With a sandwich lease option deal, I’ve received different pieces of advice regarding who should pay the monthly mortgage payment, taxes and insurance. I’m wondering what the best set up is to ensure that payments are being made, and they are made on time.
I’ve heard that ideally I should have an escrow company make the monthly mortgage payments, but if I’m just starting out (which I am), to make them myself. In the latter option, how could I ease an owner’s concern that I wouldn’t miss any payments, since it’s still in their name? I’ve also heard that I just send payment to the owner every month and they continue to take care of it - but in that situation how can I ensure that they are paying on time?
There’s different types of lease/option contracts.
One type gives you an effective option to find a tenant/buyer without the obligation to pay rent prior to finding one. This would be more of an ‘assignment’ option.
This would be a situation where there wasn’t any equity to play with and therefore no reason to stay with the deal long term.
If you were capturing a significant amount of equity as the principal lease/optionee, you would likely accept responsibility for the rent payments at the get-go as an inducement to get the deal in the first place.
Frankly, high equity lease/options are a rare bird. The most common reason for doing a lease/option is because the seller can’t get the price he needs without offering a buyer some time to either capture future equity, or achieve some ‘seasoning’ in order to qualify for financing at a full retail price.
Lease/options are not for bargain hunters. Just saying.
Either way, we’re talking low-equity transactions that are more about home ownership, than ‘getting a deal.’ Otherwise, our involvement will often include accepting liability for the lease/payments in order to capture the higher equity deals.
My experience in owner financing is that the original property owner should be responsible for physically making payments to their lender. The purchaser is responsible for real estate taxes and insurance above and beyond their payment to the owner. Pretend that the owner is your bank. Lenders require you to pay for taxes and insurance. They may require receipts or they could take an escrow payment. Personally the escrow payment is a real pain since the correct amount of money never seems to be in there when the bills came due unless there is a big deposit at the start.
Have you thought about creating a joint bank account with the property owner? The account would receive the payments from you (based on what is negotiated in the contract) and then automatic payments can be made for items such as insurance and mortgage/rent payments. The taxes can also be withdrawn from this account. In this way, there is no mixing of personal and property income. Both parties can check that the deposits/payments have been made.
I think it would be mistaken to depend on the seller to make payments on your behalf. I would rather have a 3rd party receive and make payments on behalf of everyone involved. This way, we know the payments are actually being made.
A joint checking account is not an option you want to take. It opens you to all sorts of liabilities, personal information sharing, and what not. We wouldn’t even consider this with our relatives.
The most professional and reliable way to make and receive payments is to use a note servicing company. They will offer escrow accounts to hold taxes, insurance, and HOA fees, and then pay them on a schedule for you. You can work backwards to see what amount you need to impound every month to make sure there’s no shortages when it comes time to pay the bills.
Meantime, everyone can see when/if payments have been received and/or paid.