BiggerPockets

The market is primed for sandwich lease option investors. People are losing their jobs, listening to the news (chicken littles), or are simply looking to cash out...selling would mean losing your shirt and pants and frankly the lending climate isn't what it once was...so the number of potential buyers is not there. Amid this perfect storm, how does an amateur investor find sandwich lease options?

Thanks Mitch for your insights.
Could you possibly elaborate further on NOD lists and postcards?
If you have put together and executed sandwich lease deals, which methods have worked best for you?
Thanks!

Thanks. Appreciate the help!

Anyone needing more information on lease options, such as how to find them, how to buy them, how to sell them can find it in a free report on my lease option blog page. The URL is below in my signature.
Lease options is one of my favorite ways of investing and a sandwich lease option is fine as long as you have good tenant buyers.
Good luck,
donrock

"'Or best of all, have an executed deed placed in escrow with a limited power of attorney so you can close without ever having to talk to the seller again."

Mike,

What risks does this pose to the seller? Is it difficult to negotiate this? Also, does this make it possible to refinance rather than get a new mortgage?

Heather,

As MikeOH says, sandwich lease options do have potential problems if a seller becomes uncooperative, IF you haven't set up things correctly in the beginning. Speak to an attorney in your area about how to protect yourself and the seller. Mike is also correct that around 50% don't exercise. But when you screen the tenant buyer up front you already know what the chances are of exercise. And I wouldn't put someone in who couldn't get a mortgage at the end of the lease. I have a potential tenant buyer screened by a mortgage broker and if they say they won't be able to get a mortgage during the lease, they don't get in. Period. Also, remember most of that 50% could exercise and qualify to get a loan but choose not to because they were transferred, got divorced, changed their mind, etc. (many of the same reasons why we bought from the original owner). Stuff happens. I allow people who want to own a home who can't qualify for a loan now (almost everybody these days) to get the home they want now and get a mortgage down the road, at their convenience.

Now to answer your question, As far as putting a new deed in escrow, it is not too complicated but not all sellers will agree to it. If you explain what you are doing and why, they will usually be amicable because they are motivated to sell (now at least). Essentially, you are completing all the paperwork you would need to exercise your option; you are just doing it up front and saving the hassle of tracking them down later and getting them to sign all the docs required to close. All these documents are held in escrow and WILL NOT be released from escrow until all the contingencies have been met. The seller still has title and still owns the property and its requisite interest deductions etc. This is just step one. This allows you to close without having your seller sign anything again. I notify them and they are happy if they are getting some cash (but usually not). Step two is clouding title so they can't sell it to someone else or try something funny. Here we have two choices. Ideally, I will have them put title into a land trust. That gets the title out of their name and makes it harder for them to get another loan if they decide to try something unethical. Banks don't like trusts or anything else they don't understand. My company is the trustee so they don't have a lot of options to pull anything. They can't do anything regarding the property without approval of the trustee (but that may not stop them from trying). Also remember, they are gone and moved on and are generally happy unless you don't do what you said you would do. This is all explained to them upfront. Never deceive about what you are doing and why. They still own it, they just don't have title (they have the beneficial interest). My company as the trustee, manages the property for the owner, i.e. dealing with the bank, tenants, etc.

This will solve almost all potential problems. If they won't put it in a land trust, your other option is to just record a memorandum of option to cloud title. Using this route, there is still risk they could get sued and a judgment added, mechanics lien, etc. to the property (they still have title remember) but my contract says if that happens it is subtracted from what they get. This is a reason you don't do a lease option with someone who is not stable or laid off. I generally won't do a lease option with someone who won't allow me to do the land trust option. Remember, no deal is better than a bad or borderline deal, especially in the beginning. It would have to be a great deal to entice me to just use a memorandum of option as my only protection. Make a business decision in that case.

It is not as complicated as it sounds in writing. Get competent legal advice and do as they advise you. In practice, explaining it in person to the seller is much easier. There are many ways to invest. Use the tools you like best.

Good investing to all

Mike

The two things I see over and over again with the L/O & sub2 is:
1. Not understanding who the perfect seller is for an Option.
2. Making the L/O contract too complex.

The beauty of the L/O purchase is that it benefits both the buyer and the seller. It's the perfect win-win deal. Keep in mind that 90% of the market is not a prospect. Keep the contract(s) simple, one for the month to month rental agreement and one for the Option-so you can record that document as a lien and to make sure the seller know's the price and terms are fixed until said date. Go find the seller first! It makes for a more enjoyable, easy win-win deal. Still works for me after 30yrs.

Mathews Associates LLC

It has been mentioned that in a Lease Option, you work with the T/B to help them qualify for a mortgage to buy the home, or that the intention is to allow them to rent the home until they qualify. I assume the 2 factors that doesn't allow them to get a mortgage is that they either have bad credit or do not have a down payment. What is it that you can do to help them qualify for a loan? If they do not have a down payment now, what is going to happen over the next year that is going to help them get a down payment? With the lending standards being much tougher to qualify, I am wondering how you would be able to help someone qualify and help them buy your house!

Mike Cartier,

The first question would be if they don't have any down payment why would you even consider doing a lease option with them in the first place? You could have pre-screened them, introduced them to a broker and/or financial counseling or done nothing. Outside of those, there really isn't much you can do but give them a chance to perform as MikeOH implies (quite correctly I might add).

Things work differently in different parts of the market. If you are doing a L/O with someone in a 50k house with no down payment and a repo, I agree with MikeOH, there is nothing you could really do to help them qualify for a loan, especially these days as the riskier loans have pretty much gone away. I wouldn't do a L/O in that area of the market either. Those who do get financing probably would be 5-10% if you were lucky. Sure, you can argue that they say they can improve their credit over a year or two and qualify for a loan and you are giving them a chance they would not have had otherwise. True enough and really no argument from me here. Realistically though, most won't be able to get a loan in the best of times because they won't do what they need to do to qualify, i.e. pay their bills. If that is the part of the market you like, so be it and good luck.

Now things are different in say a 200k home and in the upper ends of the market. This buyer obviously makes way more money, understands they are going to need a down payment and have a much better chance of success in getting financed. They have way more disposable income. Maybe they are self-employed but make good money and know they don't have enough saved to get a prime loan today. There are many reasons they won't qualify today. Will they get financed in 1-2 years time? Maybe, maybe not but there chance is much higher than the lower market T/B. Also remember, you are the one deciding who gets in and who does not. Granted, things are a moving target more so these days than in the past but you should know up front what the chances of them getting financed down the road are (within reason). A mortgage broker screens all mine so I have a reasonable idea of what they will qualify for BEFORE they get in the home if they perform, as they should. So if they have no chance to get financed, they don't get in. Period. What is a reasonable conversion ratio? That is up to the individual investor to decide.

Fewer and fewer qualify for loans these days without a doubt. Is it going to be harder to get T/Bs financed over the next few years? Yes. How much harder depends on how well you screen them upfront. You are providing a service to give them a chance to be a homeowner if they do what they know they need to do to get it. Things are certainly a little harder these days but things will improve eventually. When? I can't give a good answer other than a guess but I think things are going to get worse before they get better, which is good for all of our businesses. It is unfortunately time to pay the piper.

Pick your market and know your market. What is ok with me may not be with someone else and vice versa. I won't tell someone how to run his or her business. That is their decision. Our job as an investor is not to be their best friend and financial advisor. If an adult says this is what they want and they can do what they say they can (and have a reasonable chance given their good performance) I am not going to deny them that chance. If they don't do what they say they would and perform as they said they would, then so be it but they had their chance. If they do perform and have trouble, I will do what I can to help them. My motto is firm but fair. The saying "It is not show friends, it is show business" rings true.

Happy Investing. I will try to learn to write a post that is not a mile long one of these days.

Mike C