Good day everybody. It’s Rick speaking. Beautiful morning just at the farm here, woken up. I’d like to say that I’ve just finished milking the cattle but I don’t have any cattle and I’d like to just say I’ve just been sickling the corn, don’t have a sickle.
I tell you what I found out about the difference between big town America and small town America. Small town America, towns are small. I tell you what I thought might be really interesting today is on our live talk today we would talk about different types of options and lease options because there’s so many different types and it’s such an interesting area we can get into so we’re going to talk about lease options and different ways you can put them together. One of our most common ways are…good day Chris buddy. Good to see you pal.
One of the most, what’s in your lab? Okay. I tell you what, most of us we do a lease option, right? We might say if we want to say sell a house on lease option to someone. We say, “Look, I tell you what, make me a payment every month and some of the money goes towards, you know, just your rent and some of the money that you can pay me goes towards, you know, either paying off the property or going towards building up a deposit.” So money can come in towards building up a deposit or paying off the debt instrument while some of the money can be just rent.
Well, that’s like a default mechanism way. But we’ll also do a lease option where we just say, “You know what, just pay me rent and just pay me rent and pay me an upfront, yeah, option fee upfront which is the amount of money you just got to pay me sort of like right upfront, just pay me standard rent, whatever the standard rent is and then at the end of the day if you want to buy it we’ll just agree on a certain price.”
Good day James and it’s great that James has just joined us because James is an estate agent. James, this is where you guys can use this. So this is an option formula that I use with the estate agent side. I find that when I get estate agents to sell lease option products for me, they can’t necessarily get their head around all the semantics of it.
So, I say, “Look, just find a tenant who pays rent the normal way and just ask him if he’d like the rent towards, you know, coming off the house or going towards buying the house or have some arrangement he can buy the house down the road.”
So I keep it pretty simple and I just say, “Look, pay me rent, we’ll agree that the price of the house is 100 or 200 or 300 and pay me some money upfront,” and I’ll just, you know, take some money upfront, probably only 5 or 10 grand, something like that, and then we’ll just agree that down the road if he wants to, that money can go towards buying the house.
So he might pay me five grand or ten grand upfront, he pays standard rent. Nothing of the rent comes off the price of the property, nothing, right? And at the end of the day we just agree that he’ll pay me 200 or 250 or whatever it is.
I may or may not have that front bit that he gave me come off the price of the house. Sometimes I’ve found if I’ve had an agent do it, some of them are less savvy than others so I may not even say that the front bit comes of the price when he decides to buy it. Mainly because the agents aren’t that familiar with it and they won’t understand it, they get confused by it.
So I might say, “Look, get the guy to give me some application fee money, the application fee money which is actually technically the option fee, and…good day James. Good to see you pal. So when you guys do this, James, just take this on board. You’ll love it.
But, standard tenant, standard tenant’s going to say, “Hey listen, I’ll tell you what. If you think the market’s going up or you want to make some improvements on this house and be here for a while,” because when I used to be a tenant years ago I’d paint people’s houses and things. I’d say, “Look, I could organise with the owner that maybe if you want to buy this house down the road and because you keep, you know, living here for so long and you want to spend some money on it, we might be able to agree on a figure that you would buy it for if you want to buy it.”
So in return for him doing that favour for you, he might just have to charge you some sort of fee upfront just for doing that, you know, a few thousand bucks. So the rent’s just the rent. Nothing really changes. The only thing that changes is there’s just a one-option fee figure that was paid in return for that if the guy wants to buy the house, he can.
Now sometimes we might say, “Well, how much is about, you know, are you going to pay me?” Might only be two, three, four grand, it might not be very much at. It might only be a small amount of money but people go, “You know what? This is pretty good because I like this and I’m going to paint it, spend some money.” Now sometimes they may say too, if you’re dealing direct by the way and they go up I say, “Well look, if I do decide to buy it, what money go towards the house?” and you might say something like, “Well look, you gave me five grand and probably not really, but if you were to give me ten grand I’d say yes.” So it’s a great way to get more money upfront because then the more money bit will come off the price but the loan amount of money won’t.
But during the period of time that the person’s in there, it’s just standard market rent so there’s no extra component paid that sort of comes off the price you going to want, especially if you want to outsource this guys and get agents to do it for you, I want to keep the formula super, super, super easy.
Now another thing you can do with your rent-to-buys and your lease options is you simply put it together whatever it is, right? You decide, “Okay, I’ve just put this thing, the guy’s moved in and he’s moved in, he’s making payments and it’s really great, he’s given me some money upfront and he’s going to make me some cash flow every month and then when he gets out he’s going to pay me some more money.”
Guys, you can actually assign it, you can actually sell it right out and say, “Well look, it’s a great little product. Look, I’ll just assign it and sell it to somebody else.” That will give you about 20%, 25% of the what the value of the thing’s worth in cash upfront.
I was just speaking to a great little gentleman yesterday and actually his job in Florida of all places, we were having a chat for a while, and he heard of me on a podcast and so he wanted to call me up and chat to me about some stuff. And one of the things we were talking about, I said, “What are you doing at the moment?”, he said, “Look, I’ve just got this new job with this company,” now here’s what the company does.
All the company does is buy houses on the average of about 62% of what the house would be worth when it’s fixed up, okay. So let’s say the house is worth 100 when it’s fixed up, but it’s not now, it’s garbagey, they pay around 62%. His job, and this is the only thing he does, is to assign those contracts that the company has picked up giving them the right to buy the houses for 62% and then assign those and give them to a renovation, renovator guys at 75%.
They get them at 75% after repaired value because then they can sell them at 100%, but they pick them up at about 62%. So they pick it up at 62%. All his job is doing is assigning contracts, picking up contracts and assigning them, picking up contracts and assigning them. Now, depending on which country you’re in, the way you assign the contract will change based on stamp duty. So for instance, in the United States, you can assign contracts and there’s no stamp duty so it’s like seven bucks to record the deed so, super cheap.
If you’re going to assign contracts say in Australia you got to pay stamp duty so you’ll structure it a different way. You can always do this in every country, it’s just how you do it will probably be different just from the way the restructuring of the contract is immediate between you and someone else because we got to take into consideration tax considerations.
So the other thing is too, when we pick up our products from the sellers, two ways we can do our lease options when we’re picking up from the sellers. One, we can say, “Look, I tell you what mate, whatever the outgoings are on the property, you know, your loan debt, your payments, waters, council, any expenses you have on the property, I’ll agree to look after that. So I’ll make all those payments and I’ll pay you out let’s say, you know, three, four, five years or you just do a purchase option on that one.” Okay? And so you’ve agreed to, that the purchase price that you buy is for the outstanding debt on the property. So they were making payments on the debt, you look after the water, the taxes, whatever you look after, that’s the figure, that’s the monthly option fee that gives you the right to buy the property for the outstanding debt that’s left on the property. And, ah, good day Zane buddy. Good to see ya, and Paul. Okay. So that how you do that one.
Now, the other way you could do that is, which is probably more profitable for you guys sometimes, he may not have any debt on the property so you can’t go in there and go, “Look, I’ll pick up all the debts on the property,” while like, which is great, basically will feel really great when you do it that way. The other way you might want to do it is say, “Look, Iet’s just agree on a rent,” and you just rent, you just rent it.
Now, you may or may not find, because the mathematics around this guys, okay. Just do the rent on it and see if the rent is, or get rent, cheap rent. So look, sometimes I might do this. “Look, so your rent’s normally 500 a week but I guess out of that you’ve got void, you’ve got repairs, maintenance, management. Look, I’ll tell you what, why don’t I give you 350 a week, I’ll look after everything. So, you know, there’s any void for the year, I’ll still pay the 350. If there’s, if it’s, if I sublet this thing, I might have some friends I want to sort of share with or something, regardless of what happens you get the 350 and there’s no maintenance at all. I’ll look after everything at 350.”
A lot of sellers will say, “You know what? Give me the guaranteed 350 every single week as a rental, you look after everything” rather than 500 then they’re being called in to, you know, fix toilets and carpet. A lot of people like that. Give them a figure that you’ll rent at every month. It’s a lower than the market figure but what will happen is you will look after everything.
Now here’s what’s interesting. You can then take that and turnaround to the guy, the next guy 500. So you got it at 350, give it to the next guy at 500. If you give it to the next guy and you move him in as a future homeowner and not as a tenant, if you move him in as a future homeowner, he’ll actually make all your…he does all the repairs himself, he’ll look after the property so you’ll actually make about 150 a week which is not a lot of money.
What I’d probably want to do is…okay John. What I’d want to do is make more money than that, 150 is a bit weak. What I’d probably want to do might be I’d agree that I could buy the house from the seller for a price that would be cheaper than the price I can buy from the new guy coming in, right. So the new guy’s going to pay me up here, he’ll pay me this figure, and the guy that’s, I’m getting it from I’m paying him this figure. So there’s always got to be this happening, right. More coming in and less going out, more coming in, less going. Don’t do this. That will get you in trouble. Do this, okay. Whatever you’re paying this guy all comes in.
Now, people say to me all the time, “What’s the right amount?” You know, “What’s a good deal? What’s the right amount?” If I can just say this to you. From now on, whenever you say to me, “What’s the right amount? How much more should be coming in? What’s the perfect deal?” I’ll simply say this. If you’ve got this hand, right, you’re ahead of the game, okay.
It doesn’t matter. As long as it doesn’t get like this, if it stays like that, all right, you’re ahead of the game, you’re on board, you’re on time, you’re on fire. So, okay guys, we got to leave ya, love ya, leave ya. That was my little alarm in my pocket telling me I’ve got to go and do something. Funny thing is, I don’t know what it is I’ve got to go and do.
I’ve got this alarm and it’s just gone off in the pocket and my wife, it was funny. She ran out, she said, “I’ve put the thing in your pocket with the alarm. I’ve got to, I haven’t answered, someone’s calling on the phone. Gah. I’ll speak to you soon guys. Bye.