Sandwich Lease Options: Your Complete Guide to Understanding Sandwich Lease Options. Wendy Patton
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to the seller at $1,000 per month? Oh, how about if we say all $1,000 of your payment each month gets applied to the price of $180,000? Now are you interested?” Now all their hands go back up. I ask, “Why, now, are you willing to pay $180,000 for that home that you wouldn’t have a few minutes ago?” They respond in unison saying, “Because you added some attractive terms!” My response is always the same: “You didn’t ask the terms before!”
Terms are parts of a lease option deal, such as price, amount down, length of time to pay, monthly payment, monthly credits, and other negotiated items with the seller, which will be discussed further and in more detail in later chapters. Many times even experienced real estate investors don’t ask, “When does the seller need his cash?” They say “no” to a price before they ask when the seller needs his/her money. The previous example illustrates how most investors think -- they don’t ask all of the right questions about the property before they make a decision. They look at the surface but they don’t dig deeper for other possibilities.
Lease options provide a creative solution that can allow you to negotiate terms that can increase your profits and provide a great investment opportunity. Now you are able to pay a higher price on a home if you can get reasonable terms, and having this tool at your disposal allows you to open up many new possibilities and make money on deals that were before completely ruled out. It’s all about terms!
When doing any lease option deal, it is one of my mottos that everyone must win or don’t do the deal. There are 3 people involved: the seller, you the investor and the tenant/buyer. It must be a win/win/win; otherwise walk away.
Standard Lease Option Deals
My typical strategy is to lease option from a seller and then to lease option that home to a buyer.
How Lease Options Work
The above illustration depicts a Sandwich Lease Option. In a sandwich the meat is in the middle. The best part of a sandwich is the meat, and you (the investor) are in the middle of the transaction; your reward (the meat) is the difference between what you paid for the home and then what you sold it for. There are also ways to make this deal even better and more profitable, which will be discussed in later chapters.
A variation of a Sandwich Lease Option is the Cooperative Lease Option. In a Cooperative Lease Option (discussed on my website) the investor finds a seller and does a lease option with them, and then “flips” or assigns their contract to an end tenant buyer and keeps the option fee. They do not stay involved or in the middle.
One other possibility is a Lease Purchase. While a lease option gives the investor the right to purchase real estate, the lease purchase guarantees that he or she will purchase the property during a given time period. Therefore, use lease purchases with much caution.
How Lease Purchases Work
Lease Option Deal
Here’s a great real-life example from my files of a lease option deal from start to finish – a true win/win/win:
The seller: Janet
Janet, a seller, answered an ad I had placed in a newspaper. I placed an ad that read:
Janet’s home had been listed on the market for $189,000 with a Realtor and had recently expired. She saw my ad and decided to call. She’s exactly the person I was looking for. She was willing to sell and also willing to do a long-term lease. Bingo! I still had to determine some other factors to make sure it would be a win/win/win.
Janet’s most important area of concern was her price, and she was set at $185,000, and she was not going to budge on that portion of the deal. As soon as I knew that Janet was set on this one area of negotiation, I could work with the other areas of the terms for myself (see Chapter 3 on Negotiation). I would need to look at the rest of the terms to see if I could still make this a win/win for my side of the deal. These days I do not say no as quickly as I would have years ago; I look at the entire deal now, instead of getting caught up with a traditional style of price alone deal structuring.
Janet fixed her price, and so I had to look at monthly payments and the timeline available. By having all the facts I was able to analyze the entire deal, and thus make sure I would still obtain MY bottom line of profitability. At the time of this particular deal we were in a strong appreciating market – approximately 6-7% per year. So I figured that at $185,000, with 6%, that would be about $10,000 per year just in appreciation. I had really hoped to get the property for $175,000. Even with $10,000 in appreciation after the first year, I would only be where I had originally wanted to be in the first place! I did end up buying the house for $185,000, and put $4,000 of improvements into the property (just basic carpet and paint). I now had $189,000 into the property. Selling it for anything above $189,000 would be pure profit.
Janet was not in trouble financially but she was motivated to sell! She had a severe shoulder injury that was preventing her from doing the maintenance around the property. She made great money, and could have hired someone for the maintenance, but decided that with 20 plus surgeries under her belt and more to go, she just wanted some time outside of her large home and yard to deal with. She didn’t need her money out of the property, but she did ask for $1,000 up front so she could go rent a lake front home in the area. The $1,000 I gave her for the option fee, plus the $4,000 for improvements, was a total of $5,000 out of my pocket for this home, which is less than 3 percent down. In the scheme of things this is a small amount down for this home.
The Buyer: Roberta
I knew Janet and I were going to come to terms and do the necessary paperwork on Sunday so I ran an ad on that same Sunday and I got a call from Roberta. I told Roberta that she could drive by the home but that she could not go in yet or on the property, because someone still lived there. Roberta didn’t even know I didn’t have the deal tied up – I just wanted her to drive by and see if she liked it.
Roberta had poor credit and seven dogs. Most landlords won’t rent to someone with seven dogs, and most mortgage lenders won’t do a mortgage for someone who has poor credit. With an inability to get a mortgage she is also unable to work conventionally with a Realtor®, so what is she going to do? No one will rent to her, and no one will give her a mortgage. This puts many people in a situation where they desperately need a solution. I am trying to help people with this type of situation. They want the American dream, yet they are unable to obtain it any other way. Lease options give people a second chance to improve their credit while working towards the purchase of the home they desire to own.
If you’re a landlord, all you get up front on any of your rentals is the security deposit, and that is just not enough cash to take on the risk of someone with poor credit and seven dogs. You can change this scenario by converting these people from tenants to tenant-buyers. Then, the risk that once was on you is shifted to the tenant-buyer - where you truly want it. With Roberta putting a lot of money down (option fees are not refundable), she was taking on the risk.
Let’s look at how the deal transpired:
My Out of Pocket costs:
I didn’t even own this home and yet I had $5,000 in my pocket. Roberta is the one risking $10,000 with her option fee, as it is non-refundable. If she doesn’t