would find a motivated seller who didn't want to sell their house but couldn't was willing to do a lease option and there wasn't enough cash for equity. So I would say, listen, all right, I will give you a lease option contract. It's contingent on me finding a tenant buyer to live in the house so you can keep on advertising the house. If you sell it or lease it. Before I do, then that's fine. You just cancel my agreement. You don't owe me anything. So there's nothing to risk. And you get to approve the tenant buyer that I put in the house because I make the seller sign the assignment agreements. All three parties signed the assignment and I'll explain the steps, the paperwork here in a minute.

And to my shock sellers started saying, OK, fine, they didn't have any problem with me keeping the assignment fee, the option deposit as my assignment fee because I was giving them what they wanted. I was giving them the price they needed and the rent that they needed. And I was in and out of the deal and I was prescreening these tenant buyers with a mortgage broker who was telling me, yeah, these people are you know, they just need a year or two to get a mortgage and this is what they need to do.

So anyway, I started doing this and within about three months of doing wholesaling lease option deals, I was making more money doing that part time than it was in my full time job. And I was making about seventy five grand a year. So I don't know what that is. A month. Seven grand a month and started six or seven grand a month, I was making more than that three months in a row consistently, and that's when I quit my job.

One of the things I did as I first thing I did is I hired a coach who was doing lease options, and I wanted to see how you do it in a real business. But anyway, fast forward about a year. I was shocked to see that the domain wholesaling lease options was available. So I bought it and a lot of people started asking me how to do this. And then I created a course called Wholesaling Lease Options, and it really kind of took off. And I've been selling it for I've been selling that course for over 10 years. I wrote a book about this whole subject. If you want to get it, you get it for free. Just pay a little bit of shipping and handling. If you go to WLObook.com teach you how to do the strategy with the book. So anyway, here's kind of how it works.

It's really, really simple. It's not that complicated. And let's use let's use one hundred thousand dollar house to kind of break it down and keep it simple. Let's say this house is worth one hundred thousand dollars. The seller owes ninety thousand dollars, OK, and let's say it rents for a thousand dollars a month, but their mortgage payment is nine hundred dollars a month. That's principal taxes, insurance, all of it. It's a nine hundred a month is is their payment. So that's not a good deal to do a sandwich lease option or just to buy subject to in my opinion, because there's not enough equity and there's not enough cash flow. Now, some people disagree with me because the market screaming hot right now and they would would take that property all day long, subject to they would just take over the mortgage or do a sandwich lease option because there's a little bit of cash flow and a little bit of equity prices are going up. They're appreciating. So that's that's a different story for a different time. I still even in this hot market, I don't like that because it may look like a good deal now is not going to look like a good deal in a couple of years when the market finally collapses and starts coming back down to earth. I feel like we're on and we're dancing on a balloon that's inflating and just can't keep on inflating forever. So I see a lot of people making the same mistakes that we were making that I was making in twenty six and seven counting on appreciation and never thinking that house prices could go down and taking on deals with no cash flow, no equity, just to why, I don't know, tax write offs, maybe, you know, if you have enough in reserves and that's OK. But man, I don't know, history always does repeat itself anyway.

OK, so this hundred thousand dollar house, the seller owes ninety, their payments are nine hundred. So I offer the seller and but they want to sell it but they can't because maybe it needs too much work after commissions and the work they need to put into it, they're going to have to come to closing with money. I was just talking to a seller and their friend yesterday. They have a house with equity, but they've already sold it. I mean, they've already bought another house, moved into it, and this house is just kind of dragging them down. And they can't afford to mortgage payments for any much longer. And they just want to get rid of this property so they're willing to do something creative anyway. So if I want to make a cash offer on this deal, I'd probably offer seventy thousand, just twenty thousand less than what they can do that they don't have much. If they were to list it with a realtor, they're going to have to put five or ten grand in it to fix it up. They're going to have to pay, what, six grand in commissions? They're going to have closing costs, maybe a couple, three or four months of carrying costs. And they're going to still come to closing with money, but they've moved out of town or they're going through divorce or something's going on in their life. And they don't want to be long distance landlords. They don't want to be a landlord. And I come to them and I say, listen, what if I could buy it from you for one hundred grand? It's worth one hundred. I'll buy it from you for one hundred. And the payments are nine hundred. What if I give you a thousand a month in rent and you're like, how could you do that, Joe?

Well, I'm going to give the seller a lease option for one hundred thousand dollars and a thousand dollars a month and one hundred dollars down for two years. That's my lease option. Right. So when a lease option, you need a few things, you need the option price, you need the rent, you need the down payment or option money, and you need the term the number of years. And so I give the seller what they want. I say, listen, I'll give you a lease option within two years. I'll buy it for one hundred thousand dollars a month and rent and I'll put one hundred dollars option deposit for two years. And they say, well, this sounds too good to be true. What's the catch? I said, well, the catch is I'm going to turn around and sell this lease option to a deserving tenant buyer who works, is going to work with my mortgage broker and we're going to try to get them into a mortgage in one or two years. I'm not promising or guaranteeing anything, but. They get a mortgage. Well, how do you get paid? I said, well, I get paid from the tenent buyer, you don't pay me anything, and I get paid from whatever the buyer puts down on the house. So if they put three grand or five grand down, that's going to be my assignment fee. That's going to be my profit three or five thousand dollars. And I'm just going to tack, but I'm going to tack it on to the price. I want to add it to the price of the home. They say fine. I said, by the way, if they have any objections, they listen. By the way, if you sell it or rent it before I find a buyer to sell this contract to, you can just cancel my agreement. You don't owe me anything. There's no risk to you and you're going to sign all the paperwork at the end. So you get to approve whoever I put in this house.

OK, what's what's the big deal? No problem. All right. They signed my lease option contract, so I'm going to give them and I have a simple one page layout. I have a one page agreement. I give it to the seller and those three or four things are in it. Right. One hundred thousand, a thousand a month, one hundred dollars down option deposit to make the contract valid for two years. Then I want to turn around because now I am the tenant buyer in the house. OK, I have the option to lease option it. I'm going to buy it, but it doesn't start until forty five sixty days down the road. That's I forgot to mention that too. It starts in sixty days and the option also says it's nonbinding. It can be canceled by any party, either party at any time. And simple. Right, really simple. Now I'm the tenant buyer in the house, I mean in the deal. So I have an equity, I have equitable interest and I have the right to sublease it out to somebody else. This is just like, just like a sandwich lease option at this point. OK, this is just like a sandwich lease option where I'm going to be staying in the middle until I choose to get out. Right now, I'm going to bump the price up to, let's say, one hundred and five thousand dollars because we're going to sell this house to a tenant buyer in two years. So I'm going to sell it for one hundred and five thousand dollars. So I want to put a prop. I'm going to put the property on Facebook marketplace Zillow for rent if I can. Craigslist, signs, signs work really, really good. I'm going to advertise his house rent to own lease purchase one hundred and five thousand dollars. Five thousand dollars moves you in and the rent is going to be a thousand dollars a month. Sometimes I don't advertise with the option depositor's. I'll just say no banks needed. Forget the banks.

OK, we're looking for somebody. I call them penalty box buyers. We're looking for somebody who is six to 12 months away from getting a mortgage. They just need some time. They just have little things in your credit. Not big things, right. They don't have one hundred thousand dollars in unpaid child support. No judgments against them. Right. They don't have a one hundred credit score. They don't have unpaid utility bills from six months ago. These are just people that something happened, life happened, the divorce, job loss, the covid impact of them or something like that. They have a good reason for bad credit you understand. And so whenever somebody applies, I send them to a local mortgage broker who works with people with challenged credit. And he looks at their credit and says, listen, OK, this is all right. They need about 12 months. They need to do this and this and this. And they should be able to get a mortgage, not make any promises, but they should be able to get a mortgage. That's the kind of person I'm looking for.

Right. And I'm going to give them the opportunity then to live in a home and rent a home that they get then the opportunity to buy. And if they put down whatever money they put down upfront, they get credited back to them in the purchase of the home. All right. So I advertise the property then for lease option for one hundred and five thousand dollars. Five thousand dollars moves you in a thousand dollars a month. And I don't do typically rent credits. OK, you could if you wanted let's say you were doing I don't want to complicate this, but let's say because people always ask renters, what about rent credit. Right. So let's say I decide to do three thousand dollars in rent credits that go towards closing costs. Now, I remember I promised the seller one hundred grand in two years. So if I'm going to give the tenant buyer who lives in the house three thousand dollars a month in rent credits to go towards closing costs in the future, I need to bump the price up another three grand. So instead of advertising it for one hundred five, I'm going to advertise it for one hundred and eight thousand dollars.

Now, do you think that house that's worth one hundred today will appraise for one hundred and eight in two years? Well, right now in its current market, yes, it will. What if it doesn't appraise for 108? Well, it's kind of not a big deal, right? Because the seller. Do they want the house back, that tenant buyer has been in there, they've been paying the rent every month, they've been taking care of the house. Usually what happens is the seller just gives them another year or extends it until it does appraised. And there's language in my contract that if the house doesn't appraise or if the tenant can't get a mortgage in two years, they don't automatically get kicked out. They get the opportunity to extend it if they want.

OK, so I don't kick any tenant buyers out. If they can't get a mortgage in two years, it gives them the opportunity to put maybe an additional deposit down. The price might go up a little bit, the rent might go up a little bit, but they get the opportunity to stay in the house if they want to. I just think that's fair. And whenever I'm doing these lease options, by the way, you have to make sure everybody wins, the seller wins, the buyer wins, you win. There has to be full disclosure, full openness, full transparency. Everybody has to win. Right.

So I get an application. Somebody wants to see the house. A lot of times I had the sellers when I was doing a lot of these deals. I had the sellers show the house for me because they want to meet the person in there anyway. And I'm halfway across the town, halfway across the country. So I make the seller, send me pictures. It's very easy to do these deals virtually. You just have to set the expectations up front. It's very, very easy to do these deals virtually. And sometimes, you know, here's another cool thing. I hope I'm not talking too long about this. Here's another cool thing. Sometimes I presented these deals as a partnership with the seller.

Listen, why don't they partner with you on this thing? Let's let's work something out where I'll help you do a lease option on this thing. And I just get paid from the buyer, but I'm going to need your help and we'll just split whatever profit I make on this deal. Would that be fair? So I'll give I'll tell the seller, listen, I'll give you twenty five percent of whatever I make. I'll give you your asking price plus twenty five percent of my profit. That be fair? Which is really, really good. Right. So I might get five grand from the buyer. I'll keep seventy five percent of that and give twenty five percent to the seller and the seller then will be the one to take the pictures and show the property and work with me. So that's, that's one of the reasons why they, they're called cooperative assignments or cooperative lease options. OK, because and by the way, guys, listen to me. This is a huge gold nugget. You will get so many more deals if you present your when you're talking to sellers, you present it that way. It's like, hey, let's let's partner on this deal. Right. Let me do the work. Let me do the heavy lifting. But, you know, since I'm across the country, you just sent me some pictures. You help me show the house and stuff like that, and we'll split the profits on this deal. I'll give you your asking price plus twenty five percent of my profits. Would that be fair then? Now you have boots on the ground, person. You understood what I'm saying.

All right. So back to where it was. I'm going to advertise this house now for one hundred and eight thousand dollars because I'm going to add a thousand dollars a month for two years. Five thousand dollars down. Why am I doing one hundred eight thousand? Because I advertise now. Also, I'm going to be advertising this price, this property as three thousand dollars rent credits. So what's what's three thousand. Let me get my calculator non-stock and let me on my phone. Whatever. Three thousand dollars divided by twenty four months. Yeah. So whatever that let's just say it's one hundred twenty five dollars a month. You're going to now advertise one hundred and twenty five dollars a month rent credits if you pay your rent on time and they're going to go towards the closing costs. All right.

So let's say now two years tenants pay their rent on time every month. They've been working with my mortgage broker. They're ready to get a mortgage. Now, how do the numbers work? OK, by this time, by the way, I'm out of the deal. So the buyer, I find a good one. They put down five thousand dollars. The option deposit check either has to be made out to the seller or it has to be made out to the title company or an escrow company, or it could be made out to you. But it's just easier to, for that option, deposit money to be credited back to the tenant buyer as part of their future down payment if it's made to an escrow company or to the seller. So you just have to work that out. It's not a big deal, just figure it out.

But anyway, so the buyer is going to write down, right? Right. A five thousand dollar option deposit check. That's my assignment fee. That's how I make my money. Fast forward two years. When the buyer is ready to get a mortgage. We're going to set the sale price at what? The sale price of that house. We're going to do a new contract. The new contract is going to be between the seller and the original owner and the tenant buyer, the buyer. I'm done and I'm out of the deal.

OK, what's the sale price going to be on that purchase agreement? One hundred eight thousand dollars, right? One hundred eight thousand dollars. They paid their rent, so they get a three thousand dollar rent credit. Right. So one hundred eight minus three thousand brings it down to a hundred and five. They also are going to get a credit back for five thousand dollars for what they put down originally up front. So that's a five thousand dollar credit. Minus five thousand is back to one hundred thousand. So one two eight minus three is one five one two five minus five is one hundred thousand. Remember that original agreement I have with the seller was one hundred grand. OK, and then everybody's happy. Right. And they close the the monthly rent.

By the way, I like to use a third party escrow company. So a third party escrow company will collect the rent every month from the tenant buyer will pay the mortgage and then any difference that's left over will go to the seller every month. That way, you know, it's being handled and taken care of by an escrow company. I don't know if I explained that well enough. If I didn't go get my book at WLObook.com And get my free book. It's called Wholesaling Lease Options. Just pay six bucks for shipping and handling or something like that and I'll send it out to you. Yeah. See if there's anything else, because I feel like. I could have explained something better, but I think I'm OK there, really, it's simple if you if you think about it in terms if you're going to get a property under contract from the seller on a lease option where you're a tenant, I remember what I forgot.

Remember I told you at the front I give them a one page lease option agreement. OK, that's between me and the seller now. But when you find the tenant buyer, you're going to create a brand new lease and a brand new option agreement at the higher price. So I find a good tenant buyer who wants to buy this house for one to eight thousand a month, they're going to put five thousand dollars down. OK, I'm going to do a new lease for a thousand dollars a month for two years between me and the homeowner, because I'm still the tenant buyer in the middle and I'm going to do a new option agreement. And the purchase option price is going to be one two eight five thousand dollars down to three thousand dollar rent credit. If we pay the rent on time, it's all conditional and paying it on time, they're going to get three thousand dollars to reduce the price of the home or it goes towards their closing costs.

All right, then I take those two new agreements that are between me and the seller and there's an assignment agreement. And then I assign those two agreements to the tenant buyer. The new tenant buyer is going to move in the house and my assignment fee is five thousand dollars that I'm done and I'm out of the deal. OK, now those two agreements, the the lease and the option agreement are between the seller and the new tenant buyer. And I'm done and I'm out of the deal. And now there's two separate agreements. There's a separate lease in a separate option right on that assignment agreement. All three parties sign it, seller signs it, the tenant buyer signs it, and then I sign it. All right. Simple as that. Clear as mud. I think I did a good job explaining that. I think I don't know anyway.

I hope you guys are doing well. It's been fun. I love teaching the stuff. I've taught this to thousands of students. And, you know, it works better is something you know, here's the thing. It works in any market. Sometimes it works better in a cold market, a buyer's market. But I still do these deals in the seller's market. You can do these types of deals in any market. It's good to just have it in your repertoire, right. If you have a seller that reject, you can't take your cash offer because it's too low. There's not enough equity in the deal. Not enough cash flow is not something you want to stay in the middle. Don't just throw the lead away. Just give the seller their options and say, listen, one other thing we could do, we could do a lease option on this thing. And I'm not going to stay in the middle. But here's the here's the agreement. I'm just going to sell this agreement to a pre qualified tenant buyer is going to work with this mortgage broker over here. And they'll this option, the property for this and this is how I make my money and you can approve them or not. Right. And I'm not going to lock up the property. So if you sell it on your own, great. You know, just cancel this agreement. There's no risk to you. And this is how I'm going to get paid, OK? And they explain it. You understand. They understand. And you're good.

So this is just a great tool in your tool belt to offer to sellers as an option. That's why I love it so much. And you can make a full time income doing just these deals. All right, listen, guys, go check out my book if you want to learn more about it. WLObook.com You can read the whole thing in about an hour or two hours. It's really simple and it's a real good book. Got great feedback on it. You can't buy it on Amazon. OK, you have to go through my sneaky sales funnel to get it. It's free, quote unquote free if you pay shipping and handling. But yeah, it's pretty cool. In fact, I looked on Amazon the other day and you can buy it on Amazon for forty bucks. I think people sell used books on Amazon, you know, but and then there'll be some opportunity. I'm going to try to sell you some stuff if you want. But just so you don't want that stuff, just say no, just click no. Right. And then I'm going to email you and I'm going to spam you. I'm going to sell you a bunch of other stuff after that. And if you don't want my stuff, you can unsubscribe. Just reply to the email and tell me to eff off and I'll unsubscribe you. Not a big deal, but anyway, you're going to you're going to like the book. All right. Whatever.

I appreciate y'all and take care. Hey, if you enjoy this podcast, subscribe to at Apple podcast and leave me a review. I haven't asked for a podcast review in a long time. It's a good Apple podcasts. Leave a review wherever you listen.

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