Simply put, only amateurs put money down on deals. And I should know, because I used to be one of them. When I started investing over 8 years ago I made every mistake in the book, including putting large deposits down on lease option and sub-2 deals.
I think about those deals today and both laugh and shudder. It’s all part of the process from going to a new investor to a successful investor, but that still doesn’t mean it was fun.
So when did I wise up and realize not to put money down on deals? Well, it didn’t take long. You quickly realize you’ll run out of money very fast if you put money down on every deal you come across. And luckily, I ended up getting a quality mentor who was very successful and showed me how to do this business the right way.
The first rule he taught me was NEVER put more than $10 down on a deal.
As I already explained, it’s so you don’t run out of cash. But more importantly, this helps determines who’s motivated and what sellers are going to be easy to work with and what seller’s are going to turn into nightmares.
You see, motivated sellers just want to get rid of a house quickly. They’re by far, the best people to work with and cause the least problems. But if someone wants a huge deposit and is hassling you over it, that should be your first clue they’re not truly motivated and you should stop wasting your time on them.
So when a seller does ask for a deposit, what should you do? Well, it all comes down to sales skills. Ever since my first mistakes early on I have never put more than a $10 deposit down on a house. It doesn’t matter if it’s a lease option, a subject-to, or a wholesale deal. If I’m not able to convince a seller to let me put $10 down, then I know they’re not motivated enough.
Here’s what I say…
First off, all of my contracts have the $10 deposit language typed into them. A huge mistake you can make is leaving the space blank on your contract and then writing in with a pen the $10 deposit or whatever amount you usually do. That shows sellers you’re not serious about the amount.
That’s why all mine are typed in. Then, when a seller does want more money I tell them that it’s company policy we only put $10 down and there’s nothing I can do about it. Then immediately I go on and explain why we only put $10 down. Depending on the type of deal I show them how my company is taking on all the risk… how we’re guaranteeing the rent… how we’re taking over a mortgage that they’ll no longer be responsible for…
And that because we take on all this risk we need our money for other uses and we never put more than $10 down. Of course, the sales “pitch” is much more in depth than that, but I basically list the benefits of working with my company and how we are reliving their stress and putting it on us, etc. etc.
So, take my advice, from someone who’s made mistakes in the past. If you want to stay in this business for years and make a lot of money, promise yourself right now, that you’ll never put a penny over $10 down on a property, ever again.