Sandwich lease option investors are head and shoulders above the typical landlord. It’s about controlling the property without the responsibilities and costs incurred by a traditional landlord. Having the right disclosures and tenant agreements can make a huge difference between just collecting the monthly rent or taking all of your sandwich lease option money to the bank!
Sandwich lease options enable you to transfer almost all responsibility to the tenant-buyer!
Lease Agreements and Option Contracts are Separate Agreements
It’s important that sandwich lease option investors keep disclosures and tenant agreements completely separate from the purchase option documents. That means being careful with the terminology and phrasing of the documents.
You do this so that courts don’t misinterpret a combined lease and options 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 sandwich lease option document that the “potential buyer” receives no equity in the property until the purchase is fully completed.
Getting this part wrong is how you run the risk of a court interpreting your lease option contract as converting the nonrefundable option fee into equity for the potential buyer. The same equity conversion can happen with any ‘rent credits’ you allow the tenant-buyer.
What to Include in Disclosures and Tenant Agreements
Most, if not every state, have landlord/tenant laws requiring a signed lease for residential properties. The point is to inform tenants what they are signing up for.
Disclosures and tenant agreements are required even when the person intends to buy the home on an option.
Disclosures and tenant agreements are intended to protect tenants from unscrupulous landlords and to establish conditions for when landlords can have unwanted tenants evicted. At a minimum, your rental agreements should spell out:
All adults living at the property. This includes married couples, those living together, children, and roommates. Have all adults sign the agreement making them individually responsible for paying rent, not causing damage, and for all terms of the agreement and rules. The agreement should also state only these people and their listed children can live there. You may also want to specify how many and how often guests are allowed.
Be clear if the rental is month to month or a set-length lease. Among other things, this can determine how much notice must be given before increasing the rent or to vacate.
Clearly state the amount of the monthly rent. You need to include when the rent is due and any late charges that apply. Also, specify whom the rent is paid to (you or a property manager) and where it is paid (mailing address or office). Include acceptable forms of payment (personal check, money order, cash).
Give details about a security deposit. Comply with all local laws. Include the dollar amount, the purpose, when, and under what conditions it will be refunded, along with any non-refundable portions (pets, cleaning, damage, etc.). Some local laws require you to disclose where the deposit is held and how any accumulated interest will be distributed.
Protect your interest in the deposit. Clearly set out your and the tenant’s responsibilities for repairs and maintenance. Their minimum requirement is to keep the place clean and sanitary. Place clear limits on any alterations and repairs the tenant can make (painting, wall hangings, etc.). And where to report needed repairs. Note: Your purchase option agreement can include different requirements as a condition of keeping the purchase option viable.
Your legal right to access the rental. Describe what notice will be given before you enter the house (amount of time and maybe in writing). Include any emergency conditions that can allow immediate entry. Some states/municipalities require 24 to 72 hours’ notice unless there is an emergency. Know your local requirements.
No illegal activities – no drug dealing, stolen property, prostitution, etc.
Any other restrictions such as no business activity. You may want to include a separate signed copy of rules about noise limits, no repairing vehicles, no garbage in the yard, etc.
State laws sometimes dictate how the disclosures and tenant agreements have to be communicated to your tenant-buyers.
Other Important Parts of Disclosures and Tenant Agreements
All of this becomes second nature once you have a sandwich lease option or two under your belt. But the first few times, it’s good to be aware that everything isn’t covered in the disclosure and tenant agreements.
Avoid discriminating questions. You must fully comply with the federal Fair Housing Act. This means no questions based on race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women, and people securing custody of children under the age of 18), and disability. Don’t put anything of this nature in writing or ask verbally. You may have additional local laws.
It is illegal to include provisions in a rental agreement asking the tenant to waive the rights listed above.
In some states, landlords are legally responsible to keep tenants safe from dangerous conditions on a property or safe from criminal activity. You may be sued if you are aware of these conditions and fail to take corrective action.
Almost every state has an “implied warranty of habitability” regardless if it is part of disclosures and tenant agreements. The most basic of these requires you to provide heating, plumbing, clean water, a structurally safe roof and flooring, and electricity.
Know your state and local eviction rules.
Know and comply with how you can and cannot apply a security deposit. A landlord who fails to provide an itemized statement or return the unused portion of the security deposit can end up paying the tenant punitive damages.
Know your local laws regarding what you can and cannot do with abandoned property that a tenant leaves behind.
Know the laws requiring insurance on your rental property.
There is real humor in some state requirements.
Peculiar State Required Disclosures
Laws and regulations can be dull and boring but a few states have a sense of humor. These are actual state and local laws that must be complied with:
In Nevada, landlords must provide information regarding the right of the tenant to engage in the display of the flag of the United States.
In California, landlords must disclose knowledge of any former military ordnance locations in the neighborhood.
In California, landlords must disclose when he/she has applied for a demolition permit.
In Maine, landlords must provide a residential energy efficiency disclosure statement.
In New Jersey, landlords must notify tenants twice a year that they can request child protection window guards.
In Texas, landlords must make a copy of the landlord’s tenant selection criteria available if requested. This goes beyond the federal Fair Housing Act.
Absolutely don’t take these as all-inclusive of state and local requirements. The point is for you to be aware of the need to understand all local requirements for disclosures and tenant agreements.
Security deposits may or may not be refundable but Lease Option Fees are NOT REFUNDABLE
Sandwich lease options are all about you having options as an investor and being in control for little or nothing down. Start taking advantage of one or all your options today:
- Investing In Real Estate with Lease Options.
- Advanced strategies for Buying and Selling with Lease Options.
- Your Wealth Building Arsenal.
- Add Personalized Coaching.
- Cooperative Lease Options.
- Expand to Get the Deed “Subject To.”
- Round it all out by Working with Realtors.
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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