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Creative Real Estate Investing in Colorado by William Bronchick

Creative real estate investing is defined as the usage of non-traditional ideas and methods of selling and buying properties. Here, the buyer will initially secure his finance taken from a lending organization and pay the full amount together with borrowed funds which will serve as his down payment.

One of the effective ways of purchasing a house is through cash payment. Unfortunately, the typical family is not really in its proper financial situation to get into an agreement like this. Majority of the families are can modestly afford a down payment, thus, they are forced to secure what was left of the price of their purchase through a mortgage from a lending institution. However, buyers should not exhaust their entire savings just to pay a huge down payment amount. This will lead to deprivation of reserves if in case any fall back happens, or income will go down in the future. Most of these strategies work in my home state of Colorado, as well as most other states. It’s a great idea to check your state and local laws. This applies to any type of owner financing in Colorado, seller financing a home in Colorado, and any seller carry real estate deals

What are the options?

An option in real estate investment is termed as a person’s right to purchase a property for a specified amount on a certain period. The owner may choose to sell his or her option to someone. The option buyer then hopes that the value of the investment property will either down or up. The seller will receive a premium known as option consideration. The buyer also has the right to purchase the property or selling it to another person which he or she can exercise. This is usually done to gain control over the property without investing a lot of cash. Premiums in the option are generally non-refundable. Options represent the equitable interest and are recorded by the county recorder.

What is a lease option?

A lease option is comprised of two main parts namely an option and a lease (rental agreement). This is written in either one or two contracts. A rental agreement occurring between the potential lessee or tenant and the owner is implied as a lease. Leases hold the lessee responsible for paying the maintenance, upkeep, insurance, and taxes of the property. Lease payments are typically five to fifteen percent higher than the rent of the property. For the lessee to have tax benefits, this lease type is structured as if the lessee is the owner himself.

What is a sandwich lease option?

This is not, in any way, an option. This is just created by tenants who wish to exit his or her unit as the tenant not having exit options written by the landlord in their lease. In order to provide mitigation option (a way of reducing costs and risks), a person can find a tenant to replace the unit. The tenant found for replacement becomes the tenant of the existing tenant and not the tenant of the landlord. The legal tenant will now have the right to create whatever rent, policy and deposit systems that he or she wishes to imply on the new tenant.

To further understand the process in a sandwich lease option, a branch of creative real estate investing, further explanations are provided. The moment the new tenant notices any need for maintenance or has encountered problems with the unit, he or she will contact the landlord who will then contact the real, legal landlord in for repairs and maintenances to happen.

The new tenant is required to achieve payments to the temporary landlord who will then make the rent payment to the original landlord, thus, making things legal and paid. Once again, a quick reminder, most of these strategies work in my home state of Colorado, as well as most other states. It’s a great idea to check your state and local lawsThis applies to any type of owner financing in Colorado, seller financing a home in Colorado, and any seller carry real estate deals

Owner Financing Mechanics in Colorado

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To sell a house quickly, it must be attractive and so should the terms. By fixing your home to present it in the best light and offering flexible terms as well, you have in fact given your buyer an “offer they can’t refuse.” When offering your house for an all-cash purchase only, you limit your market. If you’re flexible on the financing terms of the property, you increase your pool of buyers and thus the demand for your house. 

Let’s discuss the mechanics of the owner financing, which is different if the seller has existing financing on the property. This applies to strategies such as owner financing in Colorado, seller carry deals in Colorado, and seller financing a home in Colorado. A quick note: Most creative financing techniques work well in most states (such as my state of Colorado) but be sure to check your state and local laws!

1. Property Owned Free and Clear

Let’s begin the discussion with a simple explanation of owner financing with a property that is owned free and clear of any mortgage liens; that is, there is no debt owed on the property. Let’s say Sally Seller owns her home “free and clear” — that is, she owes nothing to the bank and there are no mortgage liens on the property. Sally agrees to sell her property to Barney Buyer for $100,000, with the terms of 5% down and owner-financing for $95,000 (95% of the purchase price). At closing, Barney tenders $5,000 in cash and signs an I.O.U. (known as a “promissory note”) for $95,000. Sally executes and delivers a deed (ownership of the property) to Barney. The promissory note is secured by a mortgage that is recorded against the property as a lien in favor of Sally. In this case, Sally is essentially acting as a lender to fund part of the purchase price of the house.

Sally can set a balloon date in the promissory note by which the loan has to be paid in full, at which time Barney must either sell the property or get a new loan from a traditional source such as a bank or mortgage lender. When the new loan is obtained, the loan to Sally is paid off and the mortgage lien is removed from the property. In some states, such as my home state of Colorado, a different form of mortgage called a “deed of trust” is used. A state-by-state list can be found in the resource directory in the appendix of this book.

2. Seller Has a Mortgage, But Some Equity

The preceding example is for illustrative purposes only, because if you’re reading this manual you probably owe money to a lender secured by a mortgage lien on your property. Let’s consider a more common example — a house that has some equity because it has appreciated since it was purchased, or was purchased with a sizeable down payment.

Let’s say Sammy Seller owns a property worth $100,000 that is encumbered by a mortgage of $80,000. Sammy agrees to sell the property to Betty Buyer for $100,000. Because there’s $20,000 in equity ($100,000 value minus the $80,000 loan), Betty offers to pay $10,000 down and borrow the balance of the $90,000 from Manny Mortgage Lender. At the last minute before closing, Manny decides that Betty Buyer’s eyes are the wrong color and refuses to fund her loan. Instead, Manny offers to lend $80,000, which is $10,000 short of the amount Betty needs to close. One choice is for Sammy to drop the price of $90,000. Another choice is for Sammy and Betty to part ways and for Sammy to put the property back on the market to find another buyer.

A third choice is for Sammy to accept a promissory note for $10,000 as part of the purchase price. At closing, Betty will pay Sammy $10,000 down, borrow $80,000 from Manny and give Sammy a promissory note for $10,000. Sammy signs over to Betty a deed to the property, and Betty signs a mortgage lien for $80,000 to Manny, who will possess a first lien on the property. Betty also signs another mortgage lien to Sammy, who will have a second mortgage on the property. In a year or so, Betty gets a new loan for $90,000, paying off both the first (Manny’s) and second (Sammy’s) mortgage liens. In the meantime, Betty can make Sammy payments of interest on the $10,000 promissory note, which is a nice income stream for Sammy.

3. Seller Has a Mortgage, and Little or No Equity

If the seller has little or no equity but a reasonably low payment on his note (whether a fixed-rate loan or fixed for a few more years), he can sell the property by using a wraparound transaction. A “wraparound” or “wrap,” is an arrangement wherein you sell a property encumbered with existing financing by accepting payments in monthly installments, leaving the existing loan in place. The seller uses the payments he collects from the buyer to continue making payments on the underlying mortgage note.

For example, Susie Seller owns a house worth $100,000 and she owes $90,000 to First Federal Financial on a favorable 6%, 30-year, fixed-rate loan. Her principal and interest payments on the loan are roughly $600 per month. She can sell the property for $100,000 for cash, but this might take a few months and $6,000 or more in broker fees and concessions, leaving breadcrumbs on the table after Susie pays off her loan. Susie advertises the property as for sale by owner (FSBO) with owner financing and sells the property to Barry Buyer for $100,000, taking $5,000 down and carrying the balance of $95,000 at 8% for 30 years. Susie doesn’t pay off her underlying loan, but rather collects payments from Barry (roughly $700 per month) and continues to make payments on the underlying loan (roughly $600 per month). Susie collects $100 per month cash flow on the “spread” until Barney refinances.

Mechanics of a Wraparound Transaction

A wraparound is commonly done with an installment land contract. The installment land contract is an agreement by which the buyer makes payments to the seller under an agreement of sale. The transaction is also known by the expressions, “contract for deed” or “agreement for deed.” The seller holds the title as collateral until the balance is paid. In many ways, the installment land contract is similar to a mortgage, in that the buyer takes possession of the property, maintains it and pays taxes and insurance. However, the deed remains in the seller’s name until the balance of the debt is paid by the buyer.

An installment land contract usually contains a forfeiture provision, under which a defaulting buyer may be evicted like a defaulting tenant. Under the contract, the legal title remains in the seller’s name until the purchase price is satisfied. When the buyer satisfies the indebtedness, legal title passes to the buyer. This applies to strategies such as owner financing in Colorado, seller carry deals in Colorado, and seller financing a home in Colorado Most creative financing techniques work well in most states (such as my state of Colorado) but be sure to check your state and local laws!

Colorado Lease Options and Alternative Financing

On Wall Street, the real market mavens who make it from rags to riches do it with stock options, not with actual stocks. CNBC guru, Jim Cramer, made enough money on one option play, Merck in 1986, to leave his job as a broker with Goldman Sachs and start a hundred-million-dollar hedge fund. The rest is history.

But what does this have to do real estate investing? Well, options aren’t just for stocks. You can also buy and sell options on real estate properties, and one of the best strategies is the combination of lease-option. Be aware that lease options work in most states, such as my state Colorado, but have some restrictions in Texas and a few other states so always check your state and local laws regarding these. In addition to lease options, this applies to Owner financing in Colorado, Seller financing a home in Colorado and any seller carry real estate deals.

Terminology – What is a Lease? What is an Option?

First, we need to get some terminology out of the way. A “lease” is an agreement between a lessor (landlord) and lessee (tenant), in which the lessor grants the lessee the right to “possess and enjoy the property.” Most people have leased apartments at one point in their life, and thus are familiar with these terms. Most are also aware of subleasing, by which a “master tenant” (lessee) leases the property to another person called a subtenant. What most people don’t know is that subleasing is always permissible without an express provision in the lease forbidding the lessee from doing so.

Secondly, an “option” is the right, but not the obligation, to buy an underlying asset. In real estate terms, an option is a contract that allows its holder (the optionee) to buy a particular property at a given price (the strike price) within an explicit period of time. For example, John purchases an option to buy Jane’s house in Colorado for $135,000 anytime between now and June. During this time, Jane may not sell her house to anyone but John, although John could sell his option to another interested buyer. While John is not obligated to purchase Jane’s house, he effectively controls it for the duration of the option. For this reason, Jane expects some form of consideration – perhaps $1,000 – in exchange for granting John the option. If for whatever reason John fails to pull the trigger by the expiration date, Jane keeps the $1,000 and is free to sell her house to anyone.

A Simple Equation for Real Estate Riches – Lease + Option = Lease-Option

Just like options are great for stock market investors with comparatively little startup capital, lease-options can be great for savvy newcomers to the real estate investment world. By obtaining a lease at below-market rent, an investor can then sublet the property for positive cash flow. Since he isn’t the owner of the property, the investor is not responsible for property taxes or major repairs. He just sits back and collects the difference between the rent he charges to his subtenant, and the rent he owes his lessor.

But the real profit potential materializes in the second half of the equation, the option. If the investor negotiated for a lease-option, he may have been able to get his landlord to agree to rent credits, which apply a percentage of rent payments to the purchase price of the property. For example, if Peter leased property for $850 per month, and then sublet it to Paul for $1,000 per month, he would have $150 in positive cash flow. Not only that, but Peter’s landlord agreed to apply 25 percent of his rent payments to reduce the $100,000 purchase price of the property, so not only is Peter enjoying the monthly income, he’s also building equity. After two years, Peter is able to qualify for a loan on the property which now appraises at $110,000. His 25 percent rent credit payments have reduced the purchase price from $100,000 to $94,900 ($850 rent payments * 25% rent credits = $212.50 per month * 24 months = $5,100; $100,000 – $5,100 = $94,900) , and he is able to flip the property for $105,000, for a quick profit.

Options are Marketable Securities

In the above example, Peter could have forgone exercising his option and instead, sold it to another investor. For example, the option to buy a $110,000 property at $94,900 ($100,000 strike price – $5,100 in rent credits = $94,900) would have an intrinsic value of $15,100 ($110,000 – $94,900 = $15,100). Peter would probably be able to quickly sell the option for $10,000 and let the new optionee deal with the financing, closing process, etc. While the option may have cost Peter $2,000, to begin with, the $8,000 profit was also complemented by regularly monthly profits of $150 from his subtenant’s rent payments.

Instead of ponying up money for a down payment, Peter paid $2,000 for the option and perhaps a security deposit that would later be returned to him. He received $150 per month and built up $212.50 per month in rent credits, as well as $10,000 in price appreciation over the course of two years. What’s not to love about option deals?

Lease-Option as a Backup Plan

Of course, not every deal can be a sure winner like the example outlined above. Still, the fact remains that lease-options are underutilized by real estate investors, and they offer a great opportunity for beginning investors to get started with little cash. But the advantages of lease-options should not only be viewed from the lessee side – there is a lot to be said for using lease-options as a lessor, as well.

Even the world’s greatest real estate investors occasionally make mistakes. What separates the great ones from the also-rans is the ability to respond to their errors in judgment. Sophisticated real estate investors make the best out of a bad situation by using a lease-option as a bulletproof backup plan.

For example, if you have a property that you’ve rehabbed with the intention of quickly flipping, but the buyers simply don’t materialize, you can attract a quality tenant by offering a lease-option. Young couples starting families and divorcees rebuilding their lives are prime candidates for this strategy. Offer them rent credits in exchange for timely payments, and they will take care of your property as if it were their own. If they fail to exercise their option by the end of its duration, the market will have probably improved. If not, at least you’ve received enough income to cover your mortgage and insurance expenses in the meantime, and you can either renew the option with the current occupants or look for new tenants.

In Conclusion…

Lease options and alternative financing… many creative real estate strategies rely on alternative financing, but lease-options are, instead, a financing alternative. Rather than paying a hefty down payment, having your credit scrutinized, working with mortgage brokers, and paying costly closing fees, you can control property through a lease-option for a much smaller investment of both time and money. From the lessor side of things, the lease-option is an excellent Plan B even for investors who don’t fancy themselves as landlords. All in all, lease-options are a wonderful tool for real estate investors to leverage their resources and hedge against changing market conditions. Just a reminder that lease options work in most states, such as my state Colorado, but have some restrictions in Texas and a few other states so always check your state and local laws regarding these. And a quick reminder this applies to Owner financing in Colorado, Seller financing a home in Colorado and any seller carry real estate deals.

Owner Financing Dodd-Frank and the SAFE Act in Colorado

Owner Financing, Dodd-Frank and the SAFE Act… If you are selling properties to owner-occupants and doing selling financing, you ought to be aware of some comprehensive new regulations that have been in effect for a few years, and a real zinger that went into effect on January 10, 2014. In my state of Colorado as elsewhere, it applies to things like, Owner financing in Colorado, seller financing a home in Colorado and seller carry real estate deals.

A few years ago, the “SAFE Act” was passed on the federal level, then was implemented on a state-by-state basis.  The SAFE Act basically required that you be a mortgage loan originator or use a mortgage loan originator to sell properties with owner financing.  This means getting a loan application like an FNMA 1003, comply with Truth in Lending, and have the buyer sign the ½” thick pile of other lender disclosures.

People panicked when the SAFE Act came out and declared that seller financing was all but dead.  I simply walked down the hall of my office building and asked a mortgage guy if he could “originate” my seller financing loans.  He printed the stack of documents from his lender software and charged the buyer $400 as a loan origination fee.  No big deal, just a waste of good trees in my opinion.

The SAFE Act was later amended in my state, Colorado, (and many others) to allow you to do three or so deals a year without having to do all this nonsense.  The Act did not address using different entities every three deals, so, as a practical matter, the issue was put to bed for us in Colorado.  In other states, however, there were NO exemptions, meaning unless you were selling your own principal residence, you had to be a mortgage loan originator, or use one in the transaction, even for one deal.  Technically, you can’t even ADVERTISE the seller-financing feature – the mortgage loan originator has to do so.  But, again, as a practical matter, I don’t think the powers that be are searching through craigslist or looking for “owner will finance” signs on houses, and the likely scenario is a “cease and desist” letter from your state agency, giving you a chance to get licensed.  No fines, no jail time.

Enter two corrupt, knucklehead politicians named Dodd and Frank.  They managed to pass the Dodd-Frank regulations that go into effect January 10, 2014.  This one is a bit more complex and difficult to deal with, largely because it is confusing and has regulations that have yet to be clarified.

We’ll start with who is exempt and who is not.  If you are selling raw land, commercial property, or to a person who is not going to live in the property, you have nothing to worry about. If you are a person or a trust, you can do one deal a year, so long as it’s not a “funky” loan, like a reverse amortization, etc.  I know, you’re thinking, “I’ll use different land trusts for each property”, but that may end up blowing up in your face if you get caught.  Admittedly, however, nothing clearly in the Dodd-Frank regulations address this.  We certainly are anticipating a “controlled group” definition to come out soon.  One federal regulator commented that the rule was 25% common ownership, but nothing in the regs back that up.

If you are a corporate entity, then you can do up to three deals a year if the deals meet the following three criteria:

  1. There’s no balloon in the note (meaning it must be fully-amortizing)
  2. The interest rate is fixed for at least five years, and
  3. You “qualify” your buyer.

Of course, these geniuses did not lay out what the qualifications are supposed to be, except for the debt-to-income ratio (43%)  In my opinion,  you’d be a fool if you sold a property and did not check the buyer’s credit, verify their income (with tax returns and employment), and make sure their gross income is at least THREE times their total monthly debt payments, including the mortgage.  Personally, I’ve always done this and I don’t object to making this a rule, other than the fact that there are already too many regulations in this Country.  On a practical note, if you are selling to a tenant or lease/option tenant, you can use their rental history as strong proof of their ability to repay. Make sure you adhere to your state laws. (we are in Colorado)

Again, it is not clear if you form a new LLC or corporation for every three deals you can get around all of this, but nobody wants to be the “test case”.  Also, if you want to have a balloon after five years, simply pop the interest rate up so it hurts the buyer enough for him to want to refinance and pay you off anyway (note: you can only increase the rate 2% a year for a maximum of 6% above the original rate).

So, effectively you can do three deals in an entity, and one deal in a trust or your own name if you are strictly following the law. A second entity owned by your IRA and a third owned by your spouse would add six more deals, in theory.  If you buy and sell with owner financing more than 10 times a year, you will likely need to become a licensed mortgage loan originator or hire one on staff, which may not be a bad idea, just a bit of a hassle because of the slew of other nit-picky regulations that come with it.  Also, when you are beyond the 4-deal limit, you must not only prove the ability to repay, you must DOCUMENT it.  Tax returns, W-2’s, bank statements – the works.  Thus, if you have a self-employed person who looks broke on paper but has 30% cash to put down, you really can’t document his ability to repay (suggestion – lease/option for 2 years, then convert to an owner-carry sale).

Are the Feds going to be chasing down real estate investors for this?  No, the SAFE Act already covers that at the state level. What the Dodd-Frank Act does is provide a buyer who is being foreclosed or evicted with a counterclaim recouping all their interest paid, plus their down payment, attorney’s fees, and court costs.  I always recommend that people settle out of court when a buyer defaults, using the “cash for keys” method.  But on the off chance that they aren’t paying you and can still afford a lawyer, then you will be facing a fight.  One investor I met in Houston recently commented, “If that happens, I’ll just give them the property”.  Since he was dealing in $60k homes, that would be a simple solution.  It’s really rare that you’d end up in court over this Dodd-Frank issue anyway, but what keeps me up at night is the slimy “consumer protection” lawyer who puts out an ad that says, “Have you bought a house with owner financing?  Call 1-800-BAD-LOAN”.  Yikes!  Even so, if you do every deal in a separate LLC, then you are limited in exposure to the value of the equity in the home.  If you bought the property subject to the existing loan with little or no equity, then all you really risk losing is the cash flow from the deal.

So, to sum it up:

You can do one deal per year as a natural person or trust, three deals per year in an entity without being licensed under Dodd-Frank. HOWEVER, if your state has no exemption under the SAFE Act, you still have to use a licensed mortgage loan originator on EVERY deal.

In theory, if you are married and you both have IRAs, then that’s 4 + 4 + 3 + 3 = 14 deals a year in various entities.  That’s a lot of leeway without having to get licensed.

Remember, too, this is only a summary of the Dodd-Frank and SAFE Acts.  You should consult with a qualified attorney in your state before proceeding.  Remember this applies to investing strategies in my state of Colorado as elsewhere, and it applies to things like, Owner financing in Colorado, seller financing a home in Colorado and seller carry real estate deals.

Finally don’t forget- there’s state law disclosures, RESPA, Truth-in-Lending, and servicing rules to worry about, too!!

10 Reasons Why Lease Options Make Sense in Colorado Real Estate Investing

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There are literally dozens of ways to purchase a property with Seller Financing in Colorado little or no money down. These tend to work well with real estate investors that are just starting out or the experienced investor that is reaching the limits of their available cash and/or credit. For these investors, a lease option (also known as rent to own or something similar) can be a great creative financing option. We aren’t going to go into the specifics of how to do a lease option in this article, but instead, are going to dwell on the advantages of a lease option. Once you have convinced yourself that this is a great way to go, you can load it to your arsenal of real estate investment strategies to help you on your road to success. They key is being educated and having someone to guide you along.

For those of you that are totally new to this concept, a lease option is merely a contract between a buyer and seller. The buyer then has the option to purchase that property at an agreed-upon price at a specified time. (There may be other terms and conditions involved) Many investors act as a master tenant or middleman. The master tenant leases a seller’s property from a motivated seller and agrees upon a selling price when they exercise their option. The investor then finds an end buyer/tenant. This end buyer will normally rent the property for a specific period of time (12-24 months or more) and then choose at the end of the option period to move away or purchase the property at a pre-agreed upon price. Obviously, this price is higher than the agreement between the seller and investor.

The Lease Option strategy works well in my home state of Colorado as well as most other states. However, in some states such as Texas, there are some restrictions. It’s a great idea to check your state and local laws regarding lease options.

Here are 10 great reasons that a lease option can work well for a real estate investor:

1. Little Outlay of Cash. With Colorado seller financing lease options, you are normally dealing with decent looking properties that require minimal fix-up. The sellers are normally pretty motivated. (Relocation, divorce, illness, late on payments, etc.) In most cases, the sellers don’t require a ton of cash up front. The cash they do get, if any, can come from your end buyer’s option fee.

2. Doesn’t Go on Your Credit Report. Because this is a private transaction, you don’t need banks and it won’t go onto your credit report. I repeat, a seller carry real estate deal will not show up on your credit report!

3. You Can Usually Pay More for the Property. On lease option properties you normally have as an end buyer, someone that has income but can’t yet qualify for a standard loan. Because you have several profit centers on a lease option (see item #10) you can afford to pay a bit more ordinarily. Please note that you still must do your numbers to make sure that they work.

4. You Can Normally Sell at a Higher Price. Once again, this goes back to the type of buyer motivation. The buyer isn’t as interested in “How much?” but is more pointed to “How much down and how much per month?” Please note that your goal is to get the end buyer to eventually qualify for a standard loan, buy the home, and then cash you out. With a standard FHA or conventional loan, the house will have to appraise for that eventual selling price. Keep that in mind when you are seller financing a home in Colorado.

5. You Can Normally Command Market Rents. Because you have a motivated buyer, you can normally get market rents. Some investors propose that you can charge a lot more, but we haven’t found that to be the case. You can normally charge at the high average end of the spectrum, within reason.

6. Good Cash Flow. Lease options tend to produce good cash flow if you do your due diligence and get the right properties. The option fee plus your monthly rent (less paying the seller’s mortgage) can be substantial over a year or more.

7. Minimal Risk. With a lease option, you also have the right to exercise your option or not. If things aren’t working out, you can always give the property back to the seller. That being said, this scenario should be the exception rather than the rule.

8. Fewer Repair Issues. A lease option buyer is going to be hopefully, a future homeowner. In that regard, a strong lease option contract will stipulate that the end buyer is responsible for the small repairs. The original seller is then responsible for the large repairs such as furnaces, water heaters, etc. Be aware that this is great in writing but as a practical matter, you still may have to work out something with one of the parties if there are repair issues.

9. End Buyers are Normally Higher Quality. Your standard end buyer is normally more stable both financially and as a future homeowner than a standard tenant. In that regard they normally, but not always, take better care of the property and pay more promptly than a standard tenant. You have to qualify them just a diligently, if not more than a standard rental tenant.

10. There are Three Ways of Profit on a Lease Option. This is the strength of a lease option when done properly. First, you have an option fee that is paid upfront that can be anywhere from a couple of grand to 3 to 5% of the eventual selling price. Second, you have your monthly net cash flow after paying the mortgage. The third is the final selling price of the property, which can net you a nice bundle!

Hopefully, this article has convinced you that a seller carry real estate lease option can be a great investment strategy! These owner financed Colorado lease options give you, short-term, medium-term and long-term cash flow. Remember though, that for a lease option to work out, it has to be done correctly. We highly recommend getting as educated as possible on the techniques and paperwork. In addition, a mentor or experienced associate can be priceless in ensuring that you have done it correctly.

Finally, be sure to check your local laws. Please be aware that there are a couple of states, which either outlaw lease options outright or have strict rules and regulations regarding them. The Lease Option strategy works well in my home state of Colorado as well as most other states. For most areas, however, lease options are an opportunity to help a distressed buyer, help a challenged potential homeowner and to put a little cash, both legally and ethically, into your pocket. It doesn’t get any better than that!

Creative Real Estate Options in Colorado

Creative real estate investing (aka Owner Financing in Colorado) is defined as the usage of non-traditional ideas and methods of selling and buying properties. Here, the buyer will initially secure his finance taken from a lending organization and pay the full amount together with borrowed funds which will serve as his down payment. This technique works well in my home state of Colorado, but other states such as Texas have a lot of restrictions on a lease option. Be sure to check your state and local laws regarding these types of transaction.

One of the effective ways of purchasing a house is through cash payment. Unfortunately, the typical family is not really in its proper financial situation to get into an agreement like this. Majority of the families are can modestly afford a down payment, thus, they are forced to secure what was left of the price of their purchase through a mortgage from a lending institution. However, buyers should not exhaust their entire savings just to pay a huge down payment amount. This will lead to deprivation of reserves if in case any fall back happens, or income will go down in the future.

What are the options?

An option in real estate investment is termed as a person’s right to purchase a property for a specified amount on a certain period. This is one type owner financing in Colorado technique. The owner may choose to sell his or her option to someone. The option buyer then hopes that the value of the investment property will either down or up. The seller will receive a premium known as option consideration. The buyer also has the right to purchase the property or selling it to another person which he or she can exercise. This is usually done to gain control over the property without investing a lot of cash. Premiums in the option are generally non-refundable. Options represent the equitable interest and are recorded by the county recorder.

What is a lease option?

A lease option is comprised of two main parts namely an option and a lease (rental agreement). This is a seller financing a home in Colorado. This is written in either one or two contracts. A rental agreement occurring between the potential lessee or tenant and the owner is implied as a lease. Leases hold the lessee responsible for paying the maintenance, upkeep, insurance, and taxes of the property. Lease payments are typically five to fifteen percent higher than the rent of the property. For the lessee to have tax benefits, this lease type is structured as if the lessee is the owner himself. A quick reminder that his technique works well in my home state of Colorado, but other states such as Texas have a lot of restrictions on a lease option. Be sure to check your state and local laws regarding these types of transaction.

What is a sandwich lease option?

This is not, in any way, an option. This is a seller carry real estate deal. This is just created by tenants who wish to exit his or her unit as the tenant not having exit options written by the landlord in their lease. In order to provide mitigation option (a way of reducing costs and risks), a person can find a tenant to replace the unit. The tenant found for replacement becomes the tenant of the existing tenant and not the tenant of the landlord. The legal tenant will now have the right to create whatever rent, policy and deposit systems that he or she wishes to imply on the new tenant.

To further understand the process in a sandwich lease option, a branch of creative real estate investing, further explanations are provided. The moment the new tenant notices any need for maintenance or has encountered problems with the unit, he or she will contact the landlord who will then contact the real, legal landlord in for repairs and maintenances to happen.

The new tenant is required to achieve payments to the temporary landlord who will then make the rent payment to the original landlord, thus, making things legal and paid.

Basics of Owner Financing in Colorado

Let’s discuss how the basics of owner financing, which is different depending on whether the seller has existing financing on the property.

Property Owned Free and Clear

Let’s begin the discussion with a simple explanation of owner financing in Colorado (my home state) property that is owned free and clear of any mortgage liens, that is, there is no debt owed on the property. Let’s say Sally Seller owns her home “free and clear”—that is, she owes nothing to the bank and there are no mortgage liens on the property. Sally agrees to sell her property to Barney Buyer for $100,000, with the terms of 5 percent down and owner-financing for $95,000 (95 percent of the purchase price). At closing, Barney tenders $5,000 in cash and signs an I.O.U. (called a “promissory note”) for $95,000. Sally executes and delivers a deed (ownership of the property) to Barney. The promissory note is secured by a mortgage that is recorded against the property as a lien in favor of Sally.  In this case, Sally is essentially acting as a lender to fund part of the purchase price of the house.

Sally can set a balloon date in the promissory note by which the loan has to be paid in full, at which time Barney must either sell the property or get a new loan from a traditional source such as a bank or mortgage lender.  When the new loan is obtained, the loan to Sally is paid off and the mortgage lien is removed from the property.  In some states, (like in Colorado) a different form of mortgage called a “deed of trust” is used.

Seller Has a Mortgage, But Some Equity

The preceding example is for illustration purposes only, because if you are reading this manual you probably owe money to a lender secured by a mortgage lien on your property.  Let’s consider a more realistic example—a house that has some equity because it has appreciated since it was purchased or was purchased with a sizable down payment.

Let’s say Sammy Seller owns a property worth $100,000 that is encumbered by a mortgage of $80,000. Sammy agrees to sell the property to Betty Buyer for $100,000. Because there is $20,000 in equity ($100,000 value minus $80,000 loan), Betty offers to pay $10,000 down and borrow the balance of $90,000 from a Colorado Mortgage Lender.   At the last minute before closing, Manny decides that Betty Buyer’s eyes are the wrong color and refuses to fund her loan.  Instead, Manny offers to lend $80,000, which is $10,000 short of the funds that Betty needs to close.  One choice is for Sammy to drop the price of $90,000.  Another choice is for Sammy and Betty to part ways and for Sammy to put the property back on the market and find another buyer.

A third choice is for Sammy to accept a promissory note for $10,000 as part of the purchase price.  At closing, Betty will pay Sammy $10,000 down, borrow $80,000 from Manny and give Sammy a promissory note for $10,000.  Sammy signs over to Betty a deed to the property, and Betty signs a mortgage lien for $80,000 to Manny, who will have a first lien on the property.  Betty also signs another mortgage lien to Sammy, who will have a second mortgage on the property.

In a year or so, Betty gets a new loan for $90,000, paying off both the first (Manny) and second (Sammy) mortgage liens.  In the meantime, Betty can make Sammy payments of interest on the $10,000 promissory note, which is a nice income stream for Sammy.

Seller Has a Mortgage, and Little or No Equity Seller Financing a Home in Colorado

If the seller has little or no equity but a reasonably low payment on his note (whether a fixed-rate loan or fixed for a few more years), he can sell the property by using a wraparound transaction.  A “wraparound” or “wrap,” is an arrangement wherein you sell a property encumbered with existing financing by accepting payments in monthly installments, leaving the existing loan in place.  The seller uses the payments he collects from the buyer to continue making payments on the underlying mortgage note.

For example, Susie Seller owns a house worth $100,000 and she owes $90,000 to Colorado First Federal Financial on a favorable 6 percent, 30-year, fixed-rate loan. Her principal and interest payments on the loan are roughly $600 per month. She can sell the property for $100,000 for cash, but this might take a few months and $6,000 or more in broker fees and concessions, leaving very little on the table after Susie pays off her loan.  Susie advertises the property FSBO (for sale by owner) with owner financing and sells the property to Barry Buyer for $100,000, taking $5,000 down and carrying the balance of $95,000 at 8 percent for 30 years. Susie does not pay off her underlying loan, but rather collects payments from Barry (roughly $700 per month) on a monthly basis and continues to make payments on the underlying loan (roughly $600/month). Susie collects $100 per month cash flow on the “spread” until Barney refinances.

The Wraparound Transaction — a seller carry real estate deal

A wraparound is commonly done with an installment land contract. The installment land contract is an agreement by which the buyer makes payments under an agreement of sale in installment payments. The transaction is also known by the expressions, “contract for deed” or “agreement for deed”. The seller holds the title as security until the balance is paid. In many respects, the installment land contract is similar to a mortgage, in that the buyer takes possession of the property, maintains it, and pays taxes and insurance. However, the title (the deed) remains in the seller’s name until the balance of the debt is paid to the seller.

An installment land contract usually contains a forfeiture provision, under which a defaulting buyer may be evicted the same as a defaulting tenant.  Under the contract, the legal title (deed) remains in the seller’s name until the purchase price is satisfied.  When the buyer satisfies the indebtedness, the legal title passes to the buyer.

The arrangement is very similar to automobile financing. Suppose that you purchase an automobile from a dealer using a bank loan. The lender holds the title until you pay off the loan. You are the equitable owner; that is, you have the right to drive the car. The bank holds legal title, but the bank’s officer cannot drive your car without your permission.

Negotiating Seller Financing in Colorado

Seller financing deal in Colorado – it’s every Colorado investors’ dream. So how do you get a seller to agree to carry the payments? And, more importantly, how do you get the seller to take a real small down payment? Please note, all these Owner Financing in Colorado techniques work in my home state of Colorado and will work in most states, but it’s always a good idea to check your local and state laws regarding this type of Seller Carry real estate deals financing.

Having negotiated more than a few of these, I can offer you a few tips to overcome the, “You need to put more down” objection from the seller with whom you are negotiating owner financing when they are seller financing a home in Colorado

Here’s a brief video on the topic:

Owner Financing 101 in Colorado & Other States

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There are many benefits of doing an owner-carry installment sale as opposed to conventional financing for both the buyer and seller. Sometimes the advantages inure to the benefit of one or the other, but in most cases, the transaction is “Win/Win” for both parties. Seller financing can provide some real advantages! In my home state of Colorado, all of these facts apply as they do in most states.

Benefits for the Seller

Most sellers of real property insist on the highest price and all cash. Sellers with seller financing a home in Colorado want a fast closing with little hassle. Sellers also want to pay as little taxes as possible on the gains incurred. In many cases, the seller can have most of his needs satisfied by an installment sale rather than a traditional cash sale. Let’s look at these needs one by one.

1. Highest Price. There is no doubt that a seller can insist on and receive the highest price when offering flexible owner-finance terms. In many cases, the seller can receive more than the fair market value of the property by offering these “soft” terms. People are always willing to pay a premium for non-qualifying financing. This is especially true if you are located in a state such as Colorado, which is still a seller’s market! With owner financing in Colorado and elsewhere, you can normally command a higher price, if the terms are right.

2. Cash. Nearly every seller says he wants all cash, but few need it. What the typical seller wants is the most net cash from the deal. Often, the seller has to pay closing costs, title insurance, broker fees and the balance of the existing financing. In addition, there may be capital gains tax due to Uncle Sam. In many cases, the sale of a property by an installment sale (particularly a “wraparound”) will net the seller more future yield than any source from which the cash proceeds were reinvested. A seller carry real estate deal in Colorado can be a win-win for both parties!

3. Fast Closing. Nothing holds up a sale more than new lender financing. In some areas of the country, it can take months for a buyer to qualify and close a new loan to purchase your property. Since most standard real estate contracts contain a financing contingency, you may end up back at square one if your buyer does not qualify. Furthermore, if your house is not particularly nice or unique, it may take you some time to even find an interested buyer. Since you are competing with all of the other houses for sale, you may need to spend thousands of dollars on paint, new carpet and landscaping just getting the house ready for the market.

There are very few “assumable” loans and few sellers are offering “soft terms.” Thus, an owner-carry sale makes your house unique. Furthermore, an owner-carry transaction can be consummated in a matter of days, since there is no appraisal, underwriting, survey or other nonsense involved. In many cases, you will be able to sell the property yourself, saving thousands in real estate broker’s fees. Seller financing a home in Colorado for a buyer can speed up your closing and you can close as quickly as you wish or even delay a few weeks or months until it is the best time for you!

4. Tax Savings. On an installment sale, so you only pay gains to the extent you receive payments each year. This can be particularly advantageous if you have owned the property for several years. Furthermore, you can combine the installment sale with an I.R.C. §1031 Tax-Deferred Exchange for further savings.

As you can see, the installment sale provides many advantages to the seller of real property. Let us now turn to the advantages for the buyer.

Advantages for the Buyer

1. Easy Qualification. The buyer, in many cases, prefers an installment sale to conventional financing because it does not require traditional bank income and credit approval. The buyer may have poor credit because of a divorce or recent bankruptcy. He may be self-employed and cannot prove income. He may be new to his job and cannot meet strict lending guidelines. Even if he could qualify for a loan, the rate will be astronomical if he has poor credit. Furthermore, few conventional lenders offer fixed interest rate loans to people with a poor credit rating.

As you can see, there are dozens of reasons why a buyer cannot (or will not) qualify for a conventional bank loan. The installment sale becomes the perfect solution for him. Owner financing in Colorado can be a great boon in helping them rebuild their credit.

2. Credit Rating. An installment sale may give the buyer a chance to improve his credit rating by owning a home and making payments timely.

3. No Loan Costs. One of the biggest benefits for the buyer is not having to pay the costs associated with conventional loans. Points, origination fees, underwriting charges, appraisal, credit reports, title insurance and the plethora of other “junk” fees charged by conventional lenders can amount to thousands of dollars at closing. The buyer is free from these with an owner-carry installment sale.

4. Fast Closing. A buyer can close and move into a property within days since there is no third party lender holding up the transaction.

Despite the elevated purchase price and interest rate, there are many benefits to a buyer who engages in an installment sale transaction. Proper use of seller financing, combined with a bit of creativity to make it work well for both parties can be a real key to real estate success! Check your local and state rules just like we have done here in Colorado. Having an experienced mentor can also be a big plus to help you navigate your first few deals.

Owner Financing Real Estate for Colorado and Other States

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There are many benefits for doing an owner-carry installment sale as opposed to conventional financing for both the buyer and seller. Sometimes the advantages inure to the benefit of one or the other, but in most cases, the transaction is “Win/Win” for both parties. All of these techniques (Owner financing, Seller Financing and Seller Carry) work in my home state of Colorado, as they will in most states, but it is always a good idea to check local and state laws.

Benefits for the Seller

Most sellers of real property insist on the highest price and all cash. Sellers that want seller financing in Colorado, want a fast closing with little hassle. Sellers also want to pay as little taxes as possible on the gains incurred. In many cases, the seller can have most of his needs satisfied by an installment sale rather than a traditional cash sale. In some cases Seller Carry in Colorado can be a huge benefit to a seller! Let’s look at these needs one by one.

1. Highest Price. There is no doubt that a seller can insist on and receive the highest price when offering flexible owner-finance terms. The market in Colorado is still a “seller’s market”, which means prices can go higher. In many cases, the seller can receive more than the fair market value of the property by offering these “soft” terms. People are always willing to pay a premium for non-qualifying financing.

2. Cash. Nearly every seller says he wants all cash, but few need it. What the typical seller wants is the most net cash from the deal. Often, the seller has to pay closing costs, title insurance, broker fees and the balance of the existing financing. In addition, there may be capital gains tax due to Uncle Sam. In many cases, the sale of a property by an installment sale (particularly a “wraparound”) will net the seller more future yield than any source from which the cash proceeds were reinvested.

3. Fast Closing. Nothing holds up a sale more than new lender financing. In some areas of the country, it can take months for a buyer to qualify and close a new loan to purchase your property. Since most standard real estate contracts contain a financing contingency, you may end up back at square one if your buyer does not qualify.
Furthermore, if your house is not particularly nice or unique, it may take you some time to even find an interested buyer. Since you are competing with all of the other houses for sale, you may need to spend thousands of dollars on paint, new carpet and landscaping just getting the house ready for the market.
There are very few “assumable” loans and few sellers are offering “soft terms.” Thus, an owner-carry sale makes your house unique. Furthermore, an owner-carry transaction can be consummated in a matter of days, since there is no appraisal, underwriting, survey or other nonsense involved. In many cases, you will be able to sell the property yourself, saving thousands in real estate broker’s fees.

4. Tax Savings. On an installment sale, so you only pay gains to the extent you receive payments each year. This can be particularly advantageous if you have owned the property for several years. Furthermore, you can combine the installment sale with an I.R.C. §1031 Tax-Deferred Exchange for further savings. As you can see, the installment sale provides many advantages to the seller of real property. Let us now turn to the advantages for the buyer.

Advantages for the Buyer

1. Easy Qualification. The buyer, in many cases, prefers an installment sale to conventional financing because it does not require traditional bank income and credit approval. The buyer may have poor credit because of a divorce or recent bankruptcy. He may be self-employed and cannot prove income. He may be new to his job and cannot meet strict lending guidelines. Even if he could qualify for a loan, the rate will be astronomical if he has poor credit. Furthermore, few conventional lenders offer fixed interest rate loans to people with a poor credit rating. As you can see, there are dozens of reasons why a buyer cannot (or will not) qualify for a conventional bank loan. The installment sale becomes the perfect solution for him.

2. Credit Rating. An installment sale may give the buyer a chance to improve his credit rating by owning a home and making payments timely.

3. No Loan Costs. One of the biggest benefits for the buyer, who does not have to pay the costs associated with conventional loans. Points, origination fees, underwriting charges, appraisal, credit reports, title insurance and the plethora of other “junk” fees charged by conventional lenders can amount to thousands of dollars at closing. The buyer is free from these with an owner-carry installment sale.

4. Fast Closing. A buyer can close and move into a property within days since there is no third party lender holding up the transaction. Despite the elevated purchase price and interest rate, there are many benefits to a buyer, in Colorado or elsewhere, who engages in an installment sale transaction.

So whether you are talking about Owner financing in Colorado, Seller Financing in Colorado or a Seller Carry in Colorado, it’s basically all about the same thing a win -win for both sides!