Successful Lease Option Disclosures and Agreements

Disclosures and tenant agreements for a lease with an option to purchase contain many of the same terms and conditions as standard rental agreements but there are differences. These are important differences that both the landlord/owner and the tenant/buyer need to understand. One thing that should not surprise the owner is that some tenants almost nonchalantly enter into a lease option agreement if they aren’t fully aware that it is legally binding. While this might quickly place a paying tenant in the property, it can raise the risk that the tenant does not complete the purchase.

Whenever you are entering into a lease contract, remember that the agreements must be written in accordance with all state landlord-tenant lease laws in addition to following the state’s real estate commission’s rules, which typically require attaching specific disclosure forms.

A Lease Option is an Agreement to Purchase

Both the owner and the seller are better off when they enter into the disclosures and tenant agreements with an attitude and understanding that the main purpose is for the tenant to complete the purchase before the end of the option period. You don’t want to get two or three years down the road (the option period) to discover there is a misunderstanding.

I’m not an attorney but it’s easy to understand that from a legal point of view the owner/landlord is held to a higher expectation of understanding the disclosures and tenant agreements than the tenant/buyer. The logic here is that the landlord is a business person who understands the importance of legal contracts. Also, the owner/landlord is the person writing or having an attorney write the agreements. These are good reasons for owners to take a course on the subject. My course contains all of the information you need including how to select successful tenants and how to make sure they understand they are entering an agreement to purchase the house.

A few ways you can encourage approaching the agreement as a purchase is by suggesting the tenant take a detailed tour of the house. People treating it as just another rental tend towards a brief 10-minute tour to check out the size of the bedrooms. What you can do is encourage them to look over the yard and the neighborhood before making a commitment. Another way is by suggesting a professional home inspection since that is an early step in the purchase process.

Lease Agreements and Option Contracts are Separate Agreements

Knowledgeable lease option investors keep the lease and option contracts as two separate documents. They are also careful with the terminology and phrasing of the documents.

The reason is so that courts don’t misinterpret a combined lease and option contract to grant a tenant ‘equity’ (ownership) in the property without completing the purchase. If the tenant defaults on the contracts, having a separate rental agreement also makes it simpler to remove a tenant that has stopped making rent payments.

In the disclosures and tenant agreements, you avoid words like “credit,” “seller,” and “buyer.” Instead, use the standard terms “security deposit,” “landlord,” and “tenant”. Generally, the lease agreement does not cross-reference the option to purchase contract.

Be clear in the purchase option document that the “potential buyer” receives no equity in the property until the purchase is fully completed. Getting this part wrong is where you run the risk of a court interpreting your lease option contract as converting the nonrefundable option fee into equity for the potential buyer.

Basic Disclosures and Tenant Agreements

Landlords and property managers are required to follow federal, state, and local laws to inform tenants of policies, facts, and rules regarding the property. This includes providing government pamphlets such as the EPA’s “Protect Your Family From Lead In Your Home” (properties constructed before 1978).

There is a distinction between disclosures and tenant agreements although in some states the disclosures can be part of the agreement document. Still, you often must have the tenant initial clauses in the agreement acknowledging the disclosures. Common disclosures include:

  1. Security deposit details such as where it is held, if and how much is nonrefundable, and the conditions that make it nonrefundable.
  2. Tenant rights regarding condition of the rental at move-in and move-out. Including the tenants’ right to be present when the landlord inspects the property at either the time of move-in or move-out.
  3. Existence or nonexistence of safety features such as smoke detectors and carbon dioxide detectors.
  4. Outstanding code violations.
  5. Any shared utilities with other tenants such as shared electricity for halls and outside lighting or a shared hot water boiler.
  6. Disclosure of health hazards including lead paint, mold, or radon.
  7. Any flooding history the rental unit might have.
  8. Disclosure of a statewide sexual offender database.
  9. Any previous presence of an illegal drug lab that could leave hazardous chemicals behind.
  10. Any tobacco, smoking, or pet policy.

This is not a comprehensive list of everything that goes into disclosures and tenant agreements. Rather, it is only an indication of what these documents need to contain.

Maintenance and Repair Responsibilities Are Different

Maintenance and repair responsibilities are substantially different when there is an option to purchase. As the owner/landlord, this is a major benefit to reduce or eliminate your expenses. The tenant will soon become the new owner and it makes sense for him/her to begin taking on ownership responsibilities. Investing their time and money into maintenance and repairs is also a motivator for the end buyer to complete the purchase option. Additionally, it’s well established that most end buyers in a lease option take better care of the property they will soon own.

However, because the end buyer doesn’t yet actually own the property, there should be dollar limits to how much repairs cost him/her. Major expenses like a new roof or shoring up a sagging foundation should still be the responsibility of the current owner. Otherwise, the end buyer will not complete the option to purchase.

Don’t take these as all-inclusive of state and local requirements for disclosures and tenant agreements. My students and I have fine-tuned the sandwich lease investing technique over many years. The right disclosure and tenant agreements enable you to take control of the property for a couple of hundred dollars. You then put an option buyer in place that takes on most of the homeownership responsibilities until they make the purchase and take full ownership responsibility. The Sandwich Lease Option lets you make a big profit for a small investment.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

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How To Be A Landlord – With Sandwich Lease Options

The sandwich lease option does put you in the deal as a landlord but not in the traditional way. After all, you don’t own the property and you want that to work in your favor – while also profiting as a landlord. How to be a landlord with a sandwich lease option is much less risky than being the property owner.

I do encourage you to learn the profitable basics of being a landlord that I’ve  previously written about in, “How To Be A Landlord – Advanced Tips.” But here, I explain in detail about the advantages of being a landlord in a sandwich lease option arrangement.

Learning How To Be a Landlord The Right Way

Real estate professionals know that renting has been and remains a strong profit stream for investors. Today’s real estate market mix is ideal for sandwich lease options for two key reasons. 1. Many (even most) first time homebuyers want to buy but are priced out of the market – meaning they are renters. 2. These same first time buyers are looking for alternative ways to make their first home purchase – the sandwich lease option is their best alternative.

As a real estate investor, you want to make these market dynamics work for you and the people you are doing business with. Learning how to be a landlord using a sandwich lease option is the answer to both of these dynamics. Sandwich lease options are also the strategy for your low risk, low cost, entry into real estate investing.

Always remember that a sandwich lease option is exactly that – AN OPTION. In the absolutely worst case scenario – if the deal completely falls apart – you are not the owner. You always have the option to walk away from the deal. But also, remember that a sandwich lease option always has three profit streams:

  1. The option fee
  2. The ongoing rent
  3. The purchase profit

If you want to learn more about how to profit from all three profit streams, check out the blog “Control Without Ownership Using Lease Options.” Here I’ll shed more light on the rent profit.

How To Be A Landlord Collecting Steady Rent

Traditional landlords have three big fears (risks) that sandwich lease option landlords avoid or at least minimize. 1. A vacant rental when the landlord has a mortgage to pay is a big fear. 2. Maintenance and repairs are big costs for traditional landlords. 3. Property damage is the third big cost and fear that traditional landlords face. This is where it gets really good because these are NOT fears and costs for sandwich lease option landlords.

As a sandwich lease option landlord, you don’t have a mortgage on the property so there is no long term risk. However, you should plan in advance in case of a vacancy. The good news is you have rent paying tenants with the ultimate goal of buying the home. These are not renters who are likely to leave you. They are also highly motivated to pay the rent on time because any credit to their down payment requires on time rent. Timely rent payments also affect their credit score. Everything is working in your favor as a sandwich lease option landlord. In the worst case, if a renter moves out, they forfeit the lease option fee and you collect a new option fee from the next tenant/buyer. The worst case scenario isn’t even risky.

How to be a landlord in a sandwich lease option is almost always free of maintenance and repair costs. Either the tenant/buyer or the owner bears these risks and costs. The tenant is motivated to complete the purchase by being required to be mostly responsible for maintenance and repairs. If a major cost is involved, it becomes the responsibility of the owner or the owner’s insurance company. As a sandwich lease option investor, you have no risk or cost for maintenance and repairs.

Finally, there is the third traditional landlord fear and risk of property damage. This is similar to the risk for maintenance and repairs. But the risk is extremely low anyway. Tenants planning to become owners don’t damage their future home. But since you are not the owner, you are still not at risk if something strange happens. You want to write your contract with the owner correctly so that in a sandwich lease option you aren’t at risk for property damage.

A Sandwich Lease Option Landlord Gets a Nice Slice of Rental Pie

One thing I always point out is that the rent isn’t the biggest piece of the sandwich lease option pie. There is more money in the end sale and there can be more money in the option fee than in the rent profit (but not always). Still, your rent profit isn’t anything to ignore. The ongoing rent pays you a profit stream between when you collect the option fee and when you collect the big payday when the purchase is completed.

With the sandwich lease option, you are paying rent to the owner. Your rent profit is the difference between what you pay the owner and what you collect from the tenant/buyer. As an investor, you maximize the difference between the two. You have the tools to find motivated sellers who are happy to begin receiving rent on their vacant house. The owner is mostly concerned with collecting enough rent to cover the monthly mortgage. That’s what you offer the owner in this win-win-win arrangement. You often don’t even have to offer the owner full market rent. On the other hand, you want the tenant/buyer to have skin in the game. Rent-to-own buyers pay above market rents and the difference between the two is your ongoing rent profit.

A $200 monthly difference in the rents is more than reasonable and $300 is easily within reach (but there are variables such as the value of the house). At a $200 profit per month, you’ll collect $4,400 along with the option fee and the final purchase profit. A $300 difference in the rent means you’ll collect $6,600 at almost no risk and no cost.

How to be a landlord using sandwich lease options is a tremendous investment strategy for you that creates a win for everyone involved but doesn’t come with the risks and costs of being a traditional landlord.

By Wendy Patton

For more than 35 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

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What did you think of this article? Please leave a comment below.

How to Rehab or Flip a House – Very Successfully

When you watch a 30-minute episode of any popular house-flipping show, don’t come away thinking you’ll pocket tens of thousands in profits for 30 minutes of effort – you won’t. There’s a little more to do between the time you buy a distressed house and when it’s ready for a prime time sale.

There are three critically important criteria for how to rehab or flip a house:

  1. Investing in the right house in the right neighborhood.
  2. Making the right repairs and renovations.
  3. Getting in and out of the deal quickly.

 

How to Rehab or Flip a House Begins in the Right Neighborhood

Because you want to maximize your profit, the right neighborhood for rehabbing and flipping is upper middle income. These are neighborhoods for second and third-time buyers. Places where buyers that are more prosperous are buying up.

Top income neighborhoods aren’t attractive because these people want to customize their own homes. They aren’t going to be very receptive to remodeling choices you’ve already made. Neighborhoods for first-time buyers aren’t a good choice either because these buyers are too price sensitive.

Once in the neighborhood, it’s time to determine the after repair value (ARV). You’re actually dealing with two different processes that blend together. First is the combined total of the purchase price plus the cost of repairs (don’t forget holding costs). This is the minimum of what you’ll have invested in the house after repairs. Your profit goal for how to rehab or flip a house is to be around 70% of the ARV.

Several ARV Options to Value a Rehab or Flip

You almost certainly have the skills to do your own MLS research and double-check it on websites like Zillow. But if this is your first project or you screwed up the ARV on your last project, you want to dig deeper.

Start with your wholesaler. A good wholesaler will have done some or most of the research for you. This is a starting point but it’s just that – a starting point. If the wholesaler has been sitting on the deal for a few months, his/her information is out of date. And of course, this person has a bias to skew the numbers in his favor. Also, he might not have the current pulse on contractor and material costs. It’s a beginning but not the final answer for how to rehab or flip a house.

The market analysis is valuable. If there are real estate agents involved with the deal, there will be a comparative market analysis (CMA). If you ask for a suggested listing price on the house you intend investing in, be sure the agent understands you will be making repairs. Be as specific about the repairs as you can including the quality of the materials to be be used.

Pay for a broker price opinion (BPO). This will be similar to the CMA but the broker should be independent from the transaction. The CMA will probably come from an agent involved with the sale of the property. Since the broker won’t make anything from the sales transaction, you have to pay a nominal fee for the BPO. BPOs are done either as an exterior or interior assessment. You want an interior BPO. Just as with the CMA, be sure the broker doing the BPO is fully aware of what repairs and improvements you are planning to make. Brokers doing BPOs are often among the most experienced in the field. His or her opinion of the ARV should be one of the most trusted conclusions you receive.

Pay for a before and after appraisal. Again, you want the “as-is” and “as-repaired” values. This will almost certainly be the most expensive estimate you have prepared. If you are already comfortable with the numbers you’ve received from others, you may decide to skip this one. Also, keep in mind that if you’ll be borrowing bank money or the end buyer borrows bank money, separate and additional appraisals will be required by each bank involved.

Somewhere in this mix, you might have an inspector involved. Inspectors aren’t generally qualified to give a comparable analysis. However, they are great resources as a second set of eyes to be sure you haven’t overlooked anything else needing repairs.

Ultimately, you need to take all of these into account to arrive at your own proforma conclusion. A final step for how to rehab or flip a house is sharing your conclusion and the background numbers with a mentor, rehabbers that are more experienced, real estate agents, members of your investment club, and others whose opinion you trust on the subject. Still, it’s your money and profit on the line in the end.

How to Rehab or Flip a House Becomes Most Profitable When You Make Mom Happy

You want to strongly consider what the mother in the family finds important when deciding how to rehab or flip a house. Sure, dad wants a workshop in the garage. However, the most important renovations are made to the kitchen, bathrooms, and master bedroom. Those are traditionally the domains of the woman of the home. When you make her happy, you’ll get your full asking price.

As you consider the remodel, here are some of the upper middle class features many moms want:

  1. A mud room on a back or side entrance for the family’s muddy shoes and sports equipment.
  2. A laundry room is an essential element that is often more important than an extra bedroom. Placing this next to the mud room is even better.
  3. There is never enough storage for a growing family.
  4. In the kitchen, mom always wants the very best. She wants the latest appliances, faucets and sinks, countertops, floors and cabinetry and yet for the kitchen to be functional for the entire family to enjoy.
  5. A spa in the master bath will seal the deal.

Highly experienced rehabbers often pick a niche. For some, it’s houses with a mold problem. Others specialize in foundation repairs or fire damage. These can be great niches that few other rehabbers venture into – for good reason. These can be highly profitable when you have the expertise to pull them off. Or you could lose your shirt. For those just learning how to rehab or flip a house, it’s best to stick with the proven formula of buying at the right price, in the right neighborhood, and rehabbing to make mom happy.

Real estate investing is all about finding creative solutions that work for you and others. What you need to do now is TAKE ACTION!

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

“Subject To” Deals aka Get the Deed – To Finance Your Deals

One of the most important concepts that I stress and believe in is controlling property without ownership. When it comes to Subject to Existing Financing, I need to expand on the control versus ownership concept a little more. This is the ultimate in controlling real estate properties without investing your own money. In fact, the concept is to assume ownership without investing your money.

“Subject to” is short for “subject to existing financing.” No financing — just take over payments! No qualifying! No income or credit checks!

Although lease options and sandwich lease options are powerful tools for controlling a property without ownership, the ultimate control does still come with ownership.

Subject To Deals aka Get the Deed are about assuming ownership!

Here you’ll find some of what I’ve written previously about putting these subject to deals together: Type of Owner Financing.

Subject To Deals aka Get the Deed Have Many Many Uses

Not only do you not need your own money to invest – you don’t even need any credit! How low risk can real estate investing get when you invest nothing and risk nothing? What you have is pure profit!

You can use subject to deals aka get the deed to own your own home. You can use it very effectively with lease options to complete the purchase at the end of the option period. You can use it with sandwich lease options so the end buyer completes the purchase. You can use it to become a landlord. You can use it to flip houses. You can use subject to deals aka get the deed to control multiple properties with multiple income streams. All without investing your own money and all without risk!

And I believe in win-win outcomes. This is another when the seller is helped and will thank you! One problem you solve is keeping them out of foreclosure (or bankruptcy). Another is when they need to move for health/job/divorce reasons, or they don’t have enough equity to sell the property and payoff the mortgage. It could be a vacant house and they can’t pay the mortgage. Sometimes it’s the real estate agent commission they can’t afford to pay. Sometimes it’s both the mortgage company and the agent costs. Their best option is for you to make the payments on their existing loan in exchange for taking ownership (title).

Subject To Deals – What These Do For You

Your goal as an investor is finding these motivated sellers. You make money by helping others solve their problems. Sometimes a lease option deal is converted into a subject to deal aka get the deed. On a good day, a subject to deal comes along that is immediately ready to close.

In subject to deals, you’re taking full ownership of the property. Your name (or business) goes on the title.

Ownership brings you important benefits:

  • Great ROI. (return on investment)
  • Tax Advantages. Including write-offs for depreciation, property taxes, maintenance, management expenses, advertising costs to rent or sell, and insurance premiums.
  • No New Loan Costs. You don’t pay fees for loan application, points, loan origination, appraisal, document preparation, or any other fees that may occur. This can easily total $3,000 to $6,000 in savings.
  • No Need to Qualify. for a new loan.
  • No Personal Liability. for financing.
  • Better Interest Rates.
  • Sometimes you get paid to take ownership!

These deals are sweet. But you need highly motivated sellers. Typically, sellers behind on their payments and headed toward foreclosure. Or sellers with little or no equity. You make money from both scenarios.

These sellers are ready to turn the house over to you just so they can stop making payments. Believe me, plenty of these people exist.

How Subject To Deals Are Different From Sandwich Lease Options

Occasionally, you might need to pay the seller some small equity – but not with your own money. Instead, you write them a promissory note for the equity. The note is only due after you make your profit or from cash flow. You put a tenant/buyer in the property. You pay the seller’s equity from the purchase option fee or when the buyer closes the deal or from the monthly rent.

Subject To Deals are a win-win-win for everyone!

Subject to Existing Financing is different from a lease option. Specifically, you take full ownership of the property from the beginning. You own the property because the seller deeds the property to you and records the deed with you named as owner. You do this without paying off any loan the seller has on the property and without formally assuming any debt.

You will owe the seller whatever price the two of you agree upon. However, you don’t need to apply for a mortgage. You don’t have to qualify for a mortgage. Nor do you have to pay the high costs associated with a mortgage. There is nothing deceptive about doing this but you do want to do it in a way that minimizes your risk.

I use and firmly believe in lease options and sandwich lease options. Both are very powerful tools. However, subject to deals eliminate any possible conflicts or disagreements that can potentially come up during a lease option period. Rarely do problems come up but there is a chance the lease option seller could go bankrupt. Or take out a secret secured loan before you complete the purchase. They may also try backing out when they see how much money you are making through appreciation, rents, and reselling the house. Finally, you don’t gain tax write-offs from the lease option until you complete the purchase.

There could be dozens of subject to deal aka get the deed waiting for you RIGHT NOW in your own town – dozens of sellers desperate for buyers, and YOU CAN HELP THEM!

By Wendy Patton

For more than 35 years, I’ve used the Sandwich Lease Options System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

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