Lease option forms and contracts are used when tenant(s) are renting or want to rent a property before committing to purchasing the property. The contracts give the tenant an exclusive option to purchase the property but the tenant does not fully commit to the purchase. Hence, the word “option.”
A key concept here is that the option becomes an “exclusive” right to buy the property. The exclusivity in the lease option forms and contracts stops the person controlling the property from offering it for sale to another buyer.
The person controlling the property could be the owner. However, with the sandwich lease option it’s an investor controlling the property (you) without owning it. The investor is the meat in the middle of the sandwich controlling how two sets of paperwork are written. That is how you control the property as an investor without owning the property.
What Goes Into the 1st Set of Sandwich Lease Option Forms and Contracts
The first set of sandwich lease option forms and contracts is between the investor and the homeowner. It is very similar to the second set except key dates and dollars are different. These dates and dollars are the foundation for building the three profit points an investor makes with a sandwich lease option.
The three profit points in a sandwich lease option are:
- A higher option fee from the end buyer.
- Collecting a higher rent from the end buyer than paid to the owner.
- Selling to the end buyer for more than you purchase from the owner.
Keep these profit points in mind as the 1st set of lease option forms and contracts are written. You will sign a lease option with the owner. Negotiating a lower option fee with the owner than what the end buyer pays to you is your first profit. A profit that comes early in the transaction. The rent you pay the owner must be less than what you charge the end buyer to create your second profit that continues until the end buyer completes the purchase. Of course, you want to sell to the end buyer for more than you pay the owner. This is your third and last profit point and also your largest profit of the three. Clearly, you need to have all three of these dollar numbers in mind when signing lease option forms and contracts with the owner.
An important date you need in the 1st set of papers is the date your purchase option with the owner expires. For you to have full control of the sandwich lease option, this expiration date must come after the expiration date you have with the end buyer.
What Goes Into the 2nd Set of Sandwich Lease Option Forms and Contracts
For the most part, the same important dollar numbers and dates go into the lease option forms and contracts you sign with the end buyer. What’s important is the dollar numbers are higher to establish your three profit points. That means the 2nd set of paperwork has a higher option fee, a higher rent, and a higher purchase price.
It’s also important that your lease option time be shorter with the end buyer than the owner. This is a safety precaution preventing the end buyer and owner from completing the sale themselves, which you worked to put together. Otherwise, the end buyer might wait for your option with the owner to expire while the buyer still has an option to purchase. You could probably argue this legally but getting the dates correct keeps everything above board and simple.
Maintenance and Repair Responsibilities Also Belong in Lease Option Forms and Contracts
Other important clauses in the tenant/end buyer lease option forms and contracts include who is responsible for maintenance and repairs. This usually also includes dollar values for major repairs. This is important to the relationship you have with the owner as well as the end buyer. The reason the owner is entering into a sandwich lease option is because you are solving his/her landlord headaches. However, the end buyer will soon be 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.
Lease option forms and contracts are not complicated but they are different from more traditional real estate purchase agreements. I’d be glad to help you work through them the first couple of times. Once you walk away with the three separate profits made from a sandwich lease option, you’ll fully understand exactly how lease option forms and contracts make you a successful real estate investor.
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 and 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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