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The Real Estate UNLOCKED Podcast
Dominate Lease Options with This Guide | Episode 11
Unlock the secrets to successful lease options in real estate with Tim Yu, an army officer turned savvy real estate investor. Discover how Tim transitioned from his first fix-and-flip project to owning nine buy-and-hold properties, all through creative financing. Learn the ins and outs of lease options, including how they offer a path to homeownership for renters while providing property owners with higher purchase prices and tax benefits. This episode promises to deliver valuable insights into the practicalities and benefits of lease options for both seasoned investors and newcomers alike.
Dive into the strategic approaches that make lease options a win-win for all parties involved. Tim Yu shares his expert advice on negotiating lease options, offering three-to-five-year terms with annual renewals based on tenant performance. Understand the importance of factoring in appreciation rates and setting future purchase prices. Discover effective methods for finding and screening potential tenants, and why a three-year lease term is crucial for giving tenants adequate time to secure financing. Tim also emphasizes pairing tenants with credit repair services and mortgage lenders to set them up for success.
Explore the emotional and financial aspects of lease options and how they can serve as a creative solution for real estate problems. Learn about structuring lease option fees, mitigating risks for sellers, and the "lease option sandwich" strategy that allows investors to create passive income with minimal costs. Tim's real-life examples and practical tips bring to light the benefits and potential pitfalls of lease options, ensuring a comprehensive understanding of this innovative real estate strategy. Don't miss this opportunity to expand your real estate knowledge and discover new ways to achieve your investment goals.
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What up everyone and welcome back to the Real Estate Unlocked podcast. I am your host, Joseph Marohn, and today we're going to be covering a highly requested topic in real estate. One would even argue a better option than your traditional rental, a strategic way to sell your property at a higher purchase price. Today we're going to be covering the topic of lease options. A lease option is an agreement that gives the renter a choice to purchase the rented property during or at the end of the rental period. It also precludes the owner from offering the property for sale to anyone else, which is a huge benefit for the renter if they are looking to purchase a home but need a little time to rebuild their credit. This agreement usually requires the renter to pay an upfront fee for the right to purchase the property at a later date. It's a huge benefit for both parties and, if utilized properly, it can open up a lot more doors for your real estate business. Now, if that sounds appealing to you, this episode will cover everything you need to know about lease options, how to structure one yourself and how you can start utilizing this creative strategy today. Now you know how we do it on the Real Estate Unlocked podcast. If we're going to do it. We got to do it right. We can't just bring on anyone to speak about lease options. We got to bring on the one who's killing it in lease options.
Joseph Marohn:Today, our special guest on the podcast is Tim Yu. Tim's real estate journey began in 2022, with his first project being a fix and flip. He's also a full-time army officer, located in Louisville, kentucky. Over the last year alone, he's managed to purchase nine buy and hold properties utilizing the power of creative finance. He's also an active member in the Sub2 community with Pace Morby, and today he's going to share with us one of his favorite ways to grab rentals the lease option. So, without further ado I've been talking long enough Everyone. If you will, please allow me to formally introduce to you Tim Yu. Tim, what up, brother, how's your day going, yo?
Tim Yu:what's up, bro? It's going great, man Dude. That was probably one of the most killer intros I've ever heard on a podcast man, so I appreciate it, brother, I appreciate you man.
Joseph Marohn:Yeah, I've been having a lot of fun with these intros. I've been getting a lot of good feedback. So having fun with it, man, and I appreciate the kind gesture.
Tim Yu:Yes, sir. Well, I appreciate you inviting me on the show man and I'm excited to talk some real estate brother.
Joseph Marohn:Hey, I'm excited too, man. Awesome. Well, Tim, welcome to the podcast. First things first. Thank you for your service, brother. It's always an honor to have a veteran on the show. So thank you for everything you do for our country and thank you for taking time out of your busy schedule to help us break down such an amazing strategy to know in real estate. As you already know, with creative finance, the opportunities are limitless. Lease options are just another tool to have in your investing arsenal. Not only can you make a ton of money doing it, but you're also helping out people along the way who may not be able to qualify for a mortgage right now, which makes it a win-win for both parties, and I'm pumped that we get to break this topic down together. So thank you.
Tim Yu:Yeah, man, the ask away. I love to talk about it. It's kind of what you already talked about in the intro right. The lease option is so great for the tenant, buyer, the person that's actually renting the property and owning the property, so I'm sure we'll talk about it more in depth. But I freaking love this way to structure deals, man. It's absolutely incredible.
Joseph Marohn:I love it too, man. So, tim, you ready to drop some gems? Let's do it. All right. All right, let's get into it. So before we really dissect this topic, I'd like to talk about you and your journey for a second. You've been getting a lot of spotlight lately. I see you doing your thing on Pace Morby's Get Creative podcast. I also saw you on Pace's YouTube live breaking down a deal you did where the wholesaler started ghosting the seller. But, tim, how did you start your journey, man? What made you want to get into real estate, and what are you currently focusing on in your business?
Tim Yu:Yeah, it's. You know I get this question a lot. It's been a crazy 15 ish months, but you know. So you know I'm an army officer down in Kentucky and I used to commute to Fort Knox every day, so that's about a 50 minute commute each way and you know the corny stuff like you know. You listen to all the podcasts, you know Bigger Pockets, you know Get Creative.
Tim Yu:All that stuff kind of got me like wanting to get started in real estate, real estate, and listened to the podcast for about a year until I decided, hey, I need to get started in real estate and let's go try to do something. So I linked up with a real estate agent and I was on Zillow every single day just creeping on deals and I saw a house that was listed for a hundred grand and it dropped to 50 grand overnight. So we went to go see that property immediately and it was boarded up, had a squatter in there and all that, and the owner was from LA, so I know you're from California, so it was kind of funny that these guys are buying up properties in the Midwest. So he didn't want to deal with it anymore. It was beat up. So I bought it for 40 grand cash.
Tim Yu:So I used the hard money and all that stuff and people have heard me talk before it was not a good deal. So I think I made five grand in six months. So you would imagine how much work and pain that was. So after all that stuff, we made that $5,000 and I was about to quit real estate. So I was like man, I'm done with this stuff. This was not worth it. I ran into a sub two student at a sub two meetup and that's kind of like where how I got started in that stuff, where I met somebody that I trusted and I ended up dumping all my flip money into that mentorship and then that really all the stuff I learned in there kind of like scaled my portfolio from there.
Joseph Marohn:Dude, that's interesting. Well, first off, you know, you said you know I'm from Southern California, right? So we don't, a lot of us investors, we don't buy in California. Not to say that all investors don't buy in California, but the house pricing here is like through the roof, right. So a lot of times we find ourselves buying out of market, you know, in other markets like Texas, you know Midwest states. But it's interesting the fact that that was 100K and they brought it down to 50K. What was the reason for that?
Tim Yu:So there was a squatter that actually broke into the house. Oh, and you know, when you walked in that house, dude, it was like you saw the sketchiest stuff in there, you know what I mean? Like like some paraphernalia that you don't want in a house, right? So it's like the owner was just like hey man, I'm out on the west coast, it doesn't make that much money, you know, it's set six hundred600 a month in rent and for me I thought it was a great cosmetic flip and the risk was really low. So I said you know what, let's, let's try it. But I made all the typical mistakes, you know, like bad contractors and all that stuff.
Joseph Marohn:So yeah, you know, um, sometimes I see some of these pictures right from, like, some of these houses and I'm like, dude, it looks like something out of a horror movie. It's crazy, you know. And then, um, but yeah, I really love the fact that you, you know, you talked about how, hey, I only made 5,000 on this for six months and a lot of people would give up, right, and you said it yourself, you wanted to give up, but you kept pushing forward. And that's great, man, because we got to fail forward. We're going to make mistakes along the way, but the key is to kind of learn from those mistakes and keep pushing forward, right? So, absolutely, yeah, great stuff, man, great stuff. So let's give the people what they came here to see, shall we? What exactly is a lease option and how does it differ from traditional property buying or renting?
Tim Yu:Yeah, so lease option is kind of exactly how it sounds. It's a lease, so someone's actually going to rent the property from you, and then the option, so they have the option to purchase the property from now to a set amount of time, right? So? And the difference between that is, let's say, when you buy a house traditionally, you know you're getting a mortgage or you're doing creative finance. You're buying the property, you get the deed the person who's renting from you as a lease option tenant buyer they don't get the deed until they qualify for an actual mortgage down the road and then pay you off and then it'll be a normal transaction from there. So how I explain things, the easiest way is they're essentially renting from you. They give you a non-refundable down payment Well, it's not really a down payment, but it's the non-refundable deposit for the option fee that eventually becomes a part of the purchase price, which equivalents to a down payment down the road, and then it becomes a normal traditional sale, like they qualify with a mortgage lender and then we go to a closing table and then they get the deed and they own the house and I'm out of it.
Tim Yu:The great part about it for us as the investor is we're more hands off in terms of maintenance. So it's very state dependent depending on the rules and the regulations. But for us, you know everything over $500, I take care of everything under $500, the tenant buyer takes care of. So it saves a lot of pain on them calling you for, like you know leaky toilet or you know small maintenance stuff. You just don't have to deal with it because they're okay with taking care of it, because they're eventually going to be the property owner.
Tim Yu:The second thing is obviously the non-refundable down payment. If you're putting 10, 20,000 down, do you think you're going to kick a hole in the property? No, I don't think so. They're usually going to take care of the property. Also, for every tenant that I put into my homes, I tell them that this is your house. Right, this is, this is your house. So you know, take care of it, do what you want with it. You know, as long as you're building your credit and you're paying your rent, you're good in my books right, awesome.
Joseph Marohn:And just to clarify, like you said, it's two separate agreements, correct? That's being combined together. So there's the lease agreement and then there's the option to buy agreement.
Tim Yu:Yep Absolutely Two different documents.
Joseph Marohn:Okay, great man. So can you kind of walk us through the structuring of a lease option agreement? How does that start from A to Z?
Tim Yu:Yeah. So I think it's like dealer's choice, right? Like how long do you want to have that option, how long you want to keep that house kind of locked up? Right, because when you sign a lease option agreement, that option contract prevents you from selling it to anybody else. So that's the beauty of it for the buyer as well, because they have that sense of security that from three to five years, wherever you agree to, that house cannot be sold to anybody else and I can't change the price. So wherever we set the price to, that's what they're going to pay.
Tim Yu:So for me, on the investor side, I like to do three to five years. I allow the seller or the buyer to have three to five years to buy the house, but to kind of remain in control, to kind of avoid myself from falling into a. You know, a tough. Tough situation is I have one year option contracts and then if the, if the tenant is performing, paying on them, paying the rent, actively, trying to improve their credit score, I will extend their option for free. There's no fees or anything. I just have that as a controlling mechanism just in case that tenant just goes off the rails and stops participating in the program. Right, because you don't want to trap yourself Now.
Tim Yu:I usually like to do a three-year option, so you set the the price. So how I usually do it is I keep things fair that I add three percent appreciation for every year. So if they're, if they're gonna buy, if they tell me, hey, I need three years to buy this house, I'll probably add nine to ten percent appreciation on the purchase price on the back end. Right, if they don't exercise the option in three years, we just have a conversation. We go, hey, are you close? Are you still trying to do this, are you not? And if they say that they want to do it, then we'll renegotiate a new purchase price.
Joseph Marohn:Awesome. Yeah, that's smart that you're factoring in that appreciation for the future, right? So you're factoring that 3% over three years if you're doing a three-year lease three ways.
Tim Yu:You're getting paid upfront with the down payment, you're getting cash flow from the rental and then you're hoping to get paid on the backend with the appreciation you forced into the property.
Joseph Marohn:Right, and so at the end of the terms, the buyer still needs to qualify for their own loan, correct?
Tim Yu:Yep. So what we like to do and like this is what I suggest. So to also protect you as the investor, right? You want to make sure that that tenant is set up for the best way possible to be able to qualify, because you don't want to be predatory, you don't want to take a down payment and hope that they're going to not buy the house on the road so you can like redo it right. So what we like to do is hey, if you're in our local market in Louisville, which is where I do most of my stuff now is we actually pair you up with a credit repair person that that helps that person plan out their finances and gets their stuff repaired, their credit score. And then we also pair them up with a mortgage lender that I work with for my deals and also that understands the lease option process, so that they know that that payment that they give me should count as the down payment when they go qualify for that conventional loan.
Joseph Marohn:Yeah, that's awesome, man, because you're not looking at it just as like an investment, right, but you're also looking out for the tenant as well by finding them those available options for them. That's great, man. I love that. So how are you exactly finding these tenants that purchase a property and how are you screening them?
Tim Yu:Yeah, so screening is a little different. But let's, I guess we'll start off with how I find them. It's actually as easy, I find them. It's actually as easy as easier than you think it is. So Facebook marketplace and we advertise as a rent to own straight up, and then we also pay for ads. The reason why we pay for ads on Facebook is because there's a lot of bots and spams out there and we want to give the tenants or the people looking at the house to realize that we're real right, because usually scammers don't pay, you know, $30, $40 on ads. The second way is we actually list their properties on all the free property management software like Avail. Like, have you heard of Availcom? I have Yep, so I actually list all my stuff on there as well and label it as a rent-to-own. The third and most effective way I kid you not, dude is bandit signs.
Joseph Marohn:Bandit signs Good old bandit signs.
Tim Yu:That orange arrow that says rent-to-own and you have a couple of them leading to your house and right in front of the house is rent-to-own. Call this number and I probably generate the most leads from the bandit sign, honestly, and you'll get like like on Facebook Marketplace. I think I get like 40, 50 people that message me in like a day. So it's crazy. But how you screen them is complicated because there's so many people. So like, for instance, like if you're doing it yourself, like I did, I just had a pre-generated message that had all the instructions. Instead of individually DMing every single person, I just sent them this gigantic paragraph and that cut out half the tenants because half the people didn't want to read it.
Tim Yu:That's right. I was okay with showing the property first and then talking, because in my instructions I said, hey, go see the property and if you like it, then contact me back, because there's no's like available for an hour. So like when they go show or when they go see the house, they have an hour to go see the house, right? So I'm like I'm trying to automate everything. Once they tell me that they have, you know, they like the house, they want to move forward. We do the background check. So we don't necessarily care as much about credit. We care about how much money they have because they have to pay rent. And then, second, we just want to see if they got some crazy stuff under the hood.
Joseph Marohn:Okay, got it so, and I know you said three years is what you typically target. Is that like the standard duration for a lease agreement?
Tim Yu:I mean some people do one year, Some people do two year. I just feel like that time frame is too short, right, because it takes time to build credit, right? I think three years is a respectable amount of time for someone who is seriously trying to build credit can actually get the job done.
Joseph Marohn:Who's seriously trying to build credit can actually get the job done, Because I think I see some people do five years and so I know like three years or five years one year, like what is that standard duration that people would typically use?
Tim Yu:Yeah, so you're right, people do do five years and it really is. I think from the three to five year timeframe is like the standard, like industry average right now, because I remember like after my three year mark I actually negotiate with the tenant to see if they want to stay Right, and I'll allow them to go even higher than five, six years Right. It just depends on what the conversation is and what their situation is like financially. But really, though, when it just comes down to screening is hey, do they have enough income to pay rent? And do they have enough, you know, so they don't go under right, because you don't want them to like not pay rent, and then you know, now I'm evicting them and that's even worse on their credit score and history. We want to make sure that they're good financially.
Joseph Marohn:So Are you opening escrow on lease options or is it directly between you and the buyer?
Tim Yu:So for me it's between us and the buyer until we go actually qualify for the loan and actually go sell the property. So what we do is we notarize the property or we notarize the option agreement and the lease, and then we have a relationship with the closing attorneys and title companies, so we always close the same one. So when I tell the tenant buyer like hey, this is what we're going to close, and they have copies of all the paperwork as well, so it's like you know what's notarized, you have the copy and you know what we're going to close, right, and then also they have the loan officers information as well that also understands what we're trying to do as well. So it kind of like I can't scam them, right, like even if I wanted to, like there's too many people involved and that's how we want it right. We want tons of third parties to be involved in this situation, this deal, just to protect myself and protect the buyer, if that makes sense.
Joseph Marohn:It does make sense and so something I want to circle back on. So you said anything that's $500 or below that the buyer's responsible. Anything above that you're responsible for correct.
Tim Yu:Correct. So I think that's more personal preference, and also in Kentucky as well. So I would definitely recommend talking to a real estate attorney or closing attorney in your area, because in Kentucky if you're having the tenant pay for like a roof repair, like you know, change out the whole roof, they may or may not have equitable interest in the property and then if they sued me down the road like a legality issue, I would probably have to foreclose the person versus just evicting them. Wow, right, so you have to be very careful with like the laws. So I would make sure you know everything lines up in that way and then you adjust your lease option like paperwork accordingly to to to meet those those compliance rules and stuff.
Joseph Marohn:Yeah, I'm glad you touched on that, because every city, every state's going to be different. So if you guys are doing lease options, make sure you look up your specific city or state and look up those County laws to make sure that you're being covered yourself. Great, great point that you brought that up. And you know, what I also like about lease options is, like you just mentioned earlier, is like if I rent out to a normal tenant right, a regular long-term rental, now they're going to be hitting me up for every single repair, right, and I got to pay all these repairs. And it could be big repairs, you know.
Joseph Marohn:It could be HVAC, you know roofing, but a lot of times they could be bugging you at one in the morning. If you don't have a property manager blowing you up for a toilet repair, yeah, and they don't, and not saying all tenants, but necessarily they don't really care, right, because they're just renting. They're the renter, that's not their property. But with a lease option, you know they actually plan on buying the property at the end of the term. So they're going to treat it like their own home, which tell you and I think we kind of talked about this before where there was a tenant that I moved in in March.
Tim Yu:So, oh, this month Actually it's March it was my wife's old house. We got married so she moved out and then she heard me about doing all this real estate stuff. And she's like you know, I don't want to be a landlord, why don't you lease option it for me? And she's like you know, I don't want to be a landlord, why don't you lease option it for me? So, and the tenant, when I told the tenant that we were going to take her and let her move in, she literally cried and said it was always my dream to buy a house and I was just never in the predicament to do it Right, or no one ever gave me a chance. So that stuff.
Tim Yu:If you're a sentimental person, I am like that's why, like hey that you know we get put in these predicaments of real estate investing and all this stuff to affect change, and I'm literally seeing it like right in front of my face. So, absolutely awesome, man, this is like what I, this is like why we're here, right, this is why we do real estate. So it's awesome.
Joseph Marohn:That's what I love about this business, what I love about creative finance, because a lot of people, a lot of sellers, are in bad situations and we get to come in and be the hero, right, you know. We get to come in and be problem solvers and find solutions for these sellers that you know the traditional route didn't work for them, right, and we can come in and find these solutions from and see that happy face at the end of the day. Yep, dude, it's crazy man. You just gave me chills right now, bro. I love it. I'm glad you brought that up, man. Yes, sir, so sounds like this strategy has its pros and its cons, for both the seller and the buyer. I'd like to break that down and talk more about you know some of that here. So let's start with the seller first. Why would a seller consider offering their property under a lease option instead of just selling it outright? How can a lease option benefit them?
Tim Yu:What if I buy a house in a C-class neighborhood that doesn't really have appreciation, like historically right? So there's not a lot of appreciation, it's a cashflow heavy market and my family and I my wife and I don't want to keep this property longer than five years. Perfect time for lease option. We buy it creative. So lease options don't work, always work. I like lease options because we get creative deals on the contract and then the tenant buyer can actually fund the entry fee. So that's why I like it on the buy side. So as an investor, let's say I'm buying your house, joseph, you ask for $10,000 down seller finance. I go get a lease option buyer that's going to give me $12,000 down. I just made $2,000 up front to buy the house. Right, right, now we're cash flowing. I'm not a property manager. It's not a historically cat or appreciative market. So let's go add 10% appreciation on the backend and get that person a home. So everyone's happy, right, I get a cash flowing asset. The tenant buyer buys a house three years from now.
Joseph Marohn:So that's kind of like my I guess my take on it from the buyer side so for the, the seller side, I guess another benefit would be you get to sell at a higher purchase price, right, because you're factoring in that appreciation. So that's, that's another benefit for the, for the seller right. Then you're getting your main, you're getting your property maintained, because now you don't got to worry about some guy just messing up your property because they want to be in it. You know they looking at it as a, as a property they want to purchase down the road, right, they're not going to be trashing your property.
Tim Yu:Absolutely. Oh, and you keep the tax depreciation because you're the homeowner.
Joseph Marohn:Okay. Yeah, that's a good point too, because you still own the property right. Because right now, in the beginning phase, it's just the lease, right, so they don't own the property. You still own the property, so you get all the tax write-offs as well.
Tim Yu:Exactly so. That's why I prefer a lease option versus a wrap, and I'm sure you know we're in sub two, so everyone loves wraps, right, Right. That's one of the positives of a lease option is you keep the deed. You're still the homeowner.
Joseph Marohn:Okay, so I know you brought up like the lease option fee in the beginning, so let's talk a little bit more about that lease option fee. So what percentage should a buyer expect to pay, and is that lease option fee refundable at all?
Tim Yu:No, so the fee is non-refundable, right? So if they violate an option or if they violate the lease, like they don't pay rent or whatever they're violating the option contract, right? So the way you structure the option contract is you protect yourself with the lease. So it's like if you violate the lease in any way, you're violating the option contract. If you violate the option contract, your fee is non-refundable. If you don't exercise on the option contract two years, three years from now, it's non-refundable. If you perform on the option, that money is going to go towards your purchase price.
Joseph Marohn:Awesome, and so how are you determining that percentage? Like, is there like a range that you're shooting for?
Tim Yu:Is it like for me it's we try to be as realistic as possible, right Like it depends on the deal that I'm buying, because I try not to go out of pocket when I'm buying a deal. So if a seller is telling me that I need $20,000 down, that's what I'm going to shoot for, at least because I want to actually break even. We don't want to go over 10%, 15%, because, remember, these people most likely on average I'm not saying everybody is in a predicament where they don't have a lot of money. Or I would just tell them hey, why don't you pay off your high debt credit cards If you got 30 grand in your bank? Right Like? You want them to have money to be able to pay rent and also to fix their credit. So I don't want to like gouge them with a $40,000 down payment. You know what I mean.
Joseph Marohn:Yes, cause, um, I've seen, you know, I've watched other episodes, like where pace was talking about. You know he charges like a $7,500, you know price range or you know fee whatever, and I just figured there's gotta be some type of you know percentage, like is it like 3%, 10%? But yeah, you make, you're making a lot of sense, like you're not going to make it 15%, 20%, because then it's not going to make sense for them at that point.
Tim Yu:Correct On average. I would like if I could get an entry fee super low, 3.5% down. The reason why I picked 3.5% down it's equivalent to an FHA loan. That's like the lowest loan product you can do if you're not a veteran. 3.5% down it's serious enough money for the tenant to like not destroy your house and they'll eventually qualify for a loan down the road.
Joseph Marohn:Right, and so if the buyer happens to back out and doesn't exercise their option at the end of the terms, you as a seller, you're going to keep that option fee and then you have the ability at that point to turn around and do it all over again. Essentially Correct.
Tim Yu:Yep, we clean out the property, we repaint and then we just re-advertise for another lease option. Buyer.
Joseph Marohn:Okay, now does the buyer have the right to exercise their option before the end of those terms? Like I know, you said, you do three years. Let's say in one year. Do they have the option to exercise that then?
Tim Yu:Absolutely the sooner the better, because if we tacked 10% appreciation and they want to go buy the house next year, great Right, Like I'm happy, you're happy, you know you pay less in rent and you buy the house, the sooner the better for me personally. Now, when I first started, I was hoping that they would take all the way because I didn't have as many properties and I wanted the cashflow for as long as possible. But if they end up performing on the deal, I think that's great. I want them to buy the house. But, yes, there's nothing in my clauses, personally, that they can or they cannot perform early, like they're allowed to.
Joseph Marohn:Okay. So what I'm gathering here is the benefit for the seller is that you know they could sell the property for a higher purchase price in a traditional sale, since you're factoring in appreciation for the next several years. You're increasing demand by attracting a wider pool of potential buyers, since some some may not qualify for traditional financing due to credit issues or whatnot. Also, you're receiving an upfront, non-refundable option fee, which is great. And then, I guess, lastly, the property will be maintained better because instead of someone renting the property, they're actually planning on purchasing the property. So those are some great benefits for the seller. What about any disadvantages for the seller? Is there any disadvantages you could think of?
Tim Yu:I don't know, I'm kind of biased. I'm kind of biased with the lease option, but I think that a con would be still, you're still a landlord at the end of it, like we. We think that, like I mean, it does have its perks right. It has its perks of, you know, minimizing the amount of property management, but we're still property management, we're still renting out the property and, at the end of day, if you wanted to sell it traditionally, you should have just sold it right, because that truly is the most clean way to break off and we can negotiate seller finance deals for the tenant right. We can sell it that way as well. But there's a reason why we want kind of like the low key punishment is because we want the tax appreciation and we want the rental income right. So I think that's the big thing that people forget is we're still property or still managing the property of some way, some form.
Joseph Marohn:Yeah, I think one. One disadvantage I can just think of off the top of my head here is that you know you're kind of locking in that future purchase price, right, but what happens if the home prices just shoot up? They rocket, rocket up, you know, and now you're leaving all that equity on the table because you've already committed to this purchase price. So that's one disadvantage I can think of yeah, that's, that's the bet you take.
Tim Yu:Like, if you did a lease option, what? Like two years ago, you'd be crying, right, 100k of equity overnight. And you're like, oh gosh, like I have another two years with this lease option buyer, right, right. But you know, that's kind of why I like to do the one year options with the renewals, because, you know, one of my mentors says always be in control.
Tim Yu:Right, like what if, like something like that happens, like a hundred K equity, like, yeah, like you know, you gotta make a business decision. Right, like, are we going to exercise this with the seller? Are we going to go actually sell on the market? Um, you know. So I guess, like that one year renewal option contract, you know, obviously you have to be very upfront with the, with the tenant buyer, like I just want to say, like it sounds kind of messed up to have that one-year thing, but you just have to be transparent, because I've been in a situation where I had a three-year term and I was kind of trapped, I couldn't get out of it and the tenant was just doing not a good job and I didn't take a big down payment. I took like a $6,000 down payment and they knew. They knew that they could lose the money. So they're just like yeah, you're trapped with me, bro.
Joseph Marohn:No, I think it's good that you actually put that, because a lot of people I don't hear them doing a one-year lease option or like a preset agreement, like you're doing. So you're still doing so you're doing a year where you can reevaluate the terms, but the goal is to do three years, is what you're saying. So you're going to have two agreements in there in place.
Tim Yu:Yeah, so we. So in my option contract it literally has like, like, like, in a paragraph that says like hey, yes, this expires in this date, but you extend it, you know, up to two times, up to two more times if you meet the following requirements. Oh okay, so we break it down barney style, right? So, like you know, hey, you keep doing this, you keep doing this, you keep doing this. You can renew for another year, got it okay?
Joseph Marohn:you're violating. If you're violating those, hey, you're violating the option contract, so now we can cut you okay, so now let's let's talk a little bit about the benefits of a lease option for a buyer. You know what are some of the main benefits for them. What do they gain by doing a lease option?
Tim Yu:well, they get the opportunity to one day own a home, right? Right, you give them a chance to live in a place that's not super slumlordy, right? I had so many tenants that moved into one of my houses. They're paying a little bit more rent per month but they're living in a nice house, they're living in something livable and they have that sense of pride of like home ownership and the price is stable, so kind of the same way that you were talking about with selling a lease option if that house skyrockets a hundred grand. They just bought a house a hundred grand cheap, right, they bought on a hundred thousand dollar discount because they locked in it with me two years ago. You know so.
Tim Yu:And if you're a good like tenant, like lease option landlord, you're gonna get resources from me. You're gonna get great lending officers. You're gonna get a person that's actually going to hand walk you and build your credit. Um, the rent that I that they pay me, I actually report to the credit bureau, so I, so I pay the extra two dollars a month and I report their rental payments. So I'm really trying to like get these dudes to like qualify. You know I'm saying like, we want them to buy that house, so there's so many things that you can do for them to make their experience like a one-stop shop.
Joseph Marohn:Yeah, and I think another great thing is that you know you really get time to build roots in your community, right? Because when you go in you know, let's say, you go rent an apartment building or you rent a house in an area and you only have a one-year lease to your lease. That can be tough, man, if you have kids, right? Because then if they don't renew the lease, or, let's say, the landlord happens to raise the rent on you and you can't afford it, well, you're forced to move. And now you've got to change your kid's school, change their activities, their sports activities, and have to relocate. You can't really build roots in your community. So I think that's also a great option for the buyer your community.
Tim Yu:So I think that's also a great, great option for the buyer. Yep Super smart right. They get to be stable for the amount of years that they're staying with you.
Joseph Marohn:You know what I mean. So it's great, it's cool that you actually go out of your way to help them improve their credit, right, because, let's say, they can't get approved for a traditional loan right. Then now you're giving them that option. So like, hey, you got three years to live in this property, let's get your credit straight so when, by the time you go to qualify for this loan, you can actually get approved for it Exactly, exactly.
Tim Yu:And after they buy the house, their credit score is improved, right. So, like financial, like overall health has improved, and now you're a homeowner Right. So there's so many different perks for the buyer, especially if you're a, you know, if you're an investor that really cares about people and actually want them to succeed.
Joseph Marohn:Right. And then not only that man, they get to test drive the property. Right, Because now they get to stay in this property, let's say like year two, three years down the line. They're like you know what I don't really like this house. Man Thing makes noises at night, man, I don't know, there's some voodoo stuff going on here, you know. But and now they can kind of move out, or let's say that they don't like the area, Maybe they don't like their neighbors. They have the right to not exercise that option, right, Because they're not forced to exercise that it's your choice.
Joseph Marohn:So, in other words, it binds the seller to sale, but it doesn't bind the buyer to buy.
Tim Yu:As long as that tenant is willing to lose their deposit, it's their choice. They can walk and we've seen that happen too where they're like, hey, it's just not really in the books for us for our life anymore. We want to move somewhere else and no harm, no foul.
Joseph Marohn:I mean Tim. Correct me if I'm wrong here, but it almost sounds like a lease option is more beneficial for the buyer than it is for the seller.
Tim Yu:Honestly. Dude like if it's done right and you know the the, the owner's not charging super high rent. Dude like there's so many positives for the buyer man, right, but the problem is there's just not many available right, because of maybe it's lack of education or, you know, lack of knowledge of a lease option. But it's just like you know, because everyone thinks of a, if I'm going to rent or if I'm going to do a rent to own, it's going to be a contract for deed, right, and it's like no, no, no. I think contract for deed is actually more dangerous for everybody than a lease option. But we can argue about that all day. But I think it's a little safer to rent the property and then qualify to just buy me out entirely, versus that trickle down effect. You know where you're, where you're owning more and more of the property. It's just kind of weird.
Joseph Marohn:Absolutely, I mean. So what are some of the disadvantages for the buyer?
Tim Yu:Well, they're paying rent and it's not towards any principal, that's the biggest thing, Like it's. They put a down payment down. So you know, their piggy bank money is all locked in this deal and then they're not paying. So, you know, versus a contract for deed, they're paying down equity. They're not paying anything down, it's just rent. So they have to budget as a rental. They got to pay rent and then they also have to, you know, pay their bills and keep building their credit. You know what I mean.
Joseph Marohn:So I think that's the biggest problem is they're just renting. Yeah, that's a good point because, like you said, you're locking in this future purchase price, but as they're paying that payment for the next three to five years, it's not going towards the principal, it's only going towards the lease agreement that you structured. It's only going towards the lease agreement that you structured. So at the end of those terms, they still have to start over and start paying down that property that they originally signed the deal for. Absolutely Okay. So talk to us about applying creative finance strategies with the lease option.
Tim Yu:How are you doing that? So that's a good question. I like to buy creative, so I like to buy wraps or hybrids. So seller finance subject to, and then my exit strategy is sell on a lease option. The reason why I like to prefer to buy creative, sell on lease option is because what we talked about earlier I like to be in control of the deed. So always be in control, always be in the driver's seat when you sell on a wrap. So if I buy a wrap and sell a wrap, I technically give the deed to the buyer and if they don't pay me, I have to foreclose them because they have the actual paperwork In a lease option if done correctly God forbid, they don't pay we evict the person.
Tim Yu:And in Kentucky option, if done correctly, god forbid, they don't pay, we evict the person. And in Kentucky it's a lot faster and a lot cheaper to evict than foreclose. So that's my big thing. And then the second way is you can do a lease option to a lease option, the lease option sandwich. So I'm sure a lot of you creative finance guys out there have talked to sellers that don't actually want to sell their property or they feel uncomfortable giving their deed up, right. So they're like oh, I don't want to sell the property. Okay, well, what if I give you a down payment and pay you rent, so your entire landlord but I'm going to give you passive income every single month. He or she agrees to that. Get on their contract and then you lease option it back out to another tenant buyer.
Joseph Marohn:Dude, that's sweet man. That's what I love about creative finance man. You could just really get so creative. You're only limited to what your imagination is. And you said that's called a sandwich lease option.
Tim Yu:Yep. So imagine lease option from buyer to me and then me to the tenant buyer that's renting the house.
Joseph Marohn:So you're structuring the terms with the seller and then you're restructuring your own terms to your future potential buyer.
Tim Yu:Yeah. So like, let's say, average rents in the neighborhood is 800 and the seller wants 5,000 down, $500 a month. Great, I'm going to give him 5,000. And then let's say we find a tenant buyer that gives us 8,000 down and wants to pay us $800 a month. We just made $3,000 in the exchange and then now we're cash flowing 300 bucks a month passive right. So no money, no money technically, no money out of our pocket and we're making three $400 a month cashflow.
Joseph Marohn:That's awesome, man. So all right. So, tim, so if you're the buyer, like you're purchasing the property you know subject to, or seller finance, and then you turn around and you sell it on a lease option, is that buyer paying you and then you're paying the mortgage and pocketing whatever's extra, or is the seller I mean the buyer paying directly to the lender? How does that, how does that process work?
Tim Yu:so it would kind of be like a traditional well, you can use it like a servicing company. Um, especially if you're doing like a sub two seller finance deal and you got to pay the sellers like mortgage and stuff, I would would use a servicing company. But I guess, like the basic logistics of it is so your tenant, like a normal rent, like a normal renter, would pay you your monthly rent. You have that money and then now you have to go pay your mortgage, right, so it flows that way, so from tenant to you and then you to whoever you have to pay to get the deal done. So if you got a 30-year mortgage at a bank, you got to pay that mortgage, right, you got to pay that seller finance note, you got to pay that seller somehow. So we like to use the rental income from the tenant to pay whoever we have to pay, just like a traditional rental Senate to pay, whoever we have to pay, just like a traditional rental Got it Makes sense.
Joseph Marohn:Okay, and you said the main reason, because a lot of people do argue that right, they're like hey Tim, why don't you just do a wrap instead of doing a lease option? So your main purpose for not doing a wrap is because you actually hold the title on the lease option, correct?
Tim Yu:Correct and also I think it's more complicated to tell people what a wrap is Right. So if I say rent to own, majority of people know what that means they're going to rent until they own the house. When I say like I talk to agents all day right, it's like hey, want to sell my house on a wrap. And then you're like, they're like what is that Right? You're like well, it's when you wrap a new mortgage around a previous mortgage and it's like it's effective. But I think it's a little more difficult to sell and to get rid of.
Joseph Marohn:Yeah, I think you got to do a little bit more teaching than just saying you know, lease to own it's a lot more simple, a lot of people have heard of it more than a wraparound mortgage. Absolutely okay, so can you wholesale a lease option to put in buyer?
Tim Yu:that I don't know actually, um, that would be really interesting if you could. If you can, I mean, I guess, like, I guess in that way though I would probably just try to convince them to do a seller finance deal if I was going to wholesale, because, like that, like that's crazy, right, like yeah, that'd be nuts, that'd be nuts. If anyone can like kind of shed some light on that, that'd be pretty awesome.
Joseph Marohn:Yeah, because I'm thinking about it right of finance. You know structuring a lease option agreement with the seller and then just turn around and wholesale, my wholesale, and often click an assignment fee like. You structured the terms Right and now you're collecting that assignment fee. So yeah, man, if anybody knows any, you know about that, or if you can do it, drop a comment down below. I want to. I want to know more about your experience with that, because it also leads me to another question. Can you flip a lease option, do a fix and flip and do a lease option?
Tim Yu:Yeah, you technically can, right, Because at the end of the day the landlord, the original seller, just wants to get cashed out, right. But I think you have to have that conversation with the seller like hey, is there gonna like kind of the same question. You asked me like do you have a prepayment or pre-execution penalty if the seller is like no man, if you want to like refinance and pay me off, I'm good with that. Then we can put that in the paperwork and kind of get it done. But I think that kind of gets messy right, because I think that kind of starts to like go into like potential innovation, agreements, potential, you know. I mean now we're like I think we're over complicating the sauce, if that makes sense, because so many moving pieces. But I think that you know, if you have a conversation with a seller and you get it down on paper, I don't see a problem with it yeah, and so another cool thing that you're talking you're kind of talking about um, a third party servicing company.
Joseph Marohn:Right, I saw this uh podcast interview with pace and Jerry Norton I don't know if you saw it. It's part of his masterclass Um, and he was talking about if you service the least option with the third party servicing company and when the renter goes to get qualified for a new mortgage, it's not considered a new mortgage. Instead, it's a refinanced, because you're showing the lender that they were making the payments to a third party servicer. Yes, yes, have you applied that at all, or is that something you're familiar with?
Tim Yu:No, I have not, just because I have the local people in my, in my market. But if you don't have that resource and you're like doing it virtually and all that stuff, yes, absolutely leverage the third party servicing companies, because that actually gives you an advantage in that way. Um, I do everything in my backyard, so like literally I can call like three loan officers that normally do business with me, so like I have that kind of connection locally. But I would definitely leverage a servicing company that does all that stuff for you, cause it only helps you.
Joseph Marohn:Yeah, cause that's interesting to me, cause you know, now they don't have to actually go apply for a new mortgage because they can already prove like hey, I've been paying Tim for the last five years, so now it's not really a technically a new mortgage loan, it's actually just a refinance. So interesting stuff there.
Tim Yu:To my name yeah, new rate. And to my name Right.
Joseph Marohn:So what kind of what common mistakes do you see beginners make with lease options, and how can they avoid them Picking the?
Tim Yu:wrong tenants and not getting enough money down. Like don't let somebody lease an option with like a hundred, like with a thousand dollars, right, it's something that you need to have enough of a down payment for them to think twice if they're going to do something bad, like, oh, if I don't pay rent, like I don't care if they evict me, right, I'm only going to do something bad. Like, oh, if I don't pay rent, like I don't care if they evict me, right, I'm only gonna lose a thousand dollars. But they're losing eighteen thousand dollars or ten thousand dollars, like that's a significant amount of money yeah, absolutely.
Joseph Marohn:I mean that's. That's a very good point, man, you know, make sure that you know you're not bringing in someone that's just paying too little bit of money, right, because then you're at a higher risk. You're not bringing in someone that's just paying too little bit of money, because then you're at a higher risk, tim do you mind sharing a story of one of your lease option deals that was a successful turnout.
Tim Yu:Yeah, I've only been in the game for 15 months, so I actually don't have anyone that's actually performed recently, because a lot of them are recently put in there in the last year or so. But I can tell you a story of a lady we just moved in a couple weeks ago. So she we usually like to have 10 down. Um, she didn't have that right. She had a bad credit score and and I said, hey, listen, we just want, like we can work something out. Let's do three and a half percent down on move-in day and then I'll sell her finance or let you pay that non-refundable payment over a course of two, three years. So, yes, I'm taking a risk, but I met her family, I met her and you know she's an incredible lady that's just been through a lot of health issues and kind of. You know you hear their story and you understand, like why they're in that predicament and you know she's like I had a lot of medical bills and stuff like that and you know I kind of fell behind and I said if you have 3.5% down, we'll move you in. So she did so 3.5% down moves her in, and then we structured a payment plan for her to get the remainder balance of that non-refundable down payment.
Tim Yu:Now, guys, be sure to remember this Do not mix your checks with each other. Do not have your rent check in the same check as your non-refundable money. Everything must be kept separate. I've seen this before in my actual city. This person was taking non-refundable payments within the rent and it was combined and then when they had a bad issue she was trying to evict the person. The judge actually said this person has equitable interest in the property You're going to have to X, q, o, f or C. Wow, keep everything separate. It's good practice for your books, it's good practice for everything. Rent is rent. Non-refundable is non-refundable.
Joseph Marohn:Yeah, that's a very good point you brought up, because I did see a lot of people word it and they say a down payment, when it's not actually a down payment. It's a lease option fee which is non-refundable. So you got to make sure that your verbiage and your contracts state that, because if they put in a down payment, technically it's hey, I put a down payment on this house, I have an equitable interest in this property.
Tim Yu:Yes, non-refundable option fee Like do not say down payment.
Joseph Marohn:Crazy. Yeah, that's good stuff. That's good stuff, man, so awesome. Well, tim, I think we pretty much covered all the basics of how lease options work, for not only the sellers, but for the buyers as well. Is there anything you can think of that we might have missed and didn't cover today, that you think we should cover?
Tim Yu:I think we cover most stuff. I think there's potential good leads out there, so maybe we can talk about that real quick. I love rental. If you look on rental markets and any house has been not rented for 30 days or longer, those are great potential lease option sellers Because they're trying to rent it out the property to begin with. They just unfortunately can't rent it out. So if you kind of pitch something like, hey, what if we sign a? It's kind of like arbitraging right Right, right, right Right.
Tim Yu:What if I what if I, you know pay you a monthly and then in a couple of years I buy the price. I buy your property at a higher purchase price. That's how I would sell it. It's like, if you're interested in potentially selling, what if I rent this house from you for three something years, whatever, and then I buy it at a higher purchase price and then you negotiate it from there.
Joseph Marohn:I'm glad you brought that up, man. So you're looking at properties that have trouble renting out for the last 30 days is what you're saying. So what sites are you looking at? Are you looking on Zillow? Are you looking?
Tim Yu:on Instagram Zillow Facebook Marketplace. Bro, like you'd be surprised how much crazy stuff is on Facebook Market. Surprised how much crazy stuff is on Facebook market. Like those people that are, you know, like you know, mom and pop owners, right that just list on Craigslist and stuff. They're the perfect people to talk to.
Joseph Marohn:Dude, that's awesome Cool stuff, man. Anything else you could think of? I want to make sure we cover everything right, Because I know there's so much to lease options. We could probably even do a part two of this, but I just wanted the main focus of this was to cover the basics of it and then we can get to more deeper strategies on the next episode if we decide to go that route. But anything else you can think of right now. That for the basic standpoint that we should have covered.
Tim Yu:I think we're good on the basics. I think that you you know it is a good tool to have in your tool bag and it gives you flexibility, right like gives you flexibility and and I guess like the biggest takeaway is, you have the potential to give someone the opportunity to buy a house, and it's, it's a great feeling to have. And also, you make some money. Well, so you're getting paid for the service you provide. So I think it's a win-win across the board. It's super awesome and if you do it right, you're protected legally as well. Awesome.
Joseph Marohn:Well, tim. It's been an honor to have you on the show, brother. You brought a ton of value here today, not only to my viewers, but myself as well. You're absolutely crushing it in this space right now. I see you on the rise, jumping on different platforms and creating a ton of momentum. People in the real estate space are getting to know exactly who Tim Yu is and the value you bring to the table. I know you've been talking about it lately, but I truly do hope you start that podcast soon, bro. I can't wait to see what you do with your channel, and you can count me in as a subscriber for sure.
Tim Yu:Hey, I love it, brother. Thank you so much for having me. Everyone hit the subscribe button on Big Jose's podcast. I reached out because his show is awesome, man, so tons of value, and thank you so much for inviting me on, man.
Joseph Marohn:Hey brother, I appreciate that.
Tim Yu:Sam, where can people get a hold of you? Instagram's the best way. It's so the at sign it's Tim, you so ITS and then my name. Um easiest way to reach me please shoot me a DM. I love to help you guys. Um, I help a lot of wholesalers renegotiate contracts, so feel free to hit me up.
Joseph Marohn:There you go Hold, hold Tim to that man, send him a DM and I'm sure he'll be able to answer any questions that you guys might have. So again, appreciate you, bro. Now, if you guys are finding value from this episode, don't forget to show me a little love. Subscribe to the channel and hit that bell icon so you don't miss any future episodes. Don't forget to like this and drop a comment down below what you learned today about lease options. Appreciate all the continued support and, guys, stay tuned. I got a new real estate topic that I'm dropping every two weeks. Best believe I'm a key. Bring you that fire. Thank you, tim.
Tim Yu:See you guys Appreciate it. Thanks for watching.