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Sandwich Lease Options
Make money on a property without buying
it!
Invest in Property With Low
Capital Outlay
A lease option is a fantastic
way for a landlord seller or an investor to sell a house. It
is also a good way for the tenant buyer who can't go through
normal financing channels to buy a house. Now an investor
could buy a house the same way. In fact, this is a great way
to gain control over a property without incurring the risks of
actual ownership, while still making the same kind of profit?
The vehicle here is called a
sandwich lease option.
A Sandwich lease is a leasing
arrangement in which an entity leases property from one party
and leases that same property to another party. In this
arrangement, the entity is both a lessee and a lessor, so it
both pays and collects rent on the same property.
You gain control over the
property by signing an option agreement to buy it. You now
control the property because the owner cannot sell without
first going to you. Your outlay on the deal might be a little
as a security deposit, the first month's rent, and possibly a
little option consideration. Obviously, you will not volunteer
to pay more consideration than the seller requires. Instead of
paying Option Consideration, try to pay that same amount as
pre-paid rent.
Meanwhile, you quickly place a
suitable tenant buyer in the property using a lease option on
the other side. Here you charge the normal option
consideration, both upfront and monthly over the term of the
option, while requiring normal market rent.
Your profit?
The full amount of the option
consideration (perhaps less your security deposit, unless you
get a security deposit from your tenant to offset that amount
and obviously your tenant buyer needs to offset the rent you
paid). Additionally, if your rent obligation is favorable
enough, you can pick up a little on the spread between the
rent you pay and what your tenant pays you.
What are the advantages of a
Sandwich Lease?:
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The investors capital costs can be minimized,
since the property is not purchased until the tenant buyer
exercises their option and buys the property. (You do a
double escrow. One escrow for the Tenant buyer who purchases
the property from you and another escrow where you
simultaneously buy the property from the owner.)
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This can be done regardless of the investor's
personal income or credit history.
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Since the investor does not need financing,
as many of these deals can be done simultaneously as the
investor can find and negotiate.
Where do you find these
deals?
Don't bother with advertisements, classified or otherwise, for
lease-options. The person who calls it that is savvy enough to
pull all the potential profit out of the deal before you get
to it. Instead, approach landlords who advertise a house for
rent.
Note: Do not call "For
Lease" ads and ads that are managed by property
management companies. They are usually not interested in doing
a lease option and you will waste your time. Call only
on For Rent By Owners ads.
All they want to do is get a
tenant in before they start losing money. However, many would
welcome the chance to sell the house, too.
Why?
Why does a landlord rent
out a single-family house? There are a few possible motives:
-
The landlord is an investor who is holding
onto it for cash flow.
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The landlord used to live in the house, then
bought a new place and thought it would be cool to rent this
one out; now it has become clear that that involves work,
and it's no longer fun.
-
The landlord had to move because of a job
transfer, or just couldn't get the house sold when the new
house was ready, so had to rent it out to offset the extra
mortgage expense
In any of these cases, the
landlord might easily be persuaded that giving you an option
would be smart business. In the last situation, persuasion
probably won't be necessary, this is a highly motivated
seller. At any rate, you can test it out with the following
dialog:
"Hi, I'm calling about the house you
have for rent in Pacific Beach. Can you tell me a little about
it?"
After discussing it for a
minute, continue:
"To tell you the truth, what I want
to do is buy a place, but I can't afford to right now. But I'd
be very interested in renting this one from you with an option
to buy it down the road a couple of years."
Now picture the reaction of the
person who is tired of owning the house. You have just
answered his or her prayers. Imagine if this person lives 1000
miles away now because of a job transfer. You are offering to
relieve him or her of a major headache. Even better, what if
the house has been vacant for two months when you call!
Note: Any time you spy a
house for rent and see signs that nobody lives there nor has
it been occupied for any length of time, stop the car, get
out, and talk to a neighbor. Find out the situation. Where is
the owner? Why is it being rented? What happened to the last
tenants? If the owner is out of state and had to rent it
because it couldn't get sold in time, you have struck the
mother lode. Call the owner and help him out of his misery.
Make sure you don't pay rent in a much higher amount than what
is needed for the mortgage, taxes and insurance (yes, he still
pays taxes and insurance, it's his house!)
If the landlord is interested
in giving you an option, you can discuss the details at this
time.
What if the owner is not
interested?
Thank him for his time and
call the next "For Rent" advertisement in the
paper.
Here are some things to
watch out for:
1. Make sure that the lease agreement
you sign as tenant doesn't prohibit you from subleasing.
Remember this about subleasing. A primary reason for not
allowing a tenant to sub-lease is because the landlord wants
to control who lives there, not give up that power to a third
party.
However, in this case, you have now taken
over interest in the property, and you need this control for
yourself. Besides, without striking that clause from the
contract, you cannot do the deal. Highly motivated sellers
will give in.
Solution: You prepare the lease
agreement and make sure it does not mention subleasing.
2. Make sure you take in more money
than you spend on the transaction. This may seem like a
no-brainer, but that is why you avoid the people advertising a
lease option. Go to those who are only thinking of renting out
the house. Ideally you want to pay no option consideration.
Maybe you end up paying $1000 up front. Then you collect $5000
in option consideration from your tenant plus $250 per month.
Remember, the landlord was not thinking consideration when he
placed the rental ad. Also, negotiate the lowest possible rent
payment for yourself, so that you have a margin between what
you pay and what you collect. It helps that you don't have to
pay property taxes and insurance out of your rental revenues.
3. Set an expiration for the option
you give to be three months prior to the option you buy. If
your tenant exercises the option, things will take care of
themselves with a simultaneous or double closing. If the
tenant doesn't exercise the option, you have three
possibilities for your next move.
-
The tenant walks away from it, so do you.
The option gives you the right to buy the house, not the
obligation to buy it.
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Tell the owner, "I thought I had
things set up to buy this from you next month, but that
just fell through. I'd still like to do it though. Would
you be interested in renewing the option for another three
years?" For the past three years, you paid like
clockwork and the house is in marvelous shape. Why
wouldn't the owner want to continue?
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You like the house, you have a three-month
window, go out and get financing to buy the house under
the original option terms or to find another tenant buyer.
In conclusion:
A sandwich lease option is a
good alternative to the normal buy-fix-sell type of lease
option or flip. The advantage is that if you are currently
cash-poor and overextended, you're not out of business. Just
rent a three-year investment, make a little bit now, make the
rest later.
Among the most successful
investors, a sandwich lease option is a favorite strategy.
Home
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Lease Purchase Solutions, Ltd.
Gar C. May
ca. dre 479003
gmay@san.rr.com
858-272-5510
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