There are TONS of buyers out there who can’t buy a house. And there are many ways for investors to make money. What’s not intuitive is that there are ways for investors to earn money helping buyers that are coming up a little short of being able to purchase a home. One of these ways is with Cooperative Lease Options (aka wholesaling).
The sandwich lease option is the most profitable and most preferred method for investors to connect tenant/buyers with a seller needing to sell outside of traditional channels. But there are times when cooperative lease options are a better choice for everyone involved. Three of those times are:
- When you (the investor) are just getting started and could use a quick deal generating fast cash.
- When you have maybe a dozen sandwich lease options under contract generating monthly rental income (let’s say $250 per house per month) but it will be several months before a tenant/buyer closes a purchase to generate a bigger payday for you.
- You have a possible deal that will generate a decent lease option fee for you but there really isn’t much equity (big payday) for you to earn by holding the rental contract for a few years.
Here we look at the third scenario.
Cooperative Lease Options for the Option Fee
This version of the Cooperative Lease Option works well when the seller doesn’t leave much meat on the bone for you (the investor) to stay in a sandwich lease option for two or three years. Sorry to say but this could be a time when the seller is plain greedy. Or the seller might not have enough equity in the house to afford sharing with you in exchange your knowledge and expertise. Greed is greed and you should always be very cautious when working with a seller motivated by greed. But there are times when the seller needs to sell a house and just doesn’t own enough equity to be able to share.
Cooperative lease options are about finding a buyer that wants a lease option and connecting him or her with a seller wanting the same thing. You are the middleman flipping the lease option to the buyer for a fee. An example of a seller without enough equity to share is when the seller’s mortgage balance is equal to the sales value of the house. For some reason (divorce, job relocation, illness, etc.) they need to sell the house but will be stretched to pay off the mortgage at the current value of the home. This is a time the seller is motivated to make a creative sale because they probably can’t afford to pay a Realtor® commission either.
That means the seller will put a tenant/buyer in place to generate rental income to make the mortgage payments until the tenant/buyer can qualify to complete the purchase. These tenant/buyer is also willing to pay top dollar for the house which helps the seller pay off the high mortgage. This is a win-win-win for the seller, you as the investor, and for the buyer.
What you are going to do in a cooperative lease option is bring the seller and tenant/buyer together for a lease option and collect an option fee from the tenant/buyer but then you step out of the deal. The seller and buyer must complete the sale before the end of the option period.
How to Structure Cooperative Lease Options (Wholesaling)
This might seem more complicated than it is. But it’s actually simple. This is nothing more than creative investing that most people don’t think about. First, you use one of the many methods I share to find a seller in a bit of a pickle that needs some help with this type of creative selling.
Then you explain in a general way how a lease with an option to purchase works. What’s important here is that you do gain some control over the property. You do this by signing a purchase option agreement between you and the seller for some “consideration”. When it comes to a cooperative lease option, you want the option fee you pay the seller to be very small. You probably want to start negotiating for as little as $1 to $10. This is important because your money comes from a much higher option fee that you collect from the tenant/buyer. If you pay too much to the seller, the tenant/buyer fee will only be reimbursing you rather than earning you a decent fee in exchange for your work and knowledge of how to put the deal together.
The purchase price you have under contract in a cooperative lease option is the same price you offer the tenant/buyer. What you want from the tenant/buyer is the full “traditional” option fee. A traditional option fee is between 2% and 5% of the purchase price. At 3% on a $200,000 purchase price, the option fee you collect is $6,000. Once you collect the traditional option fee, you “flip” your purchase option agreement (you paid $1) to the tenant/buyer. At this point, you step out of the deal.
It becomes the responsibility of the seller and the buyer to close the deal at some future date before the option period expiries.
Of course, what is great about creative investing is that there are variations to everything discussed here. The cooperative lease option is only one tool in your toolbox.
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.
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