Profit Extraction! Getting the MOST juice from your deals!

Hey Folks,

It’s been a little while since I posted. I want to continue with the series started earlier this month about the proper care and feeding of your deals………….and you.

We talked about lease options last time, covering the basics for setting them up, as well as how to advertise your available rent to own property for the most exposure.

Now, we will cover some details on how best to create profit from common lease option/rent to own exit strategies.

For those who choose to sell their properties with a lease option, or rent to own exit strategy, there are three main profit centers.

Those are:

1. Upfront Non-refundable option consideration. (this is not really profit until later, when the tenant buyer purchases. It is best to keep this amount banked for an emergency/vacancy fund.)

2. Monthly cash flow. This is merely the difference between what you collect from the tenant buyer, minus any expenses monthly from the property. (mortgage payments, insurance, taxes, etc.)

3. Back end profit. This is the profit you make when and if your tenant buyer purchases the property. It is the difference between what you must pay off, and what you collect at closing. This is THE MOST SIGNIFICANT chunk of cash coming from the deal.

There are those who think these would be the only profit centers, however, they’d be wrong. Sure, we can structure the deal to put more weight on each of these, or shift the profit weight. Meaning, if you are shooting for 5% down, and your tenant buyer pool just cannot produce this amount, with perhaps only 2% at inception………..you can collect monthly on the option consideration as well. Of course, you can also charge a fee to promote such a “pay over time” approach.

So, the with the three main profit centers identified, lets take a look at where else profit can be generated from the same deal.

Remember when you are selling an item on terms, whether that be a T.V., House, car, or even furniture, the buyers main concerns are not always the bottom dollar price. The things most consumers who use terms to purchase items are looking for, are “how much upfront”, and “how much per month”?

I recall when I purchased automobiles with financing in the past (have not in years by the way, cash for cars is the only way to really go), I was only concerned with how much the dealer wanted down, and what my monthly payments would be.

Why?

Simple, I lived paycheck to paycheck, and HAD to maintain a budget. The majority of your tenant buyers will be the same. They will be working people, who need to allocate their paychecks every month to cover vital expenses. Housing is second only to food, for most people anyway. Departing with large amounts of cash, if they have it, is never the preferred method for purchase with the vast majority of folks seeking a home on a rent to own basis.

Let’s rewind a bit, and take a look at a scenario.

You, investor Jones, have a house you just purchased and took possession of, which you intend to sell via rent to own, or lease option. The house is nice, needs some cleaning, as most do post move out. The house also has a nice set of matching appliances, ceiling fans, patio furniture, a workbench in the garage, along with metal shelving in the basement for storage, along with a nice 12x 12 moveable bard shed on the rear yard. All items that make the home more convenient and liveable for an occupant. The type of things that residents purchase, usually over time. Lots of people improve their homes with new appliances, storage sheds, accessories, etc, and pay for them with credit.

This my friends, is where YOU can help these folks save on the expense of using conventional credit, like visa or mastercard, or appliance store credit cards. YOU can be the lender, just like on the house.

Remember though, these items were all left behind by your sellers, so they cost you nothing really.

So, when you are advertising your rent to own home, include two sets of terms. Rent to own, with and without these items. or, just offer it rent to own, without them, and advertise the items seperately.

I prefer to just advertise my homes with no appliances, and minimum accessories. Then, while at the house, we will have flyers advertising the “matching appliance set”, or “back yard garden shed”, or “Ceiling fan upgrade available throughout”.

Naturally, because I am a nice guy, I’ll sell the house rent to own, with money collect upfront, price locked in for the property, and most times, no extra money down for the household accessories. I will however collect a monthly fee for each item, basically selling the items along with the house. I recently (over the last couple years), changed my plans some.

Rather than collect seperate payments for refrigerators, stoves, washer/dryer sets, and being responsible for their repairs etc, possibly, we just began to offer the houses with one package for none, and another increased monthly rent amount, for the full accessorized deal. This way, the rent covered the appliance payments, and, we could not have a tenant/buyer default on rent payments, but keep up with appliance payments, causing issues upon eviction.

Another way to create profit centers, is thru referals for services.

Example: I have several properties we have sold on terms that use septic systems for waste disposal. These require maintenance in order to work well. I have a friend who happens to own a septic cleaning and repair service. By setting up getting tanks pumped on several properties annually, (the tenant buyers pay for this, since they must maintain their own home), the price is discounted to all who sign up. At the same time, I have a few rentals we hold with septic, and my buddy takes care of those, free of charge. He has even redone drain fields for me. He originally came to me as a landlord, seeking my business, and offerering me a referal fee for any others I sent his way. We worked out something different, but profitable for me, and him. win/win.

Other services, like lawn care, pool maintenance, etc. Use the same idea. I even used to have my kids do lawn work on some houses we sold rent to own, thus allowing them to make some money.

Remember, every item that comes with each house you purchase, has value. Even when you must clean out houses with debris left from previous occupants. That could be a small profit center. We once cleaned out a house that had been vacant and bank owned for over 5 years, and found many TREASURES. We located boxes in the storage areas of the house that contained silver, jewelry, coins, stamps, all kinds of things. We hired a local resale shop operator to clean out the house. Our deal was that she could clean out the entire house, inventory it, and keep 20% of whatever we could sell the items for. That time actually netted us several thousand dollars, due to the high quality antiques, etc, left in the vacant house.

Other times, simple items, like lawn mowers, and garden equiptment, all the way to recreational vehicles and boats, and yes, on occassion, cars.

I bought with a student, a LARGE, multi million dollar house, located in a private country club, on the green of the best golf course in the club. The seller left behind a few year old luxury sports car, in need of repair in the garage. We sold that car to an electrician, who reqorked the house, installed all new lighting, etc, in exchange for taking the car off our hands.

Another deal, we purchased a house on a lake, with a nice boat dock, pool, etc. Upper end area, but older. The sellers left behind a john boat, small sailboat, and older motorboat and water skis. We sold that entire package of items to one of the neighbors, for $4,000 in extra profit. In hindsight, should have sold it for a higher price and on terms. But, the profit was killer, because all of these items cost me nothing to obtain in the first place.

Another nice thing about items left in houses that cost you nothing to obtain, is that someone, somewhere, just might need those. You don’t always have to sell these items either. Some you may keep for yourself. (my kids collected old video games for years from my houses), and others, you may find someone in need to give the items too. We gave an entire house of used furniture to some neighbors who moved into a rental near us a few years ago. The week before moving into my area, they had lost their old house and all things inside to a fire.  Profit there, for a good deed, infinite.

We also donate old toys we get to local churches and day care centers. Those large fischer price kitchen sets, and outdoor toys kids love so much when they are little, often get left behind during moves when the kids have outgrown them. They are also not cheap, so cleaning them up nice and giving them to deserving kids, just makes sense.

Last year, my kids and I cleaned out a house and found two older mountain bikes and a girls BMX bike left in the garage. Some cleaning, filling the tires with air, and oiling of chains made for three perfectly useable bicycles. At the same time, my neighbor had his grandkids move in with him. They were out in front of his house, frankly looking bored out of their skulls, daily after school. My kids and I noticed that all three kids were sharing one skateboard as their sole entertainment while out playing. Yes, you guessed it, we gave those bikes to the kids accross the street, and just today, I saw them riding them still. Profit there………infinite. Smiling kids are always a good thing.

One last example: Take a look at any repairs, or maintenance you are doing. Keep in mind, materials you remove, might just have some value. We did a house some years ago, it was brick, but the previous owner had installed aluminum siding over the brick. They had also surrounded the entire property with a rather expensive (UGLY) iron fence. Both had to go in order to make the house sell for top dollar.

We removed the fence, and the siding, selling the metal. From that, we obtained enough cash to pay to have the entire house painted, trim outside, soffet, facia, and interior as well, and still leave a few bucks in my pocket.

There are of course no limits as to how you can profit from your deals, as long as your mind is wide open. Remember, everything has a price, and someone, somewhere, needs that item, and is willing to purchase it…………if you make it easy for them to do so.

That’s it for today, this post has become a small book, sorry about that.

I will post some more money making ideas and deal scenarios in the next post.

Until then, Happy Investing,

Jim

a/k/a “The Biker Who Buys Houses”

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