I hope you’re in the mood for some number crunching. You need to be because that is how you find hidden profits in deals that other investors walk away from. After all, how to find rent to own properties is all about crunching the numbers.
You do NOT have to offer what the seller is asking for the house or even what they still owe on the house. You might not even have to pay them a monthly rent amount equal to what they owe on their mortgage. These deals aren’t the most common. These types of deals are not often recommended for beginning sandwich lease option investors but are some of the more advanced deals that I and other investors have been doing for many years.
A great thing about lease options is that even advanced deals are low risk when you don’t take ownership of the property!
Although I do try to keep lease option deals above water, there are win-win-win deals out there that look like sure losers if you aren’t flexible and creative on the terms that can be offered.
What you have to do is help the seller out of a difficult situation. How to find rent to own properties is very often about helping the seller with debt relief. But that might only be partial debt relief coming at the right time. If the seller won’t make any money on the deal, the debt relief you offer has to be substantial. That is possible, which is why you always invite potential sellers to call back again if they can’t find a better way to solve their problems.
When you are their best solution, they are thankful that you are still available to help them out!
Let’s look at a few of these more advanced sandwich lease options that show you how to find rent to own properties at any time and any where…
Example #1. This is a 5 bedroom house with 4 baths on a little over an acre of land. The after repaired value (ARV) of the home was about $185,000 in a rural area of Michigan. The owner still owed $183,000 on the mortgage, which meant there was not enough equity to pay an agent commission for a sale. Their monthly mortgage payment was about $1,635. With the very small spread of $2,000 between the ARV and balanced owed, another investor would assume the risk is too high and that no profit could be made.
But with a sandwich lease option, you can offer to pay off the mortgage when the deal closes in a couple of years while writing a contract with a sales price at about $171,000 so that you collect anything above the outstanding mortgage. You’ll also offer only $1,300 for the rent although the seller currently owes $1,635 monthly towards the mortgage. You do this so that you can earn something on the rent spread with the tenant/buyer until the final sale happens. But before you make that $1,300 rent offer, you need to crunch the numbers and know the seller can refinance the existing mortgage at a lower interest rate to lower the seller’s monthly payment to about $1,300. The seller sees this as a win because of the monthly debt relief.
Your deal with the tenant/buyer is a sales price of $192,500 with a monthly rent of $1,450. That gives you a $250 monthly rent spread. You also collect a $7,500 option fee. Everyone comes out a winner in the end and you’ve added a total of about $23,000 to your bank account.
Example #2. Flexibility and creativity enable you to get into a deal without risking any of your own money. This house had an ARV of $161,000 and the investor agreed to that as the sales price. The seller also wanted $2,500 as an option fee. In exchange for the full ARV price, the seller agreed to allow the investor to first find a tenant/buyer before making the option payment. The tenant/buyer’s option payment was $10,000 that put $7,500 in the investor’s bank account after making the option payment to the seller. That is no cost and no risk upfront but still comes with a handsome front-end payment. This was also a call back a year after the investor and seller originally had a conversation about sandwich lease options. By the end of the deal, the investor made $39,000 on the deal, which is a good in the Michigan market where median home sale values hover around $150,000. These deals will be worth considerably more to you if you are in a market where prices are closer to $250,000 or $300,000.
Your Deals May Be Worth Much More In Your Local Market!
Example #3. This is a 5 bedroom, 2 bath, 1,800 square foot home on a 20 acre ranch. Large rural properties can be difficult to sell. This one had an ARV of $230,000 that is well above the median home sale in Michigan. The seller had not been able to sell the property after three years on the market. When they decided to use a sandwich lease option, their only requirement was coming away from the closing table with $80,000. The remaining mortgage was $130,000, which meant there was $100,000 equity available towards the $80,000 and to put a deal together.
The investor agreed to pay a monthly rent of $1,035 that would cover the seller’s full mortgage payment. However, the investor received a monthly rent credit of $100 that applied towards the purchase price at closing. The rent credit enabled the seller to fully cover the mortgage payment but the investor gained equity in the property at closing (nothing came out of the seller’s pocket). The investor sold the property to a tenant/buyer for $250,000 with a $1,600 rent. The tenant/buyer did not receive a rent credit so the investor earned a monthly rent spread of $565 plus the $100 in equity gain.
This is known as a “Mortgage Pay Down.”
The longer this sandwich lease option deal goes on, the more money the investor makes. And there is another chunk of money in this deal for the investor. The mortgage is paid down each month of the deal. At closing, less money goes to the mortgage company and the seller is locked in at $80,000. The money paying down the mortgage each month also goes to the investor at closing.
Investors need to understand the Dodd-Frank Act for advanced deals.
Something you should know is that the Dodd-Frank Act (passed in 2010) has an impact on rent credits. This legislation is about consumer protection. It mostly assumes that investors are more sophisticated when it comes to real estate deals and that tenant/buyers are less sophisticated. Because of this, rent credits are generally no longer available to tenant/buyers because of the possibility rent credits will be interpreted as acquiring equity starting at day one. However, the equity does not apply until the deal is completed and is forfeited if the deal is not completed. Under the Dodd-Frank Act, a court might award a tenant/buyer equity in the property even if the deal is not completed. The good news is that rent credits are still available in the contract between the seller and the investor.
The big take away from these examples about how to find rent to own properties is that creativity is the backbone of sandwich lease options. That creativity takes place in the Terms of the Contracts.
- 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.
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