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Learn the secret for how to avoid getting stuck with payments on real estate deals and start generating more profit today! You have to be careful when building a real estate investing portfolio not to take on debt that you can pay. Leverage is very important if you want to build a portfolio and not have it take 30 years, but you have to protect yourself so you don’t create cash flow problems for your business.
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How to Avoid Getting Stuck with Payments on Real Estate Deals
Joe: How to Avoid Getting Stuck With the Payments. Hey – I’m Joe Crump. I’ve got an email question. “How do I mitigate the risk of what I call ‘the carry’ – the time between me securing the property on a lease option and me finding a buyer? Now I’m certain as my buyers list grows this time will come down. But initially, with no list, this could take time. If I have agreed to take over the payments, and I don’t find someone within the month, I’m liable for the payment. Is that correct?”
Joe: Well, if you’re talking about taking over a property Subject To, or taking over a property with a Contract for Deed or a Land Contract or using a mortgage on it, if you take that property and close the deal, yes – absolutely you’ll be required to make the payment.
Joe: If you’re going to buy a property on a Subject To, what I would suggest is make sure you have the seller pay the next month payment. Remember, interest is paid in arrears so it’s an easy argument to make. If they make the beginning-of-the-month payment that’s coming up, they’ll have actually made the previous month’s interest payment. So, you can have them make that payment.
Joe: You can also set these deals up so that they don’t close until you have a buyer in place. So, let’s say you take a property Subject To or take a property on a Land Contract. Just don’t close the deal until you find that least option buyer. Let’s take an example here.
Joe: Let’s say you’ve got $150K property that you’re buying and you’re going to turn around and sell it for $175K. You bought it subject to the existing loan which means you’re taking over the payments. Let’s say the payment on that is $1,200 a month. The rent on it is $1,400 a month. You’re going to be making that $1,400 a month payment that’s going to be coming due on the 1st. You can set up the deal so that they pay the next month payment whenever you close the deal. But you don’t have to make that payment unless you close the deal. So, you set it up so that you can, with a purchase agreement rather than just taking the deed at that moment, so that you have time to sell that property.
Joe: So, you put it on the market, you try to get your $1,400 a month. You try to get $10,000 as a down payment. You make your $10,000, you get your $1,400 when you find that new buyer, and then you go to the seller, you sign the deed, and the deal is done and you don’t have to worry about it.
Joe: Now, eventually, if that buyer doesn’t exercise their option, they’re eventually going to move out. And that means you’re going to have a vacancy and you’re going to have to make payments when they move out. So, make sure you take that lease option fee that you acquired when they moved in and put a portion of it, or all of it, into an escrow account for vacancies, for repairs, for those types of things, for the upkeep of the property.
Joe: If you’re doing the For Rent Method where you’re just flipping these properties and you’re not keeping them for the long term, you don’t really need to keep an escrow account. You don’t need to keep money as a reserve. But if you’re keeping the properties, you should keep a reserve and make sure that you’re protected and that you can protect your seller. One of the things I tell my sellers whenever I buy a property from them, I will keep this property, I will make the payments, I will take care of it as though it were my own. And if I ever have a problem or if this ever becomes an investment that’s no longer viable, I will give it back to them in the condition that is at least as good as what I took it, and the payments will be current up to the month that I give it back to them.
Joe: So, that way I want to make sure that I’m in the position to be able to make those payments during that time. I’ve never failed to make a payment on one of my Subject To properties, or my Land Contract properties, at least not since the crash back in ’91. So, make sure you learn how to do this properly, make sure you have cash reserves and those cash reserves can be in the form of that lease option fee that you got from the buyer that you sold it to and you don’t have to close until you find that buyer.
Joe: Now, I never take properties like this. I never wait to take the property. I got ahead and have them close the deal because we go in, we’ll clean up the property, I want to get a good tenant in there. So, we’ll go in and clean up the property, do a little bit of work on it, maybe spend a little bit of money. And then we’ll put a lease option tenant in there. That’s the kind of property that I want to keep for my long term portfolio.
Joe: But I’ve had plenty of people that have taken properties and not done work to them, and been able to flip them and do these types of lease options and use the purchase agreement. I just find it’s a little bit easier to make sure that I have that property and I own it. It’s easier to show, I don’t have to deal with the seller anymore. It’s just me and the buyer. But, if you’re in a position where you don’t have the funds or are concerned that you won’t have the funds at closing or there might be a gap between the time you sign the deed and find a buyer, then I would go ahead and use a purchase agreement to purchase the property with a 90-day period to close it.
Joe: All right. I hope that answers the question. Good luck with it.