First sandwich lease option (possibly?), am I doing this right?

General Real Estate Investing
1

So while looking for a wholesale opportunity or a short sale, I’ve found myself in what seems to be a great position for a sandwich lease option.

In talking with the seller, I threw the idea out there of doing a lease option, and explained pretty much the entire process, inside and out. The seller knows I’m in it for a profit and is OK with it, they’re open to up to a 5 year lease/option.

The house is on the market for $180k and after running the comps, I’d say the current value is right around there. It’s been on the market a few weeks, but the offers they’re getting keep falling apart. Mortgage payment is $1,100 and rent’s on similar sized houses in that area are $1,100 - 1,600

What are the best ways to structure the contract to avoid having to pay the option consideration fee / deposit out of my own pocket? We talked about maybe doing something hybrid, where the seller would get a share of any profit above a certain point when the house sells, as well as my lease payment being $100 more than the mortgage to give them some money in the meantime, so would it be reasonable to shoot for no money up front?

Since lease options aren’t really my focus, I don’t have any tenant-buyers lined up. I was considering throwing an ad up on CragsList to see what sort of response I get. Is it typical to do this and tell the calls that the house might already be rented, that you’ll get back to them if it becomes available?

The numbers in my head are saying the monthly payment will be 1,200 to the seller and 1,500 from the tenant-buyer, with my purchase price being $180,000 and the purchase price to the tenant buyer would be $210,000. How do I determine how much $ each month goes towards the purchase of the house?

What details am I missing (if any)? Any advice on ways to make this deal work best?

Thanks!

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Hi Chris,

Congrats on your lead! First and probably most important thing I’d say is to find out what is motivating this seller. Why are they selling? Lease options don’t fit every situation so you gotta find out. Also understanding seller situation gives you the upper hand during your negotiating. L/O work the best when the seller is in a good stable situation financially. So if they didn’t lose a job, or getting a divorce, or something that is soon to be bad. If they are, and you sign a L/O remember you don’t own the house, they do. So it could mess up the deal if it’s the wrong fit and they try getting another mortgage on the house or something stupid like that. If they are good financially, here is what I would give you to consider. Is the seller current on payments? If not, don’t do L/O. Is the mortgage fixed rate or variable? If it’s variable, that cashflow you are looking at will be eaten up possibly. Is the house in perfect condition? I only do L/O with houses that are as close to perfect as you can get. If not perfect and if seller wants L/O, they must fix imperfections themselves first before I sign. Also a good idea to calculate what double closing might work out to be mathematically right at this stage so down the road you’ve already done the math come closing time with a future tenant/buyer. That is if you intend on closing that way. Also, something that I hear that is increasingly more common is sellers who don’t even know how to do L/O’s are doing it just to get the sale for themselves. So ask yourself, is the market where this home over-saturated with L/O’s in general. If yes, don’t do L/O because there is nothing making your L/O stand out in the marketplace. And my personal feeling is it doesn’t make sense to consider a hybrid when you’re projecting cashflow of less than 500/mnth max on a place. Let’s say the cashflow where 1000/mnth positive I might look at kicking some back to the seller. Otherwise it’s best to just keep the seller far away until your t/b is closing. Also is this house in a good metropolitan type area with high desirability? You don’t necessarily want to do a L/O in an area that is runned down. But if you understand the neighborhood, you run your numbers, and understand the seller motivation, and these things favor a L/O then sign it up. If not, then you have to consider doing something else. Lastly, you must get a way better price than 180k to be a deal of any type. What price is good is up for debate. Figure out what you want in profit first and work backward. Consult an agent and know what has sold (with some buffer) and pitch your offer to the seller. My 0.02

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Seller is downsizing… Kids are out of the house, not sure where they want to settle down so they wanna rent for a few years. Not behind on the mortgage, everything seems stable…
The house is in good shape. They put an addition on and it hasn’t been carpeted yet, and one of the bedrooms could use some paint. It’s in a decent area, in a commercial area but it’s a great commuter location and is right between two major cities. Didn’t see any “RENT TO OWN” signs in the area and there’s nothing on CraigsList that’s RTO.
If nothing else, I’m learning a lot from this!

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in a nutshell be careful if u do not get the deed. You are at someone else’s mercy and are not in control. Being in control of all of your properties you hold is a big deal.

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I agree with being in control. You might want a clause in your contracts that allows you to pay the mortgage company directly if the seller fails to do it. I would even have them send a letter to the mort company allowing them to release mortgage information to you so you can check up on it every once in a while to make sure their payments are being made.

The other important thing here is to make sue you have enough spread between your buy and sell price to cover the cost of closing twice. If you are going to use transactional funding then figure in the cost of that.

Anybody else jump in here to recommend ideas on how to structure closing costs for this type of deal?

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Scott good reply. I haven’t done a sandwich but I understand something like this. At closing have the original seller and your t/b go into a purch. and sale agreement, then you sign an option release for your spread. Assuming you recorded a memo. of option of course. No closing costs for you. Now if you think the seller would be upset with your profit then use a flip funder and double close but add in the additional cost. Herbster

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I’m in agreement with being in control, but you don’t necessarily need the deed to be in control. To further secure you financial interest, one may opt to attach either a performance mortgage on the property, or one may opt to attach a memorandum of option as was suggested. But I’m sure Tony will take what I’m saying to mean he is wrong. Just pointing out to the original poster both ways are possible. Obviously consult a qualified attorney to make sure to work what I’m saying properly in your area. I’m a control freak, so I like getting the deed especially if I were in the US market. As part of L/O deals I do, I have the seller sign a “loan info release” and have the bank keep it on the record so that I can check anytime what is going on, and do the initial due diligence. Also with L/O I’d suggest NEVER giving the seller the money to pay the bill (i.e mortgage & taxes). Pay these bills directly from your account to the bank so that you maintain that control. Not every seller will allow you to ‘get the deed’ on their house, so it is a good idea to have some options available to still work a deal.