Doing Sandwich Leases

Randy has provided some solid information here, and demonstrating a wide open marketplace for this type of transaction. I have also had great success calling on properties listed for rent. There are many "tired" landlords who are getting older, not able to take care of their property, just got through with the tenant from hell, etc. When their property goes vacant, that is the most vulnerable time for a landlord, and many ask themselves if they really want to continue to own it.
The path of least resistance kicks in and they do the same thing they always do--put it up for rent. But if someone came along and made it easy for them to sell, they may easily jump at that opportunity.
If you decide to call on rental properties, here is the script that has worked for me over and over for years to find owners who are open to negotiation. It's so simple it does not seem like it could work, but it does:

Calling on Rentals
Hi, I’m calling about the rental property ad that I found on __________________. Am I speaking with the right person?
What else can you tell me about the home besides what is in the ad? (Compliment them on the property)
At the conclusion of their description of the property:
Wow! It sounds like a nice property, it sounds like what we are looking for. There is one thing that is important to us, and that is that we would ALSO like to purchase the property. That could be now, or sometime in the future. Have you ever considered selling this property sometime in the future?

Three possible answers—Yes, No, or Maybe. For yes or maybe, make arrangements to see the property, they are open to negotiation.
If the answer is no, then respond:
You know, I certainly understand, it sounds like you are not looking to sell properties right now. But you are a landlord. I didn’t mention before but we are also real estate investors, and I wondered if you are interested in acquiring more rental properties. We may be able to help with that. Is that something you would be interested in?

In any LOs I have done, I have never given any option fee to the seller. In fact, I even set up one deal where the seller paid ME $24K to do the deal, and then I got another $5K from the TB.

I also always set it up that my purchase price is whatever is owed on the mortgage at the time that the option is exercised. Then, any pay down on the mortgage balance is also profit for me. In addition to the higher sale price for the end buyer and the monthly cash flow.

My sellers are always just thrilled to get out from under the obligation of making the monthly payment. As we hear over and over, "motivated" is the key! Find their hot button and give them what they want. Very, very often money is NOT what they want the most!

Karen

Just wanted to compliment you on your negotiation and deals. I absolutely agree that motivation is key, and have found, as you have, that frequently there are other considerations for a seller that are much greater than how much money they are going to receive. An unfortunate parallel is that owning an unwanted property is very much like owning a pile of garbage--the owner can see no value in it, and will gladly pay someone to come and haul it away.

I love this strategy, known of it for years. Unfortunately, I never seem to think about it until I read a post on the site here LOL.

Thanks, for again bringing this wonderful strategy to the forum.

Jim

Hi ALL DG Family

This is Great and helpful information!

Thanks for sharing and helping!!

Karen...I think that is FANTASTIC that you received $24K from the Seller! Way to go!!

A lot of the sellers I come in contact with want ME to give them $5K option consideration. How do you get them to agree on you not paying for the option fee?

I tell the sellers something like... "Get top dollar, w/o the landlord & management hassles and you pay No real estate commission fees"...to draw some interest.

Most sellers want the purchase price to be the market value price at closing. How do you get them to agree on setting the purchase price to the loan balance at closing?

If one is doing a Sandwich Lease Option

Should the purchase price be set to the loan balance at closing and the rent payment be set to the mortgage payment?

- OR -

If one is doing a Lease Option Assignment

Should the purchase price be set to the appraised value at time of closing and the rent payment set to the current market rent?

I was thinking the Lease Option Assignment may be a little less risky than the Sandwich Lease Option.

Thanks to ALL!
Nick

First of all, I always get all the info from my seller (details about their loan such as amt borrowed, when loan originated, fixed or adjustable rate, percentage rate, mortgage company, amount of pmt and does it include PITI and is it current)

I tell them I need to do some research on property values and to run numbers and see what I can do to help them and will get back to them tomorrow. I do a LOT of my LOs on upside down properties because most investors do not know how to work with them or to do any kind of deal except SS. They (sellers) are so happy that someone can give them some hope that they will be very open to whatever you can come up with.

I do not necessarily tell them upfront a LO is probably going to be their only option. I want to give them options, so that they think they are choosing.

I work up the numbers including the length of time needed for the option period and make up contracts. I do not include an option fee to them in the contract. If there is ever any question on this and there usually isn't, I tell them that that his how I make my money on setting up this deal, is the option fee that I receive from the end buyer. Then just move on to the next point.

In the purchase price area, I say "The full purchase price shall be the balance owed on the current outstanding loan with __Wells Fargo____ balance of approximately $100,887.96__ reduced over the term of this loan by principal payments at the time the option is exercised." (of course, you put in the name of their mtg co and the approximate balance on their loan) This could probably be tweaked a little to flow a little more smoothly, but you get the idea.

I set my monthly pmt to seller to whatever is the amt of loan pmt. NOTE: I DO NOT make the pmt to the seller but directly to the mortg co. I also do not start making the pmts until i get an end buyer in the house. The seller is responsible until then if at all possible. If they are unable, I let them know that I will NOT be making the pmts but once I find an end buyer, I will bring everything current. (Be sure to take all this into consideration when giving an option fee amt to the end buyer.If pmts are behind, the option fee from end buyer will need to be higher)

When I go to sit down with them (seller) to present their choices, I present them an option of a cash price and how much money they would need to bring to the table to make this one possible. This is really not usually an option as they have no cash. Then I show them the LO contract and go through that as the explanation for how it works. My blanks are already filled in.

Then you ask which option would work best for them.

On the deal where the seller paid me $24K, I knew that she had excellent credit and was really wanting to keep it that way (hot button). She and her fiance both owned houses and did not want two mortg pmts. She was upside down $30K.

I told her I would love to be able to take over her mortg but asked what she could do about the negative equity. She volunteered to go to her CU and was able to get a separate loan for the $24K. She was very upset that she couldn't get the whole $30k and was there any way I could do it with it short $6k? Even though I would have done it for $10k, I told her I would work the numbers with the 24 to see if I could do it and call her back. I got off the phone and did the happy dance! I LOed it for 10 years from seller. Six years to buyer with $200 cash flow/month and a nice chunk at the end.

Another very important note. Be sure to get a Release of Information form signed by the seller for you to fax to the mortg co. This will make it possible for you to contact the mortg co and they can give you any info pertaining to their loan. You need to make sure that all the numbers are correct and that their loan is NOT adjustable. Also, if they are behind you will need to know if there are late fees or any other fees that you will have to cover with the end buyers option fee and can adjust it accordingly. Just be sure to cover yourself.

When you "assign" your LO contract, this is usually called a Wholesale LO or a Co-op LO. Yes, it is less risk and sometimes is the best choice. In this case, you will usually want to set a sale price to the seller and not just use the clause above. Your fee is added to that price and that is the end buyer's purchase price on their contract. That is how it is able to be counted toward their down pmt when they purchase. In this case, you set everything up, collect your fee and you are finished.

Anytime that you are setting your purchase price for the end buyer, you want to try to make sure that the house will probably appraise for a loan at the end of the option period. You want to be sure that it is a win for all parties involved. If not, it isn't a good deal.

The rent pmt to the end buyer is usually a little higher for a LO than the current mkt rate. They are willing to pay a little higher because of the opportunity you are offering them. This way you are also able to offer a rent credit to help cover closing costs or additional down pmt. This credit is given each month as long as the pmt is made on or before the first of the month.

OK, I think I covered all your questions and any that I anticipated.

Karen

That information was VERY helpful!! I see you're referring to over-leveraged properties.

I believe the sellers that I've been contacting from Craigslist mostly want to get "full price" for their home,. They don't seem to be in dire need to sell their home and have a little to no equity. So my plan was to get their "full price" and assign the l/o to a t/b for a $5K option fee.

I will advertise and contact sellers to seek out prospects that are over-leveraged or in need of debt relief. If they respond that they are over-leveraged or in need of debt relief, maybe I can work the sandwich lease option type deal.

Thanks so much Karen!! Keep up the Great work!!

Nick

In reading through this thread, there are some very valuable points included. Very thorough Karen, thank you so much for sharing.
I would like to point out that there are a few pieces that are required to give legitimacy to your option agreement. To the best of my knowledge, the following MUST be included--if you fail to do so, the terms of your agreement could be challenged in court.
1) Set Option period (I like to be very precise; i.e. from 12:00 Noon MST, November 19, 2013 through 12:00 Noon MST November 19, 2016).
2) Set purchase price
3) Option Consideration (This can be as low as "$1.00 and other valuable consideration." But there MUST be an option consideration amount included in the contract)
I believe that all other components of the agreement are negotiable, meaning that, as long as you do not break any laws, whatever the optionor and optionee agree to is binding.

Hi Dallin

...so in doing the Wholesale Lease Option, can you set the purchase to the current market value or the seller's asking price and have a clause in the contract that says after one year the sale price will be set to the appraised value from a professional appraiser by the Lender at the time of exercising the option and closing?

Would this be fair for both the Seller and End-Buyer?

Thanks,
Nick

Hi Nick, thanks for raising great questions and for your terrific posts and input. Inasmuch as I am not able to respond as an attorney, I believe that contract terminology that does not specifically identify a selling price would be violating the requirements of a legitimate lease option. I could be inaccurate in this, but that has been my perception.
My way of dealing with appreciation and time values is to do my best to estimate an increase in value over the course of the lease option. I typically place tenant buyers in the property for a period of 18 months, and the purchase price I set for the tenant buyer is typically between 6 to 12% higher than current market value, depending on my perception of value change during that time period.
My lease options are typically sandwich lease options, so I am still linked to the seller. If I am incorrect in my estimates, then remember my comment above--Negotiation Never Ends. The tenant/buyer has gone to a lender, an appraisal has been done, we now know that we are over the price that the lender will fund, and the buyer can afford. I start working with everyone involved to amend the arrangements so that everyone comes out with a win--it may not be as big a win as anticipated, but when you are close to a deal, then everyone has to sacrifice a few dollars in order to make some dollars, and I have yet to see an arrangement that we could not create a solution, because everyone is so emotionally invested in the success of the deal. Hope that helps.

I know it was mentioned above, but for those who are searching for motivated lease option sellers you want to call on the for RENT adds Not the for sale adds. If they are willing to rent than you are over one hurdle to the deal. I love lease options and they are a great strategy for no money down deals. So many people are trying to wholesale (and I also do wholesale) but the sandwich lease option is a great way to create income with none of your own money.
Success to all!

John wakefield

Just reading your comments John, I'm with you on the calling on rentals, it really is a direction with less resistance from the property owner.
I wanted to just mention here, that in another location in this forum I discuss my perspective on how combining sandwich lease options with wholesaling satisfies the two different types of motivation and flexibility for sellers, and constitutes what I call "Two Fisted Investing." I would encourage other wholesalers to look into how this combination of two strategies increases your likelihood of creating more successful transactions, and, of course, making more money.

I actually DO have a $10.00 option clause in my seller contract but the money never changes hands.

Karen

In regard to the Wholesale Lease Option:

Yes, I was concerned about the future appraisal when the option is exercised.

If the sales price turns out to be above the appraised value at the exercise of option, the lender will probably not lend to the T/B and the T/B can not buy the property and their Option consideration is Non-Refundable. I thought with the clause setting sales price to appraised value at the time of exercise of option, the T/B at least had the opportunity to buy the property "if" they want to or decline to buy "if" the price was not acceptable to them.

Yes, I've also had less resistance contacting Landlords than FSBOs.

Sandwich Lease options sound interesting and I would like to do these but I want to learn more and know what I'm doing first because of the possible pitfalls such as (getting stuck with paying rent payments, tenant tears up the place, seller gets liens or judgments on the property, seller wants a large option deposit, seller wants to see your credit report & job history, etc)

DG Dealmaker, thanks for your added comments. I'd like to comment on your concern regarding sandwich lease options. Your greatest insurance is to collect lots of money up front. That way, if you have to resolve a problem, you will be doing it with money that was paid to you by the tenant buyer. It also makes them less likely to default. I typically collect between 3 to 6% of their purchase price on the property as option consideration up front before they are allowed to move in.
As a corollary to this, my greatest peace of mind comes from the emergency fund that I began creating 18 years ago when I started as a real estate investor, and which I maintain to this day. A little money from each deal went into the fund, until I had built it to several thousand dollars. This money is used only to fix issues with property ownerships, NOT to buy other properties or bail out my kids problems, etc. When I use money from this fund today, I replace it as quickly as possible--it helps me sleep well at night.

Crain's New York magazine was covering a story much similar to this. I believe it was published somewhere in the first quarter 2012, and the main topic was the 12 story residential complex in Long Island City in Queens. The 600 unit building was designed to have commercial and residential space. The constructing firm was Lightstone, which is led by David Lichtenstein.

why are there so many l/os on the market? if all you have to do is be in the middle and basiclly have lease with seller then find a buyer to pay more,why are there so many available out there on like craiglist with out them moving or deals being jumped on by tenant buyers?there are so many l/os out there its like looking at fsbos etc that sit for a year and never seem to get the sandwich made so to speak on the tbs end?

What town are you in?

Michael

I see a lot of L/O ads in San Diego and the majority are ghost ads

I don't pay attention to that but TRSD, do you invest in San Diego? Why haven't we done a deal together? I have a rock solid buyers list with speculative buyers who pay more for deals.

If you get anything here lmk & we can co wholesale & split the profits 50/50 ok.

"Why haven't we done a deal together?"
If you have a rock solid buyers list, you don't need me. As you know from your speculative buyers, there is no shortage of people looking for a deal in San Diego.