The Acquisition Program

THE ACQUISITION PROGRAM:HOW TO MAKE LEASE PURCHASE A PART OF A LARGER SYSTEM

By Dr. Thomas Brewer

Most people think that once they learn a real estate investment technique, that is all they need to know to succeed. In fact, the big money is made by developing systems that utilize multiple and interconnected techniques and income streams. How else could one car dealership make ten times the income from a sales transaction when a competitor sells the same type of car for the same price? The answer lies in providing that new customer scheduled maintenance service, repair service, after market upgrades such as window tinting and alarm systems, etc. The Acquisition Program is analogous to and provides similar multiple income streams as the car dealership example. In both cases, someone is going to make money from each potential follow-up transaction. Why not let it be You? In the following description, you can be one or more of the parties involved in The Acquisition Program.

The Acquisition Program begins with finding a property for just 10% below appraised value. Not 20% or 30%, which is what most real estate investment techniques require for a property to be termed ‘a good deal.’ You can find the property yourself, or you can pay someone 10% of the difference between what the seller desires and the appraised value. For a $300,000 house in which the seller will accept $270,000, you would pay someone $3,000 for providing the most crucial piece of your system. There are various strategies for finding properties under appraised value, the scope of which is not the subject of this article. There are also various strategies for realizing the price differential (in this example $30,000) in cash, the best of which is through the utilization of an escrow instruction with the title company. Do not try to claim a ‘fix-up’ allowance in the purchase contract, they don’t work any more.

Next you have an investor with a 700+ FICO score buy the house by putting the least amount of money down, which is 0-5%. The return for the investor who is converting their high FICO score into cash is 20% of the total cash received at closing. At this point we don’t know what that is, so read on.

If the subject property was listed on the Multiple Listing Service (MLS), then someone is going to receive a typical 3% co-op commission. If you or someone on your team is a licensed agent, then that money ($9,000 in this example) is automatically part of your system. But what if no one on your team is a licensed agent? Can you legally collect the commission? Most people would say “Absolutely Not.” I say they are not thinking outside the box. Does the president of Ford or GM have a license to sell cars in your state? Does he make money from the sale of cars in your state? So let’s translate this analogy to real estate. All you need to do is start a real estate business entity, such as an LLC, and have a broker of record as a manager or member. Now the real estate commission money legally flows into the LLC, which you own and control. Clever, very clever.

Like most real estate transactions, this transaction involves a loan. Someone, the loan officer, is making at least one to three points on this loan. Why not you or someone on your team? Becoming a loan officer is as simple as paying a small fee and filling out some forms. Then you can legally be paid a referral fee from the actual loan officer, typically one point (one percent, or in this example $3,000 at a minimum). So now you have made $42,000 on the ‘front-end’ of this transaction, and you owe the investor with the high FICO score about $8,000. You have already paid the person finding the subject property $3,000, leaving you with about $30,000 profit on a property you probably don’t own, unless you are the investor, in which case you have $8,000 more in your pocket. But we aren’t done yet. We still have the ‘back-end’ of the transaction. Now we get to utilize the Lease Purchase technique. You or your business will lease purchase the subject property from the investor. The purchase price will be the balance of the underlying mortgage, and the monthly payment will be the investor’s principal, interest, taxes, insurance, and any maintenance bills. This way the investor is completely protected, but you get to realize all the property appreciation. Yo u will then find an ‘enduser’ for the property who will lease purchase the property from you. The purchase price will be fair market value at the time the end- user exercises their purchase option, or the purchase price can be written as 10% more per year than what the investor paid. The monthly payment will be $250 more than what you are paying the investor, thus providing cash flow on a property you probably do not own. You will also charge the end-user or tenant/buyer an option fee of $6,000, which is about 2% of the property value. Such a lease purchase arrangement is typically called a ‘sandwich lease purchase.’ In this example, in one year we are realizing a ‘back-end’ profit of $9,000 plus another $30,000 in a typically appreciating real estate market if the end-user exercises their purchase option. If they don’t exercise their purchase option, then we can find another end-user and charge a new 2% option fee. Of course, you or your business gets to keep the entire ‘back-end’ profit.

With the ‘Acquisition Program’ you can realize about $70,000 profit per real estate transaction on a typical $300,000 property. It all works because the ‘Acquisition Program’ utilizes multiple streams of income resulting from multiple techniques, thus defining a true real estate investment System.