Financial Education through Real Estate Investing: Creative Financing — Seller Financing through Options (Part 3)

August 23, 2022

I’ve been so excited about writing this article that the excitement woke me up at 4am this morning.

Many of you have learned through reading my articles over the last few months that my ‘baby strategy’ is called Lease Options (aka ‘rent to own’ as its more commonly marketed term). There are reasons why I keep stressing with all my students from Day 1 that:

1. Lease Options is a form of creative/seller financing
2. You can tell who’s truly educated in Lease Options and who’s not by the way they see and use this strategy (should really be part of the “How to Spot a Professional vs Amateur” series)
3. Options, when used properly, is an amazing way to structure all-win deals (bold statement, I know — that’s how much I believe in it)

Lease Options, by definition, has 2 components: the lease and the option to purchase/renew, etc. When it comes to seller financing, they do tend to go together. So, it’s really called “lease with the option to purchase”.

Options — for anyone that has already gone through a real estate transaction of any kind would know — already exist in nearly every contract paperwork. Most people just know them as conditions, clauses or subjects.

For example, a typical list of conditions in an Offer to Purchase Agreement by the Buyer would include financing and inspection as the bare minimum. If we were to take a closer look at what this means:

• A financing condition is usually used when the Buyer needs to leverage a mortgage to complete the purchase. What the Buyer is really saying to the Seller on a higher level is that “I don’t want to buy this property if I cannot borrow the money I need to borrow”. This can also be interpreted as “I have the option to walk away if I don’t like the lending terms even if I’m approved for financing.” Of course, some Buyers will specify rates and terms of the approved financing as a second layer of protection. Some will go as far as listing out the funding date and other conditions of their own during this time.
• An inspection condition is easy. This is when the Buyer can simply say to the Seller that “if I don’t like anything I see in the inspection report, I have the option to renegotiate the Offer to Purchase and/or walk away from the accepted Offer.”

For some, if you’ve done a mortgage renewal in the past, it’s actually because that you have signed a mutual option to renew in your original mortgage documents (remember the day you felt like you were signing your life away?!).

With that said, given that the focus is seller financing, we will focus simply on the concept of ‘option to buy’. This means that — in a “lease with the option purchase” situation — the tenant (or leasee — a technical term by default due to signing a lease) has the option but not the obligation to exercise their right to purchase on or before the contract end date. In other words, the tenant/leasee has the first right of refusal to purchase the property.

Iwant to look at it from 2 different perspectives in the next couple of articles here with you — as a Buyer using Lease Options and as a Seller using Lease Options. Today, we’ll look at the former.

Before going any further, here are a few bullet points to keep in mind:

• A Buyer in this arrangement can also be called a Tenant Buyer, Leasee or Optionee (someone who’s granted the Option)
• A Seller in this arrangement can also be called a Leasor or Optionor (someone who’s granting the Option)
• The Optionee has the right but not the obligation to exercise their Option

As a Buyer

I have done countless VTB deals over the years as mentioned since Part 1 of this series due to the lack of personal resources at the beginning of my career and wanting to scale quickly. Leveraging Lease Options is definitely my favourite due to “having the right but not the obligation to buy”. We will look at how it’s different from Agreement for Sale later.

Purchasing 2 Mobile Home Parks in Texas via Rolling Options

I’m going to start by clarifying one thing quickly: many have challenged me that it should be Lease Option and not Lease Options. That challenge often comes from the lack of education and the lack of experience. One might even say that it comes from the lack of empathy and detachment from reality. Whoa! That got dark in a hurry. No fret — the simple point here really is that, regardless of which side you’re on, you always want multiple options to exit for the simple fact that not everything in life goes as planned. In a business transaction, it shows maturity, understanding and vision when you can plan ahead on how to leverage options to conduct transactions.

Now, picture this — it was June 2013. I was only 3.5 years into my ‘professional investing’ career. Wanting to branch out into the US and having learned about mobile home parks as an investment strategy and property type, I could not pass up the deal presented to me. Only, it wasn’t quite a deal I was ready for yet because I didn’t have the resources to jump on the deal, even with another partner. However, the whole point of creative financing is to let money be the least limiting factor as a professional investor. So, I was forced to get creative again — even if it’s not in the same country.

Side bar: there’s real estate buying and there’s investing in real estate. I’ve come to learn that investing is a broad spectrum word and, to a large degree, misused by mass media and even some in the real estate investing community. True investors are trained on the very foundation of how money works. Therefore, their knowledge and skills are universally applicable and know no borders.

With this one — 2 separately titled mobile home parks owned by the same seller — I came up with (what I later learned) is what people call a rolling option. This allowed me to purchase both parks totalling 144 units over an extended period of time while being a leasee with the owner. Without getting into too many details (how much time do you have to read today?! lol), I’m going to list out some of the background story, how the thought process and deal got structured:

• The owner was a 2nd generation landlord that initially inherited the property from his family estate and thought he would enjoy the cashflow from it with them being debt-free and all.
• The owner had very little to no experience managing the parks and the performance slowly got worse. (He was an accountant and had only done the “buy rent and pray” before.) During the due diligence period, I found out that he was attempting to save money by cutting necessary expenses to maintain the property. This was his accounting brains talking, not the investor’s mindset. I continue to stress the importance of understanding and operating from “it’s not how much it’ll cost me but how much it’ll make it”.
• When the leases ended, the tenants started leaving. As tenants left, he was putting new tenants in without a proper screening process (from lack of landlording experience) and without improving the physical properties. This created a very mixed tenant base with frequent internal conflicts.
• Taking his wife’s advice, he finally decided to sell to ‘cash out’. When he started to let the word out, the word travelled across the border through my network to me. Again, your network is your net worth!
• When we first met (on the phone), he had no idea what seller financing is or how it works. I learned that all he really wants is a certain level of cashflow per month from the parks originally. Now he wants cashflow (or just a pot of cash from selling) and not have to deal with the management and upkeep of these properties.
• Taking his small and common wish list into consideration while aligning with our business goals, I was able to have him agree to sell the parks in 3 phases over the course of 15 months that ended up taking nearly 20 months to complete.
• Phase 1: I would lease non-performing 38 units first with and overarching option to purchase the entire 144 units. While I’m in the process of ‘turning things around’ with these 38 units, he’s able to continue to make a small and shrinking income from the other 106 units.
• Phase 2: Once I have reached a certain level of performance with the 38 units, I’m able to lease out the next 70 units. Repeat the same process to raise performance.
• Phase 3: The last 36 units became the easiest because I wanted to have commercial leases for those. By commercial leases, I don’t mean having commercial tenants running businesses in there. Rather, due to its unique location in Texas (outside the Dallas-Fort Worth area), oil was booming in 2014 at this time and many companies were putting their workers and contractors nearby. In the end, I was able to lease out 36 units with 1 lease. That’s just 1 tenant and 1 rent collection to deal with!
• Keep in mind, I’m not personally managing all tenants, there’s always been a property management company that I work closely with.
• As soon as the corporate lease was signed, I exercised my option to purchase all 144 units at the predetermined price. Because the performance has been significantly improved, the new mortgage more than covered the purchase price and all capital expenditure at that point — making it an infinite return deal.

Now, many would think “wow, you’re so lucky!” To that, I will say, yes and it’s because I took the time to educate myself prior and was willing to dedicated 20 months of my life on making 1 deal work (not knowing if it was actually going to work in the beginning).

Were there man tears from stress? Yes.

Were there sleepless nights doubting myself if my ‘brilliant plan’ was going to work? Yes.

Were there times when I thought that it would take everything I got if my plan didn’t work? Hell yes!

The way I looked at it was: I wanted to buy, he wanted to sell. That’s the first alignment. The rest is a simple breakdown on each others’ actual money goals and align again on that front.

What I also want to point out is this: remember how I keep emphasizing that BRRRR is not a strategy but simply a process? This is a perfect example of that. The “B” or “buy” part here is just through a more creative way to achieve. While the “buy” part is not 100% done yet, I started the rest to renovate and rent. The actual completion of the “buy” part now is combined with the refinance.

The most exciting part is this: I can repeat this as many times as I want. Even though I didn’t pull out money to buy other things, I didn’t need it. The knowledge, experience, skills and confidence built from this deal has given me the rest of my career so far.

There may be some details worth sharing here because I want to be real with you all — it’s not always sunshine and rainbows — and hopefully you continue to get how important financial education really is. Not real estate investing, financial education through real estate investing!

1. During the periods of the leases (Phases 1 and 2 specifically), I had to pay rent to the owner whether or not there was money coming in.
2. Even when there was little to no money coming in, I had to incur large sums to money to get the units back up to shape. Some were on the actual mobile homes on the lots and some were capital expenditures to improve the overall park infrastructure.
3. It took countless hours to educate the owner on seller financing on a theoretical level. Once he was comfortable with me and the proposal, it took many billable hours between lawyers to finalize the lease and option agreements. Of course, those billable hours were many people’s annual salary at the time.
4. I had to bring on private lenders and a few JV (joint venture) partners to raise the funds required to go through what we now call the “stabilization period”.
5. Private lenders were also paid on a monthly basis regardless of income level. This is where I really learned the importance of borrowing more than needed (and it’s ok) in a real life deal.
6. Bringing in JV partners was not the first nor the most ideal way to approach this deal as I was ‘hoping’ for a an infinite return deal after all is said and done. And then I heard my mentor’s voice: don’t be greedy and don’t be cheap! And that’s just it. Very quickly, I realized that it was worth it to share my sweat equity (that turned into real equity) than to suffer the occasional anxiety attacks of running low on funds to bring my vision to life.

To this day, this remains one of my most memorable and heart-pounding deals. There were times in between when I wanted to give up and just take the hit and walk away. However, call it blind faith or call me stupid, I stuck with it.

I existed this deal in the beginning of 2017. That was when I also experienced for the first time the added benefit of currency exchange. When done strategically, it’s another way of growing the portfolio income in our Wheel of Wealth!

Excited to continue with this series with everyone and I hope to continue to add value and get feedback from you! A fun fact on this deal, too, is that I had NEVER VISITED nor SEEN this property in my life!

Tomy dedicated readers, I thank you for your support and feedback. If this is the first time you’re reading one of my publications, I hope you’ve enjoyed it and learned a thing or two.

If you’re wanting to be a part of a community of real estate investors from around the globe, here is the T.A.L.E.N.T.ed Investors Facebook Group. It’s a place where people come together to share experiences, knowledge, successes and challenges, and money making opportunities!

For those of you who prefer watching videos, here is the YouTube channel where some of my work (very raw) has been shared.

If you prefer the live interaction and delivery to help you build some foundation, our next live in-person real estate investing Bootcamp is on September 24 and 25 in Toronto. Go ahead and speak to a Strategy Coach on how you can attend and learn more!

Lastly, I just want to say thank you for your continuing support. I aim to be authentic and adding value to your life.

It’s ultimately about LIFE and I appreciate you coming on this journey with me!

(Written at home in Edmonton, AB and edited in the air over the Canadian Rockies)