The best time in recent history to invest in real estate was around 2012 when the industry was crawling out of the Great Recession and foreclosure deals proliferated everywhere. The next best time was any time between then and now. But that was yesterday… the single most important thing you need to do Today is to Take Action with a strategy that is all upside without a downside.
What you are doing with a Sandwich Lease Option is Taking an Option to Make Money!!
Here, I share my secrets and strategies for Sandwich Lease Options with you. As you find your niche, you will perfect your version.
The basic lease option is a way to control property for little or no money out of your pocket. When you expand to the Sandwich Lease Option, it starts putting money into your pocket long before the deal even closes.
The sandwich option is not a get-rich-quick scheme. Done right, it puts money in your pocket immediately, but it usually requires one or two years for the biggest payoff. Your Future Financial Freedom (FX3) happens when you put one, two, or three of these deals in your financial pipeline each month.
I have tweaked and retweaked my tools and techniques as well as added tidbits from all of the option courses I’ve been able to find. Today, I’ve completed hundreds and hundreds of lease option contracts.
Step 1 – Understanding the Sandwich Lease Financials. When you seek control rather than ownership, you become a lot less concerned with the purchase price. Instead, you become much more interested in the “terms” of the lease. This vastly opens the larger market that isn’t available to most investors limited only to highly discounted distressed sales.
In a sandwich, the meat is in the middle. Your meat in the game is the financial difference between what you agree to pay for the property and what you sell the property for. PLUS being paid a higher lease option fee from the tenant-buyer at the beginning of the deal than you pay the seller. PLUS collecting a higher monthly rent from the tenant-buyer than you pay to the seller.
Step 2 – A Real Example. There are many variations to sandwich lease option deals. Each deal is unique. Here is a basic deal directly out of my files from a few years ago that any investor can easily put together.
It’s your role to put together a win-win-win scenario where everyone comes away feeling like a winner.
I ran an advertisement looking for a home in a decent neighborhood. A homeowner answered the advert (Barb). Her Realtor® listing had expired without her being offered her asking price of $189,000. Barb had an interest in selling as well as being open to a long-term lease. It only took a short conversation to determine that her definition of a “win” was completing the sale at no less than $185,000. This was close to the full market value of the house. That meant I had to look at other terms of the sale to put the deal in my “win” column.
Barb wanted to move into a tenant/landlord relationship that required the landlord to maintain the property. She had found a home on a lake that she could get into for $1,000 cash. That is all the cash she needed from the deal to lease the house she wanted to live in. Completely making her happy required that I assume all maintenance for the house I would lease from her.
I determined it would cost me another $4,000 to replace the carpet and paint the interior of the house. This would attract a quality tenant with the near-term ability to purchase the home. I would be in the home for $5,000. Less than 3% of the $185,000 purchase price.
I needed to look at the rest of the scenario and the possible terms for the deal. Annual appreciation was expected to be between 6 and 7%. That meant I could expect the value to increase by more than $11,000 in the first year. That more than covered my initial $5,000 cost.
I ran another advert looking for a tenant-buyer. Alexa was one of the first people to respond to the ad. Alexa had $10,000 saved for purchasing a home. But she had poor credit and mortgage brokers wouldn’t work with her. By me accepting the $10,000 as a purchase option fee, Alexa was able to get into a home.
This created the final piece for the win-win-win formula.
Here’s how my numbers worked out:
Option fee to seller (Barb) -$1,000
Option fee from tenant-buyer (Alexa) +$10,000
Left in my pocket +$5,000
That is $5,000 that I made on day one of the deal. I also shifted the maintenance requirements to Alexa. Going forward, I paid Barb $1,100 a month in rent but was collecting $1,450 from Alexa. That left $350 in my pocket each month until Alexa exercised her purchase option. Alexa’s purchase option price was $225,000 with an escalation clause of 6% (appreciation) if she didn’t complete the purchase within 18 months. After accounting for my upfront costs, Alexa’s option fee, positive rent cash, selling price, and related transaction costs, I cleared $43,700 from the entire deal.
All by controlling the property without owning it!
Step 3 – Finding Motivated Sellers. Every state, city, and town has motivated sellers. These sellers are not at all difficult to find. I strongly suggest looking for nicer homes that require little or no work. There are generally two major categories of sellers. Those who are financially motivated and those who are motivated by circumstances. Sandwich lease option investors go after people motivated by circumstances. People needing to sell at any price as long as it doesn’t cost them anything out of their pocket. People with two house payments, an inherited a home, burned-out landlords, job transfers, etc. People willing to enter into a long-term lease as long as someone else is making the monthly payment and even providing them some positive monthly cash.
When you talk to these people, be sure they understand the benefits, so they see the advantage in leasing the home to you with an option to buy.
Step 4 – Evaluate Potential Deals. Your best approach is having a written script that you can ad-lib from as you gain information from the person you are talking to. Your most important skill is listening for clues that you can build on. Here is a script I often use:
Hi, my name is ________. I am calling about your home for rent.
Can you tell me if it is still available?
When is it available?
When was the home built?
Have the kitchen and bath(s) been updated since it was built?
Does it have a garage or basement?
Is the yard fenced?
If the home sounds like something you would like to have for a sandwich lease option then pop the question.
Wow, this home sounds really nice, would you consider selling it?
Do you know how much you would want for the home?
When could I look at the home to see if I would be interested in it?
Step 5 – Evaluate Your Potential Profits. The terms you offer must be based on your understanding of the financials. You’ll quickly find several ways that it will work. Always run the numbers through a Profitability Worksheet like the one that comes with the course. You always have options. What may first look like a great sandwich lease option might turn out to be more appropriate as a Cooperative Lease Option or a Subject to Existing Financing deal upon closer analysis.
The essential information you need for the profit analysis is what the seller is looking for regarding price, monthly payment, and length of the lease option. The selling price is often the most critical factor to the seller. When you know this, you can make an offer so that the monthly payment and length of the option period work better for you but still make the seller happy with the deal.
There are more advanced profit points that you are going to want to know about. For example, if the seller owes $100,000 on their home at the start of the option but at the end, they only owe $90,000, you could receive the $10,000 of credit that was paid on the mortgage balance during the option period. The course materials get into many more of these advanced techniques.
Step 6 – Negotiate the Deal. Always focus on the positives, the interesting things. People like to know you like their house, and that builds immediate rapport. Good rapport is especially important with lease options because you’re asking someone to give you control of their house with little or no money down. You build rapport by asking questions such as:
“What is it that you’re trying to accomplish with the house as a result of my help?”
Make your first proposal. Keep it simple. Over polishing the first offer might come off as you not being open to hearing a counter-proposal or listening to what is important to them from the deal. A good opening technique is handwriting a few scenario outlines.
You’ll know when it’s time to draft a formal contract when the seller says something like “I want to see the details of the contract before I agree.”
Step 7 – Prepare the Sandwich Lease Option Paperwork. For the sandwich lease option, you need a total of six separate contracts. Three between you and the seller and a similar three between you and the tenant-buyer. The three main contracts are:
The Option Agreement – gives you control of the property without ownership.
The Rental Agreement – specifies how long you will rent the house and how much you will pay each month for the rental.
The Sales Contract – sets the terms of the final sale.
You need the same three main contracts on the tenant-buyer side of the transaction.
Step 8 – Finding and Qualifying Good Tenant-Buyers. There are several ways to find tenant-buyers but the most reliable is still running classified advertisements on sites like craigslist. However, you’ll need to word the adverts differently. Each advert is designed to appeal to a slightly different need by the person considering buying on a sandwich lease option.
You are going to find applicants with a wide spectrum of credit problems but most of them will fall into one of these four categories:
Good credit – these people can qualify for a mortgage and purchase through a Realtor®. They probably don’t need you.
Deadbeats – these are people that could pay their bills if they wanted to. They tend to be poor money managers and/or lazy. These are not the type of buyers you want in your home.
Poor credit with a reason – these are good people that had something bad happen to them. Common causes are bankruptcy, loss of job, divorce, medical problems with no medical insurance, disabilities, etc. These are the types of buyers you want buying your sandwich lease option homes.
Poor credit for an unknown reason – these people have poor/bad credit but it is unknown whether or not they have improved their situation. Their credit is still bad, but there is a reason. I recommend you stay away from those people or have a lender evaluate them first.
Qualifying a good tenant-buyer requires learning how to read credit reports. You are looking for someone that had a blip in their credit and now they are on their way back to financial stability. You must use standards to qualify your tenant-buyers. The simple qualifying standards I use include:
No Landlord-Tenant Judgments Unpaid.
Ability to Pay All Outstanding Judgments/Collections.
Good Landlord Reference.
Gross monthly income equal to 3 times the monthly rent.
If any Bankruptcy – Must be Discharged.
Option Fee Available or Must be Negotiated/Financed.
You need this information before deciding to accept or reject the tenant-buyer.
Step 9 – Doing the Paperwork for the Approved Tenant-Buyer. Once you approve a tenant-buyer for your sandwich lease option home, all you have to do is draft the paperwork and have them sign it. This is the basic checklist you need:
Collect application fee.
Review and verify the completed application.
Confirm applicant meets the criteria.
Collect non-refundable deposit.
Complete and sign the check-in list.
Sign the contracts.
Step 10 – Closing – Your BIG Payday! If you have been working with your tenant-buyer from the beginning and keeping them in touch with a mortgage broker, you will know when they are ready to purchase the home. Find out when the buyer is going to close and keep in communication with the seller about it. Go back and forth until you get it down to the exact day and the exact hour. You should be the coordinator, not anyone else. You have to make sure all the pieces fall into place.
Are You Ready to Take Action?
With sandwich lease options there are always three kinds of money – money now, money for months to come, and money in the end!!!
- Your Wealth Building Arsenal.
- Advanced strategies for Buying and Selling with Lease Options.
- Investing In Real Estate with Lease Options.
- Cooperative Lease Options when the time is right.
- Expand to Get the Deed “Subject To.”
- Add Personalized Coaching.
- 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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