What Is The Lease Purchase Model All About And How It Works

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Hey, it's Mark Podolski, the land geek with your favorite niche real estate website, www.thelandgeek.com. and today's guest actually on for a second time because he's so wicked smart. Before we talk to our guest, you know I'd be remiss if I didn't properly introduce my co host. You know him, you love him. Your flight school sherpa, the brain, the professor, Scott Todd from Scott todd.net landmodo.com if you're not automating your Craigslist and your Facebook postings hosting Domination.com TheLandgeek Learn anything about anything. Investor Ninjas.com Scott Todd how are you, Mark?

I'm great. How are you?

I'm getting stir crazy. I want to know how in the heck do we survive in in times of uncertainty. And today's guest is going to help us. It's Chris Prefontaine. He's been on before from smartrealestatecoach.com he's wicked smart. If you don't know about Chris, he's a three time best selling author of Real Estate on your Terms, the New Rules of Real Estate Investing and Monica Sawyer's Real Estate Investing for Women. He's also the founder and CEO of Smart Real Estate, smartrealestatecoach.com and host of the Smart Real Estate Coach podcast where yours truly has been on two times. But I'm not as wicked smart as Kris Prefontaine. Chris, how are you?

I'm terrific. And you said that perfectly. So I don't know if that was with practice, but it was well said.

Thank you. Because Mike Zano is from Haverhill, Massachusetts. And so for fun I would just channel my inner mic and then oftentimes like the people from Boston will email hate emails to me like how dare you butcher our accent so poorly. But that's okay. That's not here or there. So Chris, kind of give us a little bit of background about what you do and how you do it.

Yeah, so we buy everything on terms, as you may recall. And that means no banks. So that means lease, purchase and owner financing primarily. So I like to say always that it's great whether the markets up, down or sideways, but when the banks buckle down, it's even better because it was sort of the only One open, you know, the only door open for buyers and sellers. So it's, it's, it's getting crazy busy right now.

Wow, that's great. So walk us through a typical deal.

Well, let's go lease purchase only because all new people could easily do that one. Whereas the owner financing might get a little, might cost a little bit. And that's against my kind of protocol. So the lease purchase is like this. Mark owns a home, it's worth 300. We agree, he owes 250. Let's see, let's give him some equity. A lease purchase says I'm going to take over the underlying debt after I find my buyer to install in the home. And that means I'm going to pay the mortgage company directly and then I'm going to guarantee Mark, the seller, his 50,000 equity on or before the end of the term, which is typically 36 or 48. We're pushing longer terms now with the market. And so what does that mean? It means he gets his 50, but I pay off the loan, which is not 250 anymore. So I benefited from the principal pay down. I benefited from the monthly spread that I'm presumably getting higher than I'm paying out on my monthly mortgage from my tenant buyer. And then of course, at the back end, I'm getting a nice cash out. So Those are like three paydays, I call it. But those average around 75 grand per deal for us. That's pretty sweet. You know, you don't need a ton of those, most people per year.

Scott Todd, what do you think of that model?

Well, I mean, before, like when Chris was on before, I was like, let's do it. And you know, ultimately, Mark, I think that, to me, it's kind of funny because we teach land arbitrage, right? Like land arbitrage is the same thing. I bought land from other land investors, their owner financing it. I put a different value on it than they do because they're giving me like a lower price. It's almost like land arbitrage. It's house arbitrage, if you will. But instead of being an investor per se, doing this, it's the actual owner. Chris, the one thought I had though is I, I don't remember you saying this last time you said you pay the mortgage company direct.

Yeah.

So how does the seller like me being the seller? I do this deal with you? Like, that would terrify me because how do I know you're paying it and that I'm not going to get hosed on it?

Yeah, it Comes up often. So here's my answer, Scott. I say to the seller, so if this was live, I'd say, look at Scott. I've got 50 or 60 properties. I can't worry about whether you're paying your mortgage on time. And that morally and ethically puts me in a bad spot with my buyer if you don't. So I pay them all directly. However, we'll give you the same login we have. If it's paid online, you can check us anytime you want. If it's not online and we're doing checks, we'll mail you the paid, you know, the statements every month. So either way they can check on us. And they do, frankly. But that's the truth. 50 or 60 of these, I mean, I'd be up every night wondering if Joe Schmo paid their mortgage and my buyers are gonna be kicked out of the house, you know.

Yeah. And then, you know, the other piece of that is, and I think we talked about this last time, but refresh my memory, due on sale clause, right? Like, does that not constitute a due on sale if I lease option it or.

No, no, not a lease purchase. That would be if I bought it. Sub 2, we do some of that, but you know, separate conversation. Not on a lease purchase, because they can lease their house. The only time that's prohibitive is like the reverse mortgages. Any loans that were given, like say state funded or some kind of a grant. That said, you've got to be the occupant. Those are the only two caveats. But you don't come across those too much.

We don't.

So who's your avatar? Who's the one that's going to be selling you the house?

A couple different things, Mark. One is we'll go opposite of the spectrum here. So the person that's debt free wants all the money for tax reasons or other reasons. Why? I just want to take it over time, not stressed. That's good. Total opposite end of the spectrum. I got two houses, I got chaos going on right now in my world. I got a band aid, some debt like yesterday. Okay, so we can do that too. And then everything in between. So when I do say a webinar or a workshop, I'll say we're solving problems. But it's not always a bad thing. You know, someone wants to max out their house and they can wait for their money. That's the ideal. So if my conversation with Scott as a seller was, hey, I need all my money to go buy a house for my family, out of this deal, I'm not the buyer. Clearly they got to be able to wait for their money, right?

Right. Now if Scott and I wanted to get into this though, where Scott and I going to get the money to.

Be the one buying the houses?

Yeah.

Oh, the buyer. The rent home buyer.

No, to be you. I want to buy the house. Okay.

So the lease purchase deals written in the forms we have that are brilliantly done for the, you know, thousands of transactions, ten dollars is the least purchase deposit ten bucks to the seller. So those. That's why I say when you said bring us through a deal owner financing sometimes includes a teeny bit of a down payment because you got to pay closing costs if you're not putting anything down for the seller. But on a lease purchase, simple. And then you make it contingent upon finding your tenant buyer. So you're not coming out of pocket until you have that done.

Well, I really love this model.

Okay, okay, okay. Shiny object syndrome. Like for me, Mark. But like. Okay, Chris, So like here's the deal, here's what I'm thinking. So out of how many presentations does it take to get a deal? 10, 20, 30? What's my number? Starting out. Not you.

Yeah, yeah, I was gonna say that.

Me, the newbie.

One out of four presentations. When I say presentation, frankly it's a viewing of the house or a virtual viewing now. And find out what their pain point is so we can help them or their goal so we can help them. But it's one out of four if you're fairly new. Like my son in law, Zach, I don't know if he's been on your show or not, but Zach started from like nothing, didn't grow up in real estate. So when he started out, I'm giving him these metrics that I was used to and he's going, it's not cutting it. So about one out of four for him or anyone new.

Wow. Wow. So what sucks about this model, Chris? Why isn't everybody doing this?

Yeah, yeah, bunch of nuances. When you are in the trenches and I'll tell you why people aren't doing it. But while you're in the trenches, you just have to. I see our students, like the only time they get whacked or in trouble is if they get too anxious to put a buyer in a home. Don't take enough down. That means you get a renter, not a buyer. That's a headache. Not making sure the seller fills out the proper state disclosure and or doing inspection so you don't run into Headaches that you're supposedly taking over just all due diligence items. Why don't people get into the space though? Is an interesting one. I quite frankly think that it's exposure right now. Like I get students that come in go, how come I didn't know about this? Well, I mean I've read books from the early 1900s where they were doing this. They just, nobody ever really packaged it together and said here's how you run the whole system.

It's kind of like our land investing model. Like people like buying stuff, owner finance it. Yeah. So we're like doppelgangers in a way. So. So Chris, we're recording this in the midst of a global pandemic. Covid19 so even if by the time this records and gets aired where things are kind of relatively back to normal, we know inevitably there will be uncertain economic times. So tell us how do you manage this system or this strategy during times of. Of economic uncertainty?

Yeah, so I obviously wouldn't have known. Right. None of us would what was going to happen. But what we're seeing in the last 50 weeks is we are like two or three times as busy and so on our students. Why? Mainly because the banks are clamping down. Right. Recently they. You can find a few now but most of them won't do jumbo loans right now that just took all them. This is what we're having all students do that's just took all the million dollar properties. Half a million. Not frankly most markets for jumbo numbers and they there's buyers ready for those. They have the down payment, they can't get financing. So we have the vehicle to get them in, get a nice paycheck for ourselves, solve the sellers issue and then soon as things lighten up and it could be a year, a month, whatever they can get there and loan that's on the jumbos on the regular buyers, they're getting crippled because the credit scores just got pushed up. I mean just last week JP Morgan announced all this stuff. So that just took a whole bunch of people out of the market. So now they need time. They need time to get their credit higher. Everybody could, but that's that group of people. So now we have all these buyers that are pent up and then realtors aren't showing houses, they're like forbidden in some towns. So we're getting realtors calling us with referrals. We're getting sellers calling back that weren't coming back when the market was hotter. So it's kind of like it Was even More so in 2012 and 13 when I was buying because there was not a seller's market then either. And it was easy to get properties. Well, it's back to that right now. Then I just hung up a mastermind call. Three or four of the students have buyers, which is a cool thing because you can get the properties. But are the buyers still out there? Yeah, they're out there in the droves. It's crazy.

It's kind of crazy. Scott Tyner are both super busy right now. And yeah, we didn't think we'd be this busy given so much uncertainty, but there is a flight to real assets when there's so much market volatility in the stock market. Like, you've got to put your money somewhere.

Yeah, I couldn't agree, you guys. We're very similar in that, like, just the makeup of how we operate and what drives it right now in this chaos.

Yeah, Scott, Todd, what are your thoughts?

I mean, I like the idea, Mark. You know, I like the idea because it's kind of like what we're doing. The only difference is, like, it's a house versus the land, you know? Like, I do think I like what Chris is saying. Like, I just heard yesterday, for example, JP Morgan, as he mentioned last week, they raised the credit requirement to get a mortgage to 700. That's the minimum. Okay. Like, hey, J.P. morgan, you don't have a 700 either. You took bailout money. Okay, wait, and you got to have 20% down. So, like, you just nudged a lot of buyers out of the marketplace that. What's their option? Their option is that they're gonna have to look for owner financed properties or lease options or something else. The market broke down. The market's not inefficient. And Kris is going to provide the solution. And I get that. I understand it. I like it.

You know, so that's the buyers and sellers market. Now think of the other side. We are, I'm shocked, pleasantly shocked of the amount of people coming to us. And you put guys, probably the same thing saying, I got to do this now because I just lost my job or I may be able. I may be losing my job or I'm stuck at home, like we're just getting flooded, which is super positive.

Yeah, no, we are as well because we both have sort of these amazing side hustles that are non competitive and, you know, an easier barrier to entry. You don't need to come in with all this capital. So, yeah, we're busy there too, which I was Surprised about as well that, you know, because usually when there are times of uncertainty, we go into three modes, you know, evolutionally, like we freeze, fight or flight. So some people just can't do anything. Some people just, you know, start fleeing. And those are like your, let's say, your hoarders, right? Like, I'm not leaving the house, I'm not doing anything. I'm just, just going to survive. And then you've got your fighters out there, they're like, okay, I'm going to adapt and take advantage of this opportunity. So we're seeing a lot of the fighters in this time of economic uncertainty rear their heads and be like, yeah, I'm here, we're doing it.

Yeah, there's a lot of niches cranking. Like I said to my group this morning, I said, look, you got Amazon adding 100,000 people. You got Home Depot buyers coming to us going, I'm working overtime. Like, I can't stop. And then you got, I heard a new one this morning. Pet stores, guess people going out and buying pets. So these guys are crazy busy because of people staying home. So you can find the positive, I think the freeze pot. But what you just said, by the way, is the worst thing they could possibly do. Worst thing they could do.

Yeah, no, absolutely. I mean, you know, of course, of course. Scott, Todd, what's on your, your mind as far as uncertainty?

You know, I think that, you know, you always deal with the, the unknown, right? Like you never know what's going to happen. And to me, it was really kind of incredible to see just how quickly like the economy fell apart after things stopped, right? Like it happened fast. And I think that you've got to just keep moving, right? Like it's, there's, there's always someone in need. You got to find the problem. We talk about this in flight school. Four reasons why people buy land and they're all problem based, right? Like they have four problems. Find the problem and match the solution. Chris talked about it, you know, talking to the sellers that he runs into. He noted, noted what he said. He said, find their problem and if you can find problems in the world and solve them, well, then you're gonna be okay. You know, like, that's the thing is, that's what I keep looking for, is, okay, what's the problem? Let me figure out what the solution could be. And I may or may not be right, but I'll keep coming back to the problem with solutions. I think that that's really the secret is keep showing up with your good Ideas and solutions don't freeze.

Yeah. And that sort of reminds me that today's podcast is sponsored by flight school. So learn how the next 16 weeks can really transform your life. And let Scott Todd be your Sherpa up that mountain of land investing and start creating that passive income without renters, without rehabs, without renovations, without rodents, and learn how to do it in a systematic way. If you want to learn more, just go tolandgeek.com training schedule. Call with the Zen master Mike Zano or the nightcap OG dude buddy Scott Bossman. So Chris Prefontaine, Scott and I are geeks and we're what I'd like to call ambitiously lazy. So we use a lot of software, inexpensive EAs, so that we're each working about an hour in business. How does that apply to your model?

A lot of stuff now going virtual. Right. Luckily, we pivoted about a year ago doing more virtual. So we'll send inspectors, we put ads out, but we'll pick up inspectors, we'll pick up builders looking for extra work, and they'll go be the boots on the ground. They'll provide us an inspection report. And so a lot of these houses, especially now, we're not even going out. Like the last dozen or so homes, we and the students don't even go out to them. So that's been helpful. VA is big for us, too huge for us. We've built a massive team of va. So it's been phenomenal. It's like before, if you said, I want to see your home virtually or sub something like that out, it would not be the norm. Now people accept it. It's like a world thing. It's not your little policy. Big difference.

Yeah, no, absolutely. And you know, I always think about that Jeff Bezos question, which is if everything's going to change and everything is going to change, what's not going to change and what do you think as far as your model? I know what I think for our model, but what do you think for your model? Well, I've said this.

Yeah. I've been saying this for a while. People are not going to stop getting married and stop buying the first time home. It's not going to stop. So we're in a good spot.

Yeah. And for us, I think people are always going to want a real asset and they're always wanting a good deal.

Yes. And yeah.

For sure. So knowing what you know now, is there anything you would have done differently in the beginning?

You mean, probably due to the chaos, that kind of If I knew, if I had that in hindsight maybe, or.

Just as far as just, even just building your, your business, you know, every.

Time something like this happens, I think of doubling down. And I think if we double down sooner, always every cycle, I say, well, what if we doubled that? What if we had triple. We position ourselves with better cash since 08, but what if we had like triple that, man, the deals like this is when, in the next six months, in my opinion, this is when fortunes will be created for a decade if you make the right move. So always more of the reserves, more of the. More deals, double and down earlier.

Yeah, I love that Jim Cramer quote. You only need to get rich once, and really now is a phenomenal opportunity. Scott Todd, what's on your mind? I feel like I'm talking a lot.

No, I would just say, I would just say, like, that's the thing is, you know, when you have chaos, chaos creates opportunities, right? Like, go leverage the opportunities. And, you know, I remember as a growing up, my mom would always tell me, like, oh, the people that made money in the, the Great Depression were the people that had money. And there's some, some truth to that. But I'll tell you what, I think that the people that make money when times are down or in chaotic times are the hustlers, right? They're the people that are out there. They're looking to solve people's problems and their pain points. Bringing, bringing solutions to the marketplace. And you know, what if you just stop and say, wake me up when it's all over with someone will do that for you. But guess what? You missed. You missed your opportunities. Opportunities come out of chaos. Go get those opportunities and go do them now, man.

Yeah, you know, I was going to ask you, Chris, my last question before we go to our tip of the week. Considering that you teach people the model, do you see a set of characteristics that are common among your more successful students and your least successful students?

Fantastic question. Something we talk about, like, wrestle with all the time, trying to hone in on that. I'd say these are broad, but ability to manage expectations, because real estate, if you don't, you know, you get the late night infomercials telling you to get rich tomorrow. So the ability to manage expectations and then quite frankly, in your system, my system, anyone's system, put the blinders on for 36 months and not get caught up in the shiny object syndrome. It's easier said than done, but you got to do that. I don't care what niche it is. Doesn't matter. Do it for 36 months straight and listen to whoever you're with.

No, I love that focus. I had a mentor once, and he said, you know, remember when you were a kid and you'd go outside with a little, you know, what's it called, the magnifying glass, and you'd try to kill ants with the sun with the magnifying glass when you're a little kid, he's like, but what happens is you keep moving, you know, ant to ant to Anthony. You generate a lot of heat, but you never kill an ant unless you hold it there. He's like, mark, you got to kill ants. I'm like, oh, that's the best way I've ever heard anybody tell me how out of focus.

That's a good one. I write that one down when I leave.

Unless you. Unless, of course, you love ants, and then we have to think of something else. But, you know, this is a little kid killing ants.

Yeah, it's safe.

Yeah, it's safe. Well, Chris, your mentorship has been great as always. It's great having you back on. But now we're at that point in the podcast. We're going to ask you for one more tip of the week. A website, a resource, a book, something else actionable for the art of passive income listeners to go improve their businesses, improve their lives. What have you got?

I'll actually give you especially everything going on. I'm about free. I want to throw as much content as we can out there. So our second bestseller book called the New Rules are Real Estate, they wrote with my son and son in law. I want to give it to everybody free. They just got to say they heard it on the. On your show. Just go to New Rules for free. F O R. Not for New rules. For free. Calm.

And again, just mention your show for free. I'll put that in the. In the show notes. So new rules and then for free. Not the number four.

Yeah, F.O.I.

All right, fantastic. That is very generous. I'd like to get that book. And is there any way we can set up a deal that Scott Todd can't?

I got it. I got it.

I was gonna say you guys should have gotten it.

Oh, my gosh. Like, this guy needs more knowledge.

I do.

Yeah, whatever. All right, Scott Todd. I know it's a. It's a friendly competition. Until it's not.

Look, here's the deal. Like, you have a pretty cool office. I think I have a cool office. But you know what? Sometimes I really do wish, like, that I had something Side, you know, maybe with some sun beating in, you know, a quiet space. Check this out. Check out in the links. Check out Dwelledo. That's D W E L l I t o.com mini offices. Check this out. Because literally, order a mini office, it will be delivered to your house in four to six weeks. Like 96 square feet or 67 square, 64 square feet up to like 100 and something square feet. Little office architectural grade stuff. I'm not saying it's cheap and it's not free, but look, if you're looking to get away and have that quiet space, check this out.

It's pretty cool.

That is cool. I actually was going to build a casita in my backyard, but this is not going to be a casita. Like, I don't want to go back in this house to go to the bathroom and.

Yeah, yeah, that is the downside. You know, I guess technically, I mean, I guess technically you didn't have to really go inside the house. I mean, you know.

Yeah. But, you know, true.

You know, that's cool. Okay.

Yeah.

I mean, like, I don't know. And also, could you use something like this on your land?

It's a pretty cool idea. It's. It's a really cool idea. What do you think, Chris?

Well, you could stick it on your land. All you need is another building next to a little outhouse or dig a hole. You'd be good either way.

There you go.

Yeah, there you go. It's wicked smart. So speaking of, you want to get more wicked smart? My tip of the week is learn more about Kris and his genius model@smartrealestatecoach.com smartrealestatecoach.com he also has a podcast called Apley Smart Real estate coach Podcast and learn more there. Chris Prefontaine, it's always a pleasure.

Thanks for having me, guys. Always good to chat.

Are we good? We're good.

Yeah. Good.

Mark, Scott, Todd, we're good. Okay, well, I want to thank the listeners and just remind them, look, the only way, the only way I'm gonna get the quality of guests like a Chris Prefontaine from smart realestatecoach.com is if you do us three little favors. You got to subscribe, you got to rate, you got to review the podcast. Send us a screenshot of that review. To support thelandgeek.com we're going to send you for free the $97 passive income launch kit course as well as the latest wholesaling course, how to double your money 30 days or less. And Scott, Todd, I think that wholetailing course is probably valued at 2.2 million. I don't say that enough.

Yeah, I think it is. It's valuable.

It is very valuable. All right, let's do this, guys. One, two, three. Let freedom ring. Chris is like, I had no idea.

I wasn't. Yeah, I wasn't brought into that fold.

See?

Yeah, see? Sorry it's your second time on Chris. We just thought you knew.

It's been a while.

All right, so, yeah, so we're saying that and then we're saying wash your hands. All right, thanks, everybody.

Thanks. Thanks, guys.

Thanks for listening to the Art of passive income podcast. Start your journey at www.thelandgate.com and www.scotttod.net. rate and review the podcast and email support. The Landgate Geek.com your screenshot for a free passive income launch kit.