It can't hurt to ask!
Imagine creating a lease purchase deal while on vacation, which would result in a 100K profit. Yep, I did it again. This is not the first time I ventured doing some business while on holiday with the wife and rugrats. (See my article The Best Vacation I Never Took).
I began the creation of this wonderful deal while on vacation at my secret hideaway in Colorado. This is a small town nestled away on the western slope of the Rocky Mountains. My family and I have been coming here for the last eight years to enjoy the skiing, hiking and fresh air. It is a pristine quiet place to get away from it all. Even though it has a world class ski area it remains unspoiled. I always get to recharge my Lease Purchase batteries here. The town has a very small population and millions of acres of sheer national forests and mountains. I always like places where there are more squirrels than people. Another wonderful quality is that it is not a celebrity hangout. This is what ski towns were probably like 50 years ago before the mega resorts took over. It has the usual array of ski shops, eclectic restaurants, apres ski haunts, and the developers are starting to discover the area also, so some appreciation is occurring.
We had been talking about getting a home here for some time. The grand plan was that we were going to live here during the warm months, do a snowbird retreat in the winter and use the home for ski season, too. We began asking around if anyone knew of a house for sale or rent. The local real estate agents were useless and did not return calls (shocking isn't it ?); some just didn't want to deal with a guy who loves Lease Purchasing. We spoke with school bus drivers, the local ski bums, some bums without skis and the hotel owner where we usually stayed. The hotel owner told us he knew of a home for sale. We went to see the place and it really fit the bill for us. I got excited when I found out that it had a decent phone system.
The Unmotivated Sarcastic Seller:
We spoke to the owner (Herr Ludwig Von Sheiskoff) who at the time was building another home. I asked him if he would consider a rent-to-own arrangement. He laughed at me and flat out said 'no'. He exclaimed 'don't you realize that this is a sellers' market' and he mentioned that he might even raise the price because so many potential buyers were looking at the home. The thought of buying rather than lease purchasing and on top of that paying retail is blasphemy to a creative real estate investor! I told my wife (lovely CJ) that the home in the mountains would have to wait and she agreed. We decided that if we were persistent the right deal, at the right price, would eventually come along. (That's what you say when you have been living with an investor for a long time!)
The New Motivated Seller:
Well 6 months went by and we returned to our little mountain town to do a some skiing. One day turned into a windy, cold Rocky Mountain snowstorm and we decided to take the day off from skiing. I began wondering whatever happened to the home we had looked at. I just so happened to have the phone number from Herr Von Sheiskoff in my Diamond Success Planner (I save everything in this wonderful organizer). I hesitantly gave the Von Sheiskoffs a call (remembering my last humiliating experience) and he was delighted that I called! 'Of course I remember you Herr Diamond' he exclaimed, 'I will be right down to your hotel!' 'But it's a blizzard outside!' I exclaimed. 'No problem, I have my four wheel drive. Please let me give you a personal tour of my home and my lovely town'.
About 15 minutes later he arrived at the hotel (it was still snowing like the blazes). 'Herr Diamond I am so glad you and your delightful family are still interested in my home. Please, tell me some more about that rent-to-own idea of yours'. I pondered why he was spreading the Bavarian liverwurst charm on so thickly and wondered why he had had this remarkable attitude change.
When I last left you, my family and I were hibernating (during a major snowstorm) in our hotel room in the wilds of the Colorado Rockies. We were awaiting the arrival of the miraculously transformed seller Herr Von Sheiskoff and his four wheel drive wunderbar car. He was going to give us a quick look at 'his' town, view some local real estate and to show us his home, the one that we wanted to lease purchase. This short trip turned into the extended Gilligan Island 3 hour tour. He took us everywhere except to the very place that we wanted to see; the house.
The Home: We finally got there and our host informed us that the home was presently rented to a couple of nice skiers (AKA: snowboarder/ski bums) who worked at the local ski area. The good news was that they would be moving out at the end of ski season. We looked over the home both inside and out. We loved the house inspite of the untidy (nice word for dirtbag) tenants. As creative real estate investors for many years, CJ and I have seen many a home that had potential if you could see past the dirty carpets, dishes stuffed in the oven and BVDs™ hanging on top of the TV rabbit ears. (Although I do believe that the underwear improves reception).
Rule #1: Learn to see past the surface problems on a home and look at the whole deal. There was nothing in this beautiful home that a good cleaning and a little paint could not overcome.
Rule #2: Never try to sell a home conventionally with tenants occupying the dwelling unless you are willing to substantially discount. This unsightly appearance was what was turning off most of the buyers (in a sellers' market) who were coming to take a look. To the seasoned investor, this however, is an opportunity.
The home was located in a great section of the small town with all of the modern conveniences. The house was roomy enough for the two kids to have their own rooms, large master bedroom, guest rooms and the requisite home office. My Home Office is really important to me as I will be doing my lease purchase business/deals from here the majority of the time. The office comes with a killer view of the great Continental Divide, but alas there was no wet bar. I would have to learn to rough it, after all this is the wild & woolly Rocky Mountains. These are great amenities in a ski country home that can receive close to 200 to 300 + inches of snow per year. It is on a wooded acre lot in a super neighborhood and has all the modern city services like water, sewer, electric and of course, dedicated phone service. (Phone service and availability of communication lines are not to be taken for granted here!)
Remember this is a small town and many of the locals have three part-time jobs and are still chopping wood for heat and sharing party lines for telephone service.
Note: Just because I like the small town rustic style does not mean I want to become Paul Bunyan. My idea of roughing it is wearing a flannel shirt in a Sheraton Hotel without Cable TV.
The Offer: We (CJ & I) discussed in advance that we would contain any enthusiasm which could be interpreted as a strong buying signal. (The Be Cool Rule). My new pal Ludwig drove us to our hotel and as the kids unloaded and began playing outside looking for yellow snow (a NYC game that I taught them, whatta Dad), I began the negotiation process in my usual delicate manner.
Me: 'Well Ludwig' (we were now on a first name basis), 'what's your bottom line here?' 'What's your best price on a three year Lease with an Option to Purchase?' I then closed my mouth (hard for me to do) and waited to see who would blink first.
Ludwig sat in silence for what seemed an eternity, but in reality was only a few seconds. His face was contorting, straining and turning various shades of red and purple. He looked like he ate a bad wienersnitzel and then he broke his silence.
Herr Sheiskoff: 'Vell Claude, I vill do a one year rent-to-own and I might even carry back the mortgage since I own the home free and clear, but I couldn't even begin to consider selling my home for less than......'
He blurted out a price, that to my amazement was $69,000.00 less than his original asking price. The terms were great, too; no bank and one whole year to exercise the mortgage. My heart skipped a beat. This was where the fun began. This is the stuff I love about creative investing and I was smiling inside recalling how I was laughed at a few short months ago just for inquiring about a rent-to-own. Now it was my turn to laugh, but on the inside.
Recap: This is the continuing (phew) story of my dealings with Herr Von Sheiskoff structuring a Lease Purchase deal 100K under market in the wild and wooley Colorado Rockies. Last time I left you, I was deep in negotiations and snow while sitting with Ludwig Sheiskoff in his four wheeler wunderbar car in our hotel parking lot (during a major snowstorm). He had just dropped his sales price an astounding $69,000.00 in one swift swoop. This is the same man who 6 months ago told me that it was a seller's market and he would never do a Lease with an Option to Purchase. It is amazing what a few bad tenants and some complaining neighbors can accomplish.
The Deal: Herr Von Sheiskoff and I got along like a couple of Dachunds at a butcher shop staring at some Bratwurst. He seemed relieved that I was still interested in his home and he wanted me to do the lease purchase deal with him ASAP. We negotiated a one-year lease (I wanted longer) with option to purchase for $1500.00 per month and $5000.00 down. This same home would rent for that much per week during the premium ski season. Remember this was a large home on an acre of wooded land near a resort ski area. We shook hands (on the tentative numbers), I told him that I would discuss the deal with my better half and that I would call him when I arrived home in San Diego the next day.
Lease Option Leverage Heaven: Wow ! I was going to control a high figure home for less than 1% of the purchase price with an option to purchase, way under market sales price and rent. Now that's leverage America! A lease purchase is basically the use of two distinct real estate techniques; the rental and the option (right) to purchase. If used properly, it can give you the most bang for your buck with the same control as though you were the owner. All this without the overhead, liability and in some cases the higher payment. It can be utilized to get you into your dream home and is a wonderful and profitable way to generate consistent cash flow without the investment, tenant and toilet headaches. All you need is the specialized knowledge and the proper contracts.
Celebration: I went back to my hotel room 'smiling' and told my lovely CJ that I thought we had finally found the right deal and we would have our mountain home. We decided to have an early celebration and opened a good bottle of California Merlot ($6.99 @ Price Club/Costco; Guru Shopping Tip Dept.) and munched some cheese and imported crackers. I felt like I had just left Monty Hall having chosen Door Number 3 with the new Lincoln Towncar behind it. I should have realized that this celebration was unbelievably premature.
Back Home: The next day we returned to 75 degree San Diego weather with the kids, skis and an assorted oddball collection of single ski gloves and socks. (Just where do those things disappear to?) The first thing any good investor does when he returns home is to get a cup of freshly ground Starbucks™ Kona Coffee, check the mail and of course return telephone messages.
The Lease Purchase Agreement: I utilized one of my special lease purchase agreements. I have eight different contracts, which I have personally designed and copyrighted just for my lease purchase business. I punched the numbers into my computer and watched the lovely contract spit out from my inkjet printer. It was the short 3 page version that I like to use. It has an absence of legal jargon and utilizes some plain understandable English. It contains everything I need without intimidating the Seller.
Contract Note: I often see contracts that are so long that they make War and Peace look like a short story. They contain so many conflicting paragraphs with so much ambiguous language that they are litigation heaven.
I signed the parchment, enclosed the option consideration check, placed my best VooDoo goodluck spell on the contract and sent everything overnight. I sat back in my comfortable home office recliner, feet up on the desk and felt confident that this was a done lease purchase deal.
The next day I checked my faithful Friday™ voice mail machine.* I noticed that it was holding many messages including three from my old friend Ludwig in his best Boris Badinoff accent (Remember Rocky and Bullwinkle ? ) I picked up the phone with little trepidation, after all, what could possibly go wrong?
Little did I suspect that this was the beginning of a series of crisis negotiations, lawyers and stuff that would ensue with Mr. Von Sheiskoff and almost kill our deal.
I guess the old saying is true, 'into every life a little Sheiskoff must fall'!
*Best component voice mail system around, but hard to find.
Recap: The Contract Crisis. I have received a phone call from the Seller Herr Ludwig Von Sheiskoff on our pending lease purchase deal in Colorado. There are problems.
The Battle of the Contracts
Ludwig was yelling at me! He had decided that he didn't like my contract and sent me his version of a Lease Purchase agreement that was copied from some Guru's $9.95 Book that he bought from an infomercial on channel 989 Bombay, India. We had entered an area that I fondly remember from law school called the 'Battle of the Contracts'. We both wanted to use our own contracts. The only problem was that the agreement that Sheiskoff used was reminiscent of the old Florida Land deals (property under water that was sold to naive buyers)! In fact, Sheiskoff's contract was so bad that he became confused and made a costly error. He inadvertently gave me $9,000.00 in rent credit which we never even discussed in our negotiations, but he had already placed in his contract. He was embarrassed, but appreciated my honesty when I made him aware of his error. In an effort to resolve our problems and reach a compromise quickly, I came up with a reluctant solution.
Smart Note: Remember the successful LONG TERM creative investor utilizes his specialized knowledge to become a problem solver.
I committed the ultimate sin and retained Rocky Mountain Louie-Attorney at Law and part-time driveway snow plow man. Louie was a very local Attorney who considered red checkered flannel a contemporary fashion statement. Lou loved the opportunity to get into the fricassee. I had brought Lou into the deal in hopes to merge the two agreements into something that was equitable for both of us. Lou basically combined the agreements, but still retained many of my special passages that gave me the control; passages such as the right of assignment in a Lease with an Option to Purchase.
Honest Lawyer Department: His competence and honesty truly surprised me. Rocky Mountain Louie actually turned out to be just what we needed to save the deal (fairy tales can come true). If this keeps up, next I'll be writing about honest politicians and hard working civil servants, where will it all end? Esquire Lou sent Seller Sheiskoff and I the contracts which were signed quickly and the battle of the contracts was resolved. I then had a memorandum recorded and a local title company was found to open escrow.
Rule #1: Always record a memorandum of your contract in a deal that you value. A memorandum is basically a way to let the world know of your interest in a property without recording the entire contract.
Rule #2: Just because you have a signed Lease Purchase contract doesn't mean that you are protected from the owner possibly selling the home to someone else or over encumbering the property with a new higher amount loan. Additionally, I deposited my option money with the escrow/title company.
Rule #3: Create a paper trail. In the event that you have a reluctant seller who attempts to back out of the deal you want to prove the intent of the parties. Nothing works better than coming into the courthouse with a wheelbarrow full of paper to substantiate your case.
The New New Deal: All was quiet for several weeks and we began to relax, when lo and behold the phone calls began again. Herr Von Sheiskoff wondered if I would consider shortening the Lease Option to six months instead of one year. I inquired as to why the sudden request to change the terms. It seemed that the neighbors were complaining quite strongly about the renter/ski bums in the house, their loud parties and assorted cars parked on the street. Herr S. basically wanted to throw the bums out and stop being a Landlord.
I offered to flat out buy the property and forego the Lease Purchase entirely if he would make it worth my while.
Our conversation went like this:
'Well Lugwig I really wasn't even considering exercising my option until next summer. What is the best price you can give me inorder to induce me to close by June of this year? I secretly was hoping for an additional 5 or 10 k discount.
He then spoke and for the second time in our relationship I was at a loss for words.
'Ach du Lieber, Claude! I vill reduce the price $31, 000.00 to make it an even $*,***,***.**
but zat ist all I vill do!'
To my amazement he dropped the sales price a second time significantly; for a total of $100,000.00! That my loyal reader is a lot of guacamole & chips! I agreed in a heartbeat and quickly contacted good Ôol Louie the red flannel litigator.
'Hey Louie, we need a new contract with a few modifications." I didn't need a video phone to know that Lou was smiling at the other end!
Recap: I have just finished my final negotiations with Herr Ludwig Von Sheiskoff concerning the closing of my new mountain home in Colorado. We started with a Lease Purchase and this deal has evolved for over 7 months into a sale of our future semi annual home for 100K under market. We now need to find the financing to do the deal, furniture to sit on and a means to move it all!
We were really excited, we finally had our new home all wrapped up legally. The next step was to get a loan. Frankly, I expected this to be a snap since we had done so many loans before on personal and investment properties with our Lease Purchase biz. We had more than sufficient down payment and great credit. I called several mortgage brokers in Denver and was shocked to find that most conventional lenders would only fund a home in a resort area with 30 to 40% down (even with superb credit). I exclaimed to one lender that this was going to be a full-time residence and it seemed excessive to put that much down on a homeowner occupied dwelling. His reply, 'sure kid, we hear that line all the time.' Take it or leave it was his attitude, so we left it and sought other resources. I decided to see if we could do a reasonable loan in the same town where our new home was located. A great mortgage broker was recommended to me who had no problem doing the deal, the only problem was he lived down the street from my new home.
Note: In a small town it is not the best idea to spill your financial and personal portfolio guts to a new neighbor.
I decided as a last resort to go to the big local bank (two tellers, no waiting) and see what they had to offer. A nice friendly mountain lady (in flannel & cowgirl boots) sent me to her competitor yonder down the road (what's a yonder ?) to an even smaller local bank. I went into this bank and received 2 or 3 of the requisite 'Howdys' from the employees. (In New Yorkeese this would be the equivalent of 'How ya doin', ya know!)
I felt right at home immediately. There was a living room arrangement set up right in the middle of the lobby. It contained a lazyboy chair, a Wall Street Journal (only 2 days old) and fresh coffee (not Starbucks, but drinkable).
I meet the loan rep who said that a loan to purchase a local home would be no problem (with reasonable terms). She was right because we were approved for the purchase with full underwriting in less than 3 days upon completion of the application. This is faster than any loan I have ever done in California. I was congratulated by the bank president who was dressed in jeans and a plaid open neck shirt. It is so incredibly casual out here, we just love it!
We next needed to figure out what furniture we should take from our San Diego home to Colorado. CJ in a moment of feminine inspiration immediately solved that problem, 'Claude let's just buy new furniture. ' For those of you who have never furnished a home from scratch it's equivalent to buying another home within a home. After 6 different furniture stores I have come to the decision that in my next life I will not only deal in Lease Purchasing, but in furniture as well.
DISCLAIMER: IF YOU HAVE SMALL CHILDREN OR SUFFER FROM ANY MEDICAL ABNORMALITIES PLEASE LEAVE THE ROOM AND REFRAIN FROM READING THIS NEXT SECTION!
Now I have to deal with another nightmare, it's called moving! I had a moment of temporary insanity. I was thinking of renting one of those U Haul ™ - (U Get Exhausted) rental trucks. Then I began to remember what it was like when we came out to California in 1986 down Route 66 from New Jersey in one of these torture wagons. Moving Math: bad food and 55 miles per hour = a hemorrhoid bumper crop for the cheapskate driver. I came back to sanity and decided that I would forego that misery and hire a moving company.
We went to the yellow pages and found the national chain of the Freddy Krugar Moving Company*. The company sent us a dapper dressed salesman and told us his company only hired the finest moving men. I signed about 30 documents for the moving company (I could hear trees falling) and we were done.
*Nightmare on Elm Street Fame
Two weeks later Freddy and the moving boys came to our California abode. The elongated moving van ominously drove up and we could hear the brakes squeal. Freddy and his helpers came skulking into our kitchen walking on their knuckles. They were all very hairy and looked as though they hadn't shaved or bathed for a week. I wasn't sure if they were capable of voice communication until I heard the following grunt from Freddy's helper Darwin, 'Hey Mr. Diamond, we sure could use some coffee and a couple dozen donuts here.'
All of a sudden The U Haul Truck ™ didn't seem like such a bad idea!
Day One - The Arrival:
We got to Colorado after about two days of some of the greatest scenery you have ever seen. Make sure you check out Bryce Canyon and Zion National Park in Utah. They give new meaning to the words totally awesome (California Speak for WOW). We pulled into our new small town (population 523) surrounded with the beautiful snow covered mountains even though the temperature was 72 degrees! There was a banner hanging across Main Street, welcoming folks to the town and announcing a rodeo and flamethrowing Chili Cookoff.
Since the moving truck with our furniture from the Freddy Kruger Moving Company wasn't due for another four or five days we arranged to stay at the local hotel that our friends owned. We were greeted with fresh coffee and a homemade blueberry pie awaiting us inside our room.
Day Two - The Awakening:
We were awoken the next morning at 6:00 A.M. by a phone call from our mover Freddy Krugar (notice the singular text). Our conversation went as follows:
Freddy: Hey Mr. Diamond, I'm right down the road from your hotel by the Mr. Mc Donut store.
Claude: Fred, you're 4 days early!
Freddy: Didja know they have pretty good donuts in this town!
Claude: (I finally got Freddy past his fascination with donuts). Can we start moving the stuff into the house today ?
Freddy: Well we kinda have a little problem.
Claude: What ?
Freddy: I lost my helpers, the Igor brothers around Beaver, Utah, but hey that's the moving game. Let's just go around the town and find someone to help us.
I hired 3 locals after 2 hours of asking around the town. (I felt like a panhandler in reverse!) My stuff on the van consisted of 272 assorted pieces of furniture and boxes and somehow I was not motivated to help carry any of it. 12 hours later after spending $132.00 to feed this crew (4 dozen Mr. Mc Donuts, assorted pizzas, burgers and soda) the move was finished. We had boxes everywhere, but the house was starting to come together. Freddy informed me that it is customary to tip the driver; so I gave him a copy of the latest Lease Purchase Times©.
Day Three - The Neighbors: Early the next morning we hear a banging noise coming from the backyard. I discover that it's the former owner and new neighbor Herr Ludwig Von Sheiskoff. I sleepily yell out the window and ask Ludwig what's up ? 'Vell Claude, I just wanted to make sure your hot tub was all set up and in good working order. You just go back to sleep Mein friend.' Knowing from past business experience with Herr Sheiskoff I couldn't help but feel a strange sensation of impending doom. During the rest of the day we had several other neighbors come over in a wonderful American small town tradition to welcome us. One lady brought over some homemade oatmeal chocolate chip cookies, another neighbor brought some Rocky Mountain Wild Flowers and another brought a basket of wine, cheese and goodies. This was beginning to feel like home.
Day Four - Something's Wrong DAD!: I thought I would awake early the next day, sneak out alone in the new four wheel drive behemoth we had leased (of course) and check out the views and local scenery. Just as I was starting to pull away I heard the kids yell, 'Hey Daddy, can we come along?' (Caught again!) After packing them in, we were tooling along when all of a sudden my 10 year old Becca exclaims, 'Hey, Daddy there is something really wrong with this place!'
'Huh, what do you mean something wrong, it's beautiful here; mountains, trees, wildlife, clean air & water. What could possibly be wrong', I asked ?
'Everyone we pass on the road here are always smiling and waving to us and we don't even know these people. It's weird Dad.'
At that very moment I knew that moving to the country was the right thing to do!
Day Five - The Asphalt Gypsies: (this is a whole story in itself that I will write some other time, but just use your imaginations).
Day Six - The Hot Tub Blues: Early in the morning I heard some splashing in our backyard. I was greeted by Mr. and Mrs. Sheiskoff in MY HOT TUB! 'Guten Morgen (Good Morning) Claude. The vater is fine, Ja !!' I finally figured out why Ludwig was so diligently working on my hot tub the previous day!
Science Tip: Sheiskoff does float in hot tubs.
Day Seven - The Reward: CJ and I are sitting on the back porch with a good glass of delicious (California) Merlot in hand looking at the sunset upon snow covered mountain tops while colorful hummingbirds are zipping around us. The only noise is that of the kids playing and laughing in the background. This is heaven on earth!
So there it is dear readers, how to start out controlling a house in the Rocky Mountains 9200 feet above sea level. I ended up leasing, optioning and then buying a home and creating over 100k equity without going insane all within one year while on vacation. This was only possible due to one terrific concept called Lease Purchasing.
Thank You Max (my Mentor).
Reference Movie Notes: Mr. Blanding's New Home & The Money Pit!
Diamond Consulting Group
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