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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?:

  • 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.)
  • This can be done regardless of the investor's personal income or credit history.
  • 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.
  • 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.
  • 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?
  • 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.

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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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CA DRE # 479003
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  San Diego, CA 92109 858-272-5510 858-272-6135