What issues may arise when doing a sandwich lease option?
I know the seller can default, thus I need to have the loan payments put in my name. Other than that, what should I be aware of?
Thanks
Check out the seller to make sure they are financially sound. Have them sign a Memorandum of Option and record it. This should cloud the title so they can’t sell out from under you. Get a long term with the seller and and a short one with your tenant/buyer. Just a few. Herbster
the question would be, how would you mitigate the risk of rent skimming?
id never trust the seller to contribute to the negative cashflow. also id never trust the seller to touch the money to make the underlying payments. you mitigate that risk by setting up a 3rd party collection service either through escrow or through title. also the seller wouldnt trust you (investor) to make the payments either.
Alex, one 3rd party company is Loanservicingcompany.com out of Nevada. I believe that Cash on this site uses them.herbster
PS rentomatic.com and erentpayment.com might do this too.
Alex,
First, yes, you want to make sure of all numbers involved. Be sure to get authorization forms signed for all mortgages so that YOU can access account info, verify it, and maintain/manage the account, make mailing address changes etc.
With this, verify the loan info, and keep it in the file, because later after the deal is going, you may need to talk to the lender again, and they often lose these, or fail to keep them logged in…meaning, you may need to fax this to them more than once.
After you sign the deal, you don’t ‘get mortgage payments in your name’, that would be to assume the mortgage.
Instead, just get a change of address for the statements to be sent to your mailing address, care of you.
The seller may have to do this for you, and if it can be done over the phone, do it when you sign the deal, right there, on the phone with you present.
After that, when rents come in, collect them, send the payments out, and keep the difference.
If the seller wants to keep track of their mortgage, which they have the right to do, its in their name, they can call the lender and check its status, and with most, go online and look at the account. (tip for you, get that log in info, sometimes you can make payments online too, fast, cheap, easy, or set up auto-draft so the payments automatically get taken from your business checking account…which might make the sellers feel better too.)
As for securing the deal, a memo is a nice idea, but to be honest, I’ve seen, and sadly, had a title company completely ingnore them before and close around them.
So, you need to stake a claim in the title.
for this, use a performance mortgage.
This insures performance by ALL parties, gets recorded against the property, and will be inline on title, before any additional leins/loans, etc, the seller might try to get later…and would prevent them, because the title company would see that there is a lease option deal already in place.
I have a FREE one on my website for study that you are welcome to.
This is not a sales pitch, buy courses from here, but for free, what the heck.
Here is the link:
http://rementors.com/perf_mort_sample.htm
Do NOT use it as is, it has hidden text in it to prevent that, it needs lawyer review for local law compliance…but tweaked for local use, it will do the trick.
Another tip, set up your lease option with one agreement, and if you sell with a lease option, use two agreements, a lease and seperate option, for your sub-tenant buyers.
Set your agreement up with the sellers, for one year, renewable at your option, for same terms, and with the right to renew for say 5 years, or as many as you can get.
Your end buyers will need to be set up with one year lease, and one year option.
whether you allow them to renew or not is up to you…I don’t, I require new agreements, with higher rent most times, perhaps more option money, and of course give them credit for option money paid previous…at your discretion.
Anyway, a few tips, hope this helps,
Jim FL
You definitely want to control how the money flows. There is a company called Virgin Lending (formerly circle lending). They buyer would make there payments to them and they to the lien holder. This also helps to establish/ re-establish credit for the buyer so they can better qualify for a mortgage when the time comes . The cost is minimal and I’d pass it on to the buyer.
The “issues” with sandwich lease/options have barely been touched on. Yes, money control is an issue, however, the biggest issue is the fact that you DO NOT control the deal. The seller does because the seller still holds title. He who holds title controls the deal in the end.
What happens if the seller files BK? You are left with a very unhappy t/b on the other side. Possible lawsuit at worst, at best, a refund of money that you probably no longer have.
What happens if the seller decides to refinance? A performance mortgage is much stronger than an option memo, but it still is ownership and can be sidestepped.
IMO, there are much better ways to do the same thing that a sandwich lease/option is attempting that are far more secure and far less risky than a SLO itself.
Raj
I was asked to elaborate on what I meant by “better ways” in my previous post.
The main problem with a sandwich lease is that you are NOT in control. You may think you are, but you’re not because you do not control the deed.
There are several ways to control the deed. You could, of course, simply buy the property outright. That would probably defeat the purpose/reason of trying a SLO, but it’s an option.
Buying the property Subject to is better than a SLO because you get deed.
You could formally assume the loan and take title.
While it’s not technically controlling the deed, a land contract/contract for deed gives you more legal and equitable interest in the property than a lease/option does.
Even as much as I dislike the use (or misuse) of land trusts, creating one and gaining a beneficial stake in that is better than a L/O.
These are just some quick points.
Raj