The Terms of Your Lease Option

If they miss a rent payment or are late by one day, they lose all their
option money. If you rent out an apartment, what’s the tenants’ incentive
to pay on time? Not much. If they’re late, they pay a measly little
late fee.
What’s the number one complaint all landlords have against renters?
They damage the place and don’t take care of it. Are you shocked? Have
you ever rented a car? You are no doubt nice, honest, and ethical. When
you rent that car, how do you treat it? Do you drive over the bumps in
the parking lot, take the curb, do some donuts? Let’s floor it, see what
this little rental car can really do, drink a Coke, throw it in the back seat,
right? Don’t we all tend do the same? Why? It’s not that we’re bad; it’s
just that it’s not ours.

Perform Regular Inspections
How do you make sure that the property is not being destroyed and that
your tenants are doing the repairs they are supposed to do? In every lease
and lease option, you have the right to inspect the property every 30 days.
I predetermine my inspection date in writing. For example, I say, “On the
second Tuesday of every month, during business hours, I have the right to
go in and inspect for repairs, check the air-conditioning filters, spray for
bugs.” Inspect it every 30 days; if you don’t, you could be shocked at what
you find.

When you lease-option, tell your tenants they’re on a home-ownership
program, that this is their house. They’re going to fix it up. It’s theirs.
Way to go. They own it. They’re buying it. They’re lease-optioning it.
They may plant some flowers, paint, maybe put a porch on the back. If
they’re homeowners, they take care of it.
■ If they’re late on the rent, they lose the option money.
■ If they don’t buy within a year, they lose the option money.
■ If they do any damage or don’t do the repairs, they lose the option
■ If they don’t close on a new mortgage within a year, they lose the
option money.
In my landlord course, I explain that all my rent is due on the first of the
month, late on the fifth, and we evict on the eleventh. This is my policy
and procedure. I promise you if tenants can’t pay this month’s rent, they
probably can’t pay three months’ rent if you let them stay in your rental
Do you remember when, during the Vietnam War, the Chinese captured
some patriotic, red-blooded, dedicated Americans and put them on television
and forced them to say “America is not a great country”? How did
the Chinese torturers get them to do it? They used the psychological
technique based on the idea that if you put it in writing, you can’t deny it.
They’d start out very generally and have them write a report detailing
problems in America, and, of course, the valiant American POWs said
there were no problems, no way, they wouldn’t write, they wouldn’t
cooperate. Then the Chinese said, come on, there are race problems,
poverty problems, some type of little problems. Just a little one, write it


Before you read about how to put the five “magic paths” to work,
take a moment to look at these frequently asked questions.
Is this book designed for the experienced real estate investor?
Absolutely not. Although anyone with real estate experience could
benefit by reviewing the material here, what is presented is primarily
for the beginning investor.
Will these strategies work in my area?
Certainly. Although markets vary, opportunities abound in each area.
The book contains a discussion on how to evaluate your local market
for using the best strategy.
Do I create a lot of debt in real estate investing?
Not necessarily. Creating debt is not your goal. Just remember what
debt you do take on is backed up by a tangible property that is worth
more. And when these debts are paid off their value will have gone
into your pocket.
Will all the techniques discussed in the book work?
Yes, they comprise the major techniques used to practice investing in
real estate in the United States today. Although some have more
popularity than others, none are minor or insignificant.
Do they involve “no-money-down” schemes?
Not at all. Some require more money than others. But often several
techniques are used to build up cash reserves for their use elsewhere.
What is this so-called creative financing all about?
Creative financing is a catchall term that usually involves financing
other than or beyond a traditional mortgage loan. When used in this
book it refers to the seller’s participation in secondary financing and
the conservative use of a home equity loan.
Will using the techniques described here take much time?
Some take longer than others. You certainly don’t need to give up
your present work to get started with using several of the techniques.
Securing and arranging the work on a fixer-upper can often be done
easily on a part-time basis. Correspondingly, however, something like
Magic Paths FAQs 9
the operation of several apartment buildings may take a larger commitment
in time, unless professional management is used.
If I’m buying a single-family house or small apartment building do I have to
swindle the seller?
Of course not. Great profits come from dealing fairly in the marketplace.
Note that all prices come from comparable sales in the marketplace;
even a damaged fixer-upper has a reason for its low price.
Is this book comprehensive and all I need to know?
No, your study of real estate should be lifelong. Although the techniques
presented here are thorough and intended to get you started,
each is its own field with a distinct fraternity of followers, books,
courses, and gurus.
Are negotiations with sellers difficult?
Not at all. Even when you need to offer a seller less than what he or she
is asking, a seller is generally persuaded by the factual material and
comparable selling prices that you will gather regarding a property’s
value. You can make negotiating pleasant if the seller knows that you
want to take some of the responsibility of the real estate problem off his
or her shoulders. Note that you can often come near the seller’s asking
price if you name the terms; that makes it win–win for you both.
I’m not sure about my credit. How do I go about qualifying for a mortgage?
Two observations: First, consider that many investment properties,
both single- and multifamily, are financed in whole or in part by the
seller; second, many lenders base their mortgage decisions more on
the value of the property and less on the borrower. Once you have
real estate, regardless of how it’s financed, you will have gone a long
way to repairing any credit problem.
Do I need a real estate license?
Not to practice as an investor, you don’t. In fact, having a license may
compromise your investor status with the Internal Revenue Service
(IRS), as well as be a hindrance in working with sales agents. Further,
many sellers simply don’t want to talk to brokers, so don’t license
yourself to become one. Note that wholesaling a property may
feel like it requires a license, but even here you’re selling a contract
to buy a property over which you have a measure of control—and
not for a fee, but for a markup, or difference in price.
10 Five Magic Paths to Making a Fortune in Real Estate
Do I need to incorporate?
Generally, no. In fact, you will lose important tax advantages if you
do. Incorporating is supposed to limit liability, but if individuals
within a corporation act irresponsibly, the corporation will not shelter
their liability. As far as liability for someone having an accident on
your property goes, you should always cover yourself with the
proper insurance, and liability insurance is relatively inexpensive. As
for liability for the mortgage, even if you have a corporation you are
likely to be required to sign personally on the mortgage. (In this regard,
you should always make sure the mortgage is less than the
value of the property.)
What are the main ways in which I will spend my time?
Oh, yes, I didn’t tell you yet? It’s not so much about bricks and mortar
(although there may certainly be some of this). You will spend
most of your time contacting people, and the second biggest investment
of your time will go toward establishing value by investigating
comparable sales.
Will it take persistence?
Yes, definitely. It will also take indefatigability, stamina, determination,
purpose, grit, and, of course, pluck. Yes, lots of pluck.
In the next chapter, we’ll begin setting out the way you make money
with fixer-uppers.


Before we leave our overview and go into details of our first strategy,
take a moment and evaluate your own marketplace. Here are some
characteristics you could investigate about your marketplace and the
neighborhoods in which you will look for property:
■ Establish the territorial area in which you will prospect for
■ Determine territorial divisions of neighborhoods in which you
will do business.
■ In each neighborhood determine if the number of home sales
as well as the value of their prices are rising or falling, and look
at trends for the past several years.
■ Look at the number of single-family houses in contrast to the
number of multifamily dwelling units, and find whether the
trend for the past several years is increasing or decreasing.
■ For single-family houses, determine the ratio of tenants to
owner-occupants, and the trend there for several years.
■ Determine the profile of the typical buyer in each of the respective
Don’t let this list intimidate you. Investigating these characteristics
isn’t meant to be a demanding task. You probably already
know much of the information. Whatever you don’t know can be
learned from local real estate agents, property appraisers, assessors,
or other investors. A check at the county registry of deeds office
may also be helpful. The purpose is for you to start gaining a sense
of what’s happening in real estate in your marketplace. This will
start you thinking about whether the value of single-family properties
is going up and whether the tenant mixture is moving toward
owner-occupants—two important points in using the real
estate techniques in this book.

A Walk through a Lease-Option Deal

How do you find good lease-option deals? What’s the best source?
Look under Properties for Rent in the local newspaper. Every landlord
or landlady who is renting properties has major complaints. They say,
“Tenants bug me; repairs, repairs, repairs; it’s a lot of work; there are
lots of headaches.” They rent properties for $1,000 a month but never
make $1,000 a month because they’ve got to spend a lot of time and
money fixing them up. They might be empty right now because the last
tenants ran out on them. It’s frustrating. Anyone in the landlord business
has plenty of problems, headaches, and repair expenses.
If you could get them out of the repair business—and could ensure that
they receive their checks on time every month so they can go on vacation—
would they be interested in talking with you? Definitely.
Start by talking with them and finding their pain. Ask questions. How
long have they had the property? How’s the rental going? What do they
rent it for? What have the repairs cost over the years? If you found the
landlord through a For Rent ad, then the property is empty. If so, you’d
ask these questions: How long has it been empty? One month? Two months? Three months? Last year, how often was it empty? What were
the repairs? Have they enjoyed being a landlord or landlady or manager?
Have they had any problems? What don’t they like about it? What
would they change about it?
Then work the numbers for the landlords you talk with and show them
a solution in writing. For example, it they rent a property for $1,000 a
month but it’s been empty for two months, that means they’re not collecting
the full $1,000—they’re really collecting about $700 prorated
over the year. How much did they spend on maintenance and repairs?
Say they spent $1,000 cleaning it and painting it. That means they’re
not making even $700 a month; they’re making only $600 a month.
Work the numbers backward, both annually and monthly, for the past
two or three years. Then ask them how much time they spend working
on or worrying about the property. They might say about four hours a

month—they had to drive over there and fix the commode. Is their time
worth $10 an hour, $30 an hour, $50 an hour? Now the income isn’t
even $600 a month; it’s $500 a month. Show them that, with all the
work, all the headaches, all the problems, all the bills, they’re really making
only $500 a month as landlords.
Work the numbers. Say that landlord is making only $500 a month, and
the market rent is about $1,000 (which you verified by calling some
other property managers and landlords). Ask this question: “Mr.
Landlord, if I could get you out of the repair business and get your
money to you every time, what’s the least amount you’d take per
“Well, I rent it for $1,000, but it’s clear I’m making a lot less than that.”
Okay, you negotiate, negotiate, negotiate. Let Mr. Landlord speak first,
but mentally know your ceiling price—the top price you’re willing to
offer. Maybe it’s $650, maybe even $700, because you know you can
rent it for at least $1,000.
Let’s say your negotiations are weak and he insists on $700, that’s it.
You lease it from him for five years for $700 a month. That effectively
locks in the rent amount for five years, too. Maybe you can lock it in for
10 years, even 20 years.
Now ask the least amount he’d take to sell this property, because you’d
like to make an offer to buy it. Let’s say you think the house is worth
$100,000 and he responds to that question by saying, “I just had an
appraisal. It’s worth about $100,000.” Because you’re both investors,
he might say, “I know you’re going to make a lot of money, I’ll sell it to you for $88,500.” Well, that’s not a good deal; it’s is a bad deal because
it’s only 12 percent below what it’s worth.
This could be a dangerous deal, but let me show you why it may not be
such a bad deal. You could continue the negotiations by saying, “Mr.
Landlord, if I pay you $700 a month, give me $150 a month credit
toward the purchase price. That way, every month you make a payment,
you get a bit of equity buildup or debt payoff, just as you would if you
had bought it and borrowed the money.” Also remind him how much
the little repairs drove him crazy—the broken sinks and commodes and
all that (which tend to be 70 or 80 percent of the repairs). You’ll take
responsibility for those repairs off his shoulders; the landlord will still be
responsible for the big repairs, anything over $500 or maybe $1,000 or
maybe $300—whatever you can negotiate.
In cases like this, landlords will ask for money down. Every property
needs repairs, so let’s say there are $3,000 worth of repairs. We’ll get
that taken care of, so instead of giving them $3,000 option money,
you’ll do the repairs. Who’s really going to do the repairs? Your end
buyer, not you; you are out of the repair business. You’ve gotten a landlord
out of the small-repairs business. You have a five-year option to buy
the property for $88,000, and it’s worth $100,000. Horrible deal, $150
a month credit. Protect yourself: The question in your mind is, what if I
can’t rent this or sell it quickly? You’re stuck. The property is currently
empty, so negotiate delaying the first payment for 90 days or 100 days.
What if they don’t go for that? Try 60 days. What if they don’t go for
that? Try 30 days. Make a business decision.
Disclose everything you do in writing. Tell them you’re a real estate
investor—that you don’t represent them or their interests, that this offer is based on your being able to remarket the property in the next 60 or
90 days. If you can’t rent it in 60 days because the market is terrible and
the house is horrible and you made a big mistake, you walk away.
They’re not any worse off, it’s empty anyway—they’re not making any
money. Not everyone will agree to that disclaimer or contingency, but
you’ll get it most of the time if you ask properly.
Let’s say you have 60 days. They signed a lease for five years at $700 a
month, giving $150 a month credit, and you also have an option to buy
it for $88,000 within the next five years, with some of the rent going to
knock down that purchase price. How much money do you put down?
Zero. How much money have you borrowed? Zero. How many contractors
have you hired? Zero.
Clean up the yard and give the house a coat of paint to make it marketable.
Then run an ad in the paper: “Easy qualifying, become a homeowner,
stop throwing your rent dollars away, no banks involved, won’t
last.” Create a sense of urgency. Have a voice mail people can call that
describes all the attributes of the house. You think the house is worth
$100,000. You think the market rent is $1,000 because you’ve done
research—gotten comps and verified figures with property managers.
Your phone might ring off the hook because now you can sell a house
with easy qualifying.
The first responders call and say they’d like to buy this house; they’re
familiar with the neighborhood. The number one qualifying question to
ask a potential lease-option candidate is this: “How much money do
you have to put down?” Ask additional questions like these: “Do you
have anything to sell? Any tax refunds coming? Any other sources of funds?” People often don’t think about some of these things. Tell them
you might get back to them and put their information in a file.
The second responders call and say they’re looking to buy a house, but
they don’t think they can qualify. They don’t have a big down payment,
they have only $6,000. You can screen them over the phone.
Do a credit and criminal background check on everybody. Also screen
them by sending them to your mortgage company and getting them prequalified.
Explain how your home-ownership program works: They
don’t have to have perfect credit. They don’t have to have a big down
payment. But you need to check them out. Sometimes the mortgage
company calls back and says your candidates are prequalified. Say the
mortgage company has a 95 percent loan program for them, and they
have enough of a down payment to proceed.
How much are you selling the house for? You thought it was worth
$100,000. What’s the actual difference if they pay $105,000 or
$109,000 for 30 years at 7 percent? About $8 or $10 a month. So you
write a contract for $107,000, in which they pay all the closing costs
and fork over $6,000 as a down payment. They’re happy. They didn’t
think they could buy a home, and you showed them how. Now you’re
ready to close.

Call the original seller. He wanted $88,000 but you can renegotiate
that amount. As of now, $107,000 minus $88,000 means $19,000
profit in your pocket. And you already have $6,000 in option money.
So you’ve received $6,000 plus $19,000 and you’ll make another
$13,000 at closing.

How would you like some extra money? Call up the original sellers and
say, “Hey, I have five years.” Always count it out, 2003, 2004, 2005,
2006, 2007. You’ll give them $88,000 in five years; however, you’re
paying off some of the loan as you go, so it won’t even be that much.
Ask this question: “Would you like the money sooner?” They might say
yes. If they receive the cash in the next 30 days, they tell you, they’d take
a vacation, pay off bills, and so on. Great. Next ask them, “If you get
that cold hard cash in your hands in the next 30 days, what’s the least
amount you’d take?” If they say $87,000, what do you say then? “Can
you do any better?” If they won’t, you agree to $87,000. You go to closing
and sell it for $107,000. You just made $20,000 on a bad deal that
you put no money into because you learned how to lease-option and do
credit financing. You learned how to hustle, market, and take action.


Here are some guidelines for choosing which method you might begin
1. Study your local market. The technique you use will be determined
by the opportunities available. You have to work with
what people want in your area. In Chapters 2–6 on fixer-uppers
you will see more on measuring your local market.
2. Note what’s going on in your regional economy. Will fixerupper
opportunities be better in a few years when the local
manufacturing plant relocates? Or will apartment buildings
rise in value, as more people are coming into your area than
are leaving?
3. Try to find the technique that appeals to you, something that
not only fits your market but fits you.
4. Note that some techniques require more money, at least to
put down initially, than others. Specifically, the lease/option
allows you to put little down to get the deal started, but the
apartment building purchase may require 10% to 20% down
unless you can finance it creatively.
5. Gauge the amount of time you have available to get started.
And be aware of when that time is free. Generally, real estate
allows you control over your time. You can probably manage
and maintain a small apartment building in the evenings or
on the weekends, but working on a fixer-upper may require
some weekday time when tradespeople are available.


Success can come from using any one of the five “magic” techniques,
or a combination of several. The idea is not to jump from one technique
to another indiscriminately, but to begin by focusing on one, to
specialize in that area, and then add to your growing expertise by undertaking
one of the other methods. However, too many good opportunities
can come up at a moment’s notice not to be able to take
advantage of them. Therefore, you may need to be versatile enough
to shift gears at any time into another mode. It certainly would not
be unusual to have a lease/purchase in process when the chance
comes up to buy a distressed single-family.
Now that we’ve said it’s best to begin with one technique, we will
also say that while it’s true that specializing in one niche improves
your expertise in that area, the opportunities available in any given
property market may not be in your area. Besides, if openings in any
one niche area were in abundance the competition would be fierce,
driving up prices beyond reason. It’s best to stay flexible and be prepared
to learn another method—again, one method at a time—so
that you can take advantage of varying opportunities.
If you work only in a narrow area, like buying and holding
single-family houses, you will miss much of the picture because
you are concentrating on a small part of real estate investing. Perhaps
you should consider buying and selling without holding over
a period of time, or becoming a landlord of a building designed for
long-term use, such as an apartment building. Specifically, buy low
and resell a few properties to build up some cash before holding a
few, or sell with owner financing for a cash flow. Unless you have
lots of money in the bank, don’t think just of holding, but of buying
and selling.
The bottom line is that while you will be learning and gaining experience,
you will also be making money and building a financial
base that will make you wealthy. And, yes, it may seem easier to
hone your skills in a single area and develop such expertise there, but
you want to be able to take advantage of whatever the case is in your

market. It’s a lot of work, particularly when you must anticipate several
avenues of investment techniques, but it is rewarding.

Lease Optioning

People dream of owning their own
homes. Lease optioning can make it possible.
The Idea of Lease Optioning
If you rent a house or an apartment for $1,000 a month, what do you
have at the end of the year? Well, $12,000 worth of canceled checks,
right? Zip, zilch, zero. Everyone can use lease optioning. Even if you
don’t make a lot of money or don’t choose to be a real estate investor,
you can do one on your own house and stop throwing away your rent dollars. Would you like a vacation home? A house in the mountains or
condo by the beach? You have a choice. You can pay $200,000, but
what if after a year or two you don’t like the place or you want to go
somewhere else? You’re stuck because you bought it. You might have to
sell it, and what if the market has gone down? However, you could
lease-option a vacation home. Stop throwing your rent dollars away,
and stop using your own money to buy property.
Let’s talk about cars for a minute. There used to be only two ways to
buy a car. One way was cash: If you wanted the Camaro with the mag
wheels and the flared fenders, and it cost $12,000, you could pay
$12,000 in cash. Alternatively, you could borrow $12,000 from the car
company or the bank if they’d lend you the money, but your payments
would be high.
Today, about half of all cars are sold using a lease with an option to buy.
You can get the new BMW for $42,000, or put $499 down and pay just
$399 a month. People don’t care about total price; they are more interested
in the down payment and monthly outlay. We get excited when we
see we can drive a Porsche for $2,000 down option money and $599 a
month, because we tend to think of a $90,000 Porsche as unaffordable.
Now, all of a sudden, it is.

Some wise businesspeople figured out they could lease-option cars.
That means you drive it for two or three years and, if you like it and
want to keep it, pay it off at a reduced price because some of your payments
have already gone toward buying the car. It’s a win-win situation.
If you don’t want to keep the car, you simply return it. Lease optioning
offers the best of all worlds. Indeed, a whole industry has emerged out
of this concept.

What Makes Real Estate Unique

If you’re serious about your money and serious about investing, you’ll
consider all the advantages of real estate investing that don’t exist in
other forms of investing.
Contract Real Estate for Less Than Its Value
Houses worth $100,000 can actually be found for $75,000 or $80,000.
Some real estate worth $1 million can be found for $700,000; other properties
worth $450,000 can be found for $350,000. You can contract to
buy a property and control it immediately, even though you haven’t given
the seller money for it yet. Then, between 30 and 100 days later, you go
to the closing and give the seller the agreed-upon price. You borrow
money to pay for the property, then close on it, and, voilà, you own it.

Make an Infinite Return on Investment
If you find a house worth $1 million for $500,000 and your credit isn’t
great, there are some lenders who would lend you $500,000 for a property
worth $1 million. In fact, they’d hope you’d miss a payment so they
could take over the $1 million property for $500,000.
These lenders are called hard moneylenders (see Chapter 5, “Avenues
Leading to Motivated Sellers,” for more details). They don’t pay attention
to your credit; they care about the asset, the property itself, when
they make their lending decisions. If it’s 60 to 75 percent loan to value
(see accompanying explanation), they might lend the funds regardless
of your credit. Some of the big banks and mortgage companies make loans to people who have been in bankruptcy, who have made late payments,
who have bad credit, and so on. They may still lend you 60 to 80
percent of the sale price on these properties. That’s why you can find a
property worth $100,000 and get it for $75,000, then borrow that
$75,000 without putting your own money into the property. You rent
the property for $1,000 a month, and your payment on the $75,000 you
borrowed is $700 a month. After all of the expenses—taxes, insurance,
vacancies, repairs, and overhead—you make some cash each month.
Let’s say you make $100 profit a month from the rent after paying all of
the expenses. You’ve still invested zero in the property. Your return is
infinite: $X for $0 invested.