Sandwich Lease Options: Your Complete Guide to Understanding Sandwich Lease Options. Wendy Patton
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have huge capital gains to contend with, and may not want to pay those gains yet, or they may want to plan for a 1031 exchange.* [A 1031 exchange is an IRS section that allows a person to exchange their kind of property to another like kind of property, of equal or greater value, and therefore defer (not avoid) the capital gains on the first property. For instance if a seller has a home that they bought 10 years ago for $80,000 and it is now worth $140,000 and they have depreciated the property from $80,000 down to $40,000 then there is a $100,000 gain they need to realize ($140,000 value less the depreciated value of $40,000 = $100,000 of gain). This would be a long-term capital gain, but many sellers still don’t want to pay on this amount. By optioning their home to you, they might be able to better plan for a 1031 tax deferred exchange. There are sellers that will sell to you on an option to avoid the taxes now but like the benefits of renting their homes. They like the cash flow and with this solution they can still benefit from cash flow and avoid the other issues of being a landlord that they don’t like or won’t have time for now.
When I purchase a home from a landlord, one of the benefits to him or her is that I will usually assume the maintenance completely on the home, or ask them to assume only the first $500. I also will take on the advertising, vacancies, and showings, etc. You can be very creative when structuring a deal with an owner of a home. The benefits for a landlord include but don’t have to be limited to:
A.Maintenance - sellers don’t have to deal with issues and calls. Even if they pay a portion of the costs, I will handle the work.
B.Showings - sellers never have to show the home again. I will do the showings, take the calls and discuss the home with all tenant prospects.
C.On Time Rent – they don’t have to worry about the tenant paying each month. Their rent check comes from me regardless of whether or not the tenant has paid me on time. My check is good and on time each month.
D.Advertising – they don’t have to advertise the home anymore. I will pay for all the adverting and handle all of the calls.
E.Vacancies – they don’t have to worry about vacancies anymore. I will pay whether the home is vacant or not. [You can negotiate this also if the seller is willing – e.g. you have one month free rent in each X (any number you choose) months of the lease if you don’t have it occupied (all contracts with landlords are negotiable, but you should only negotiate with them to pay rent in a slower market, a buyer’s market)].
F.Insurance – they have extra liability protection when they lease option to me. I carry a $1,000,000 liability policy on properties that I don’t own and am only optioning. This liability policy is really to protect me; however, if something really bad were to happen on this property, this insurance would be utilized in a defense, which would also protect the owner of the home.
These benefits alone will allow a landlord to feel comfortable with selling, but also allow them to take less in rent then they usually receive. Talk about these benefits to help them see the advantage in leasing the home to you with an option. They now have less headaches, overhead, fees and expenses, so they can lease it for less. With a lower payment to the seller, you can also rent it to someone and increase your cash flow. It is hard to determine the exact amount to reduce their normal rent because there are many factors, but normally several hundred per month or more is reasonable.
How to Evaluate Seller Ads in the Newspaper
Besides placing your own ads in the newspaper to attract sellers, you can also answer their ads. In lease options I find that most sellers need or want their cash out. The best way to find a seller for a lease option is not the FSBO section of the newspaper, but the For Rent section of the newspaper. What you will want to do is to turn the landlord into a seller.
Your first step is to build rapport.
Call the ads in the paper that are in the For Rent section, not the For Sale section. The reason I don’t call the “For Sale” section is that 90% or more of those sellers must get their cash out and a large portion of the other 10% won’t consider something creative. It is not because they don’t want to consider something creative, it is just that they would prefer to cash out and be done with the property. Also, trying something unique will scare most sellers. Call the ads that are for rent, because the #1 and #2 objections for selling on an option have been resolved: 1) they are renting, and 2) these owners do not need to sell or to cash out of the home and they are willing to lease the home.
How to Navigate Successful First Contact with Sellers
The most effective way to contact sellers is by calling them. Immediately tell them your name to start building rapport, and try to keep your voice sincere or soft. Be sure to ask questions appropriate to the area you are calling. What is important to that part of the country? Basement? Pool? Fenced yard? A certain type of landscaping? Updated kitchen or bathroom?
When you begin to regularly respond to seller ads, consider setting up another phone line, perhaps toll free or even a voicemail box just for that particular house or ad. Personally, I prefer for callers to reach a live person, so if they call my office they get someone live. You can always use your cell phone. Even if after hours, they will get a referral to another number where they can get a live person. However, if this is not feasible for you, be sure to check messages frequently and return calls promptly.
The following is a script you can use to call an owner of a rental home. The words in bold are what is said to the owner. Don’t waste the seller’s time asking questions that are answered in the ad or from their description above but do ask questions applicable to your area of the country (e.g. Is it in a flood area? Does it have central air? Has it ever had termites? Has it ever been in a fire? How old is the roof?). Ask whatever might be of interest to you and to find out more about the home.
Script for Calling the For Rent Ads
Hi, my name is ________. I was calling about your home for rent.
Giving your name sounds warmer and will help put the owner at ease with you. It is a great way to build rapport.
Can you tell me if it is still available?
If yes, continue.
When is it available?
Can you tell me a little about the home?
Let them answer some information about the home…or expand some questions off the ad. You are building rapport with the owner. Talk and let them talk. People warm up when they are the ones talking. Listen and sound interested.
When was the home built?
This question gives you insight to any decorating or maintenance problems you might be running into. It will tell you if it might need to be updated. If the house is older, ask the next question; if not, skip it.
Have the kitchen and bath(s) been updated since it was built?
If it was built in the 70s, I might ask if the baths or kitchens are yellow/green/brown or if they have been updated since it was built.
Does it have a garage or basement?
Is the yard fenced?
This may prompt them to ask the question on whether or not you have pets. At this point they still think you are the one that will be living there. I don’t change that direction of thought until enough rapport and trust have been developed. They may ask questions as to how many will be living in the home. These are questions I don’t want to lie about, but don’t want to be totally direct on either. If you say, “I don’t know, I am going to rent it to someone else,” you can be sure they will not show you the home. That would kill the trust and rapport immediately. It is hard to say how to handle those questions exactly. Each time these questions come up, you will be answering them differently based on the owner. Here are some ways you could consider handling their questions to you:
1.Answer