Sandwich lease options always have a place in an investor’s toolbox. Today’s real estate market has all three parts that make this a very powerful strategy. The three important parts are:
- A seller needing a creative solution.
- A knowledgeable investor capable of putting the deal together.
- A tenant/buyer to complete the purchase before the lease period expires.
You, as the investor, are the meat in the middle. Done correctly, the sandwich lease option is a win-win-win scenario for all three parties.
Finding the Right People for a Sandwich Lease Option
The two elements readily available today are the tenant/buyers who are likely to be able to complete the purchase sooner rather than later and you as the knowledgeable investor. Today’s market is challenging for both first time and repeat buyers who find it difficult coming up with a down payment and/or qualifying for a loan. The sandwich lease option can easily be the solution for all of those buyers finding themselves in this position.
Knowledgeable real estate investors find the low risk and low cost sandwich lease option to be highly preferred over other high cost and high risk alternatives of owning rentals or flipping houses.
Also available, but maybe fewer in number, are sellers aware they need a creative sales solution. But these sellers always exist in all markets. It could be a landlord who already has tenants in the house but who wants to be relieved of landlord responsibilities for a few years before completing the sale. Or it could be a seller with very little equity in the house that needs to sell but can’t afford the costs of a traditional sale involving sales commissions.
It’s the sandwich lease option investor who brings together these sellers and buyers to structure deals meeting the needs of everyone.
Starting Point of a Sandwich Lease Option
As with any creative investing strategy, there are many variations to the basic sandwich lease arrangement. For the investor, the main components of the deal involve three separate income streams or paydays. The first step of the process is for the investor to locate a seller with a suitable house to be sold and assuming control of the property through a lease with an option to purchase at a future date. Sandwich lease options are about controlling properties for a minimum investment by the investor. He or she is NOT putting down earnest money or a down payment. Investors gain control through a purchase option fee but not ownership responsibilities.
Once the investor has control of the property, a tenant/buyer is brought in. The best tenant/buyer is a person likely to qualify for a mortgage before the investor’s option period expires. The investor and the tenant/buyer enter into a second lease with option to purchase agreement. A key element of this second agreement is the tenant/buyer paying a higher option fee than the investor paid in the first agreement with the seller. This higher option fee is the investor’s first of three income streams.
Another key element of the second agreement is that the tenant/buyer’s option period is slightly shorter than the investor’s option period. This places the investor in the middle of the sandwich lease (the meat in the sandwich). The purpose of the investor’s option period being slightly longer is to assure the investor is still part of the deal when the tenant/buyer completes the purchase.
The second income stream for the investor is the monthly rent collected from the tenant/buyer during the lease period until the purchase is completed. Clearly, the investor must structure the deal so that he/she is paying the seller less in rent than the tenant/buyer is paying to the investor. The rental income is typically the smallest of the investor’s three income streams but is steady and reliable income until the purchase is completed.
The seller benefits when the rental income both covers the mortgage payment and brings in positive cash flow. The tenant/buyer benefits because the option fee typically applies to the down payment when the purchase is completed. Also, the tenant making reliable rent payments enhances their credit score to quickly move them closer to qualifying for a mortgage to complete the purchase.
The third income stream for the sandwich lease option investor comes when the purchase closes. Typically, the investor’s purchase price and the tenant/buyer’s purchase price are established when the original agreements are signed. For the investor, this payday can be substantial (multiple thousands). The actual amount of the investor’s profit is based on the difference between the sales price negotiated with the seller and the final sales price negotiated with the buyer. Almost always, this involves the property value appreciating during the option period. Appreciated property value is another win for the buyer.
Common Components of Sandwich Lease Options
Creative investing strategies are all about using variables to meet the needs of everyone in the deal. Here, the option fee is important. This can be whatever everyone agrees on but is typically between 2% and 5% of the purchase price for the tenant/buyer. The investor wants to minimize what he/she pays to the seller in exchange for the knowledge and effort the investor brings to the deal. The tenant/buyer is asked for a higher option fee so that he/she has more skin in the deal and is more likely to complete the purchase.
The length of the option period (how long the tenant/buyer has to complete the purchase) is another variable to be negotiated. The longer the option period, the higher the option fee. The seller and investor typically want a short option period so that the sale is completed sooner. The tenant/buyer will want a longer option period to assure he/she has plenty of time to qualify for a mortgage. The best agreements accommodate everyone’s preferences.
The sandwich lease option typically involves shifting much of the maintenance and repair responsibilities to the tenant/buyer. Again, how much of this responsibility is shifted is negotiable. Common clauses limit the buyer’s responsibility to a specific dollar amount per month or event. Major repairs such as a roof blowing off in a storm often remain the responsibility of the homeowner who is covered by insurance. Shifting this responsibility appeals to the seller both financially and from a time involvement point of view. The same is true from the investor’s point of view. For the tenant/buyer, it begins preparing him/her for homeownership as well as adding to their financial commitment to completing the purchase.
As should now be clear, there are many variables brought into sandwich lease options. Use this flexibility to make it a win-win-win for all involved.
By taking control without ownership using sandwich lease options, you use little or no money and take very little risk. That’s Right! Say Goodbye to the expensive and high maintenance rental business. Say Hello to sandwich lease option investing!
What you need to do now is TAKE ACTION!
By Wendy Patton
For more than 35 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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