BiggerPockets

You don't need funds! That's the whole beauty of doing a L/O-sub L/O . Your not buying the property your just controlling it for the term of the lease option. Escrow or in PA. an Attorney will handle the closing and distribution of funds. Read up and learn as much as you can about L/O. The strategy is quite simple to learn but the process and presentation takes some knowledge and education.

This is a really good question. There are no issues closing this from a legal standpoint but you are correct that it could be an issue from a lending standpoint. For example, FHA requires you own the home for 90 days before you can sell it, so how is it possible to sell something you dont even own?

The best way I have done this is have a good relationship with the seller and have the seller contract with the tenant buyer directly and pay you your fee. This can be disclosed on the HUD as a referral fee and paid at the closing. If you dont want to disclose profit you may need to use flash cash to fund the deal and transfer title and then sell to your tenant if they are using conventional financing. The important thing here is that the lender must not have title seasoning requirments. If your spread is small you can also usually assign your option to them and have them pay you a fee (you can even collected this as a note)

The last way that has worked for me is to have the seller sign a deed of trust or mortgage and record it. At that time you can have your tenant contract with your seller for the agreed price and when the title company does their title search they will contact you for a payoff. Your payoff to the title company will be for the amount of your profit. You can even have your seller sign this form when you first sign up the deal. Your seller will see your profit long before closing but if you have a lien recorded there is not a lot they can do to stop it. I know this is a lot of information and can be a little confusing. Feel free to contact me if you need a little hand holding.

I concurr with what Kevin said. Deed of trust from the seller with a performance rider. The added advantage of this is that it gives you redemption rights (Colorado) if they default on their loan. Also, should the seller decide they don't want to sell, you have an ace up your sleeve......you can foreclose on them.

Bill, you raise some important issues. It goes without saying that what works here may not work in every state. In Colorado we use a deed of trust with performance rider that essentially enforces an option to purchase. In the state of Colorado (others too possibly) a deed of trust does not require consideration of monetary value, much like the encumberance of a HOA or CCR's you can use the deed of trust to secure performance.

You are absolutely right on motivating the seller, it's a tool to have, but almost never to use. The costs, time, and headache are probably not worth the gain to foreclose on someone unless it's a really fantastic deal.

I'll make an example:

You have a seller that wants to sell their house but for whatever reason isn't having any success, slow market, overpriced on mls, doesn't have enough time, etc..... They are moving and will soon have another house/rental payment to make so this becomes a financial burden. What are their options for this house they're trying to sell?

1. They could cut the price and have to bring cash to closing
2. They could turn down that awesome job opportunity and stay put
3. They could rent it out for a while until the market picks back up and then try to sell again
4. They could give you a lease/option

Option #1 is out of the question for a lot of people and option 2 unlikely if they are motivated enough to call you. Options 3 and 4 are what you will be dealing with. The question becomes, why should I do a lease option instead of just renting out my property for a while? Good question, glad you asked.

You can rent it out for a while, hope that your tenant makes timely payments, hope that they don't destroy the house, and hope that it doesn't take 4 months to fill (while you're still making payments that is). And then when all is said and done, in a couple years after 3 or 4 tenants have come and gone you'll probably have to put in new carpet, or paint, or both to get it ready to show again for sale. Now once you put $5000 more into your property to get it ready to sell you also have to make 3-4 months payments while you wait for a buyer and then finally close. Expensive!

Or you could do a lease option. I will take your property and give a lease option to a sub-tenant. This person will take care of your house like it was their own, because they plan to buy it. They will pay a higher price and more rent because I am offering terms (which means I can pay you more than you would otherwise receive from a standard renter). It will fill quicker because I have a waiting list of people who want to do a lease/option. My tenants are going to take care of minor repairs so you don't have to, and they'll go straight from renting to buying, which means no vacant house payments and no re-painting/re-carpeting.

Let's say I pay you 90% of whatever I sell the house for to my sub-tenant/buyer. It's about the same you'd pay a real estate agent with closing costs but you'll spare the headaches, repairs, and extra costs of having a vacant house. You can try to collect rent from Joe Blow off the street and hope he's got the money this month, or you can collect a payment from a professional real estate company. Who's the better tenant going to be?

If push comes to shove I can even give you a portion of my sub-tenant/buyer's down payment once I have them signed up.

Rent then sell, or lease/option, I think the choice now is obvious Mr. and Mrs. Seller.

Bill, that is an interesting predicament in your state. When I use the Deed of Trust method I record it with a face value at the difference between my purchase price and the market value of the home. Though not a transfer of funds it does represent consideration in the form of equity. I would think this would be similar in theory to a HELOC, no funds have to be transferred, but rather it is an obligation to do so in the future if actions are performed in accordance with the agreement.

Makes me wonder, but I don't have a desire to open the Missouri State law books so you have the final say Bill........for now :)

Bill, I appreciate your detailed response, you bring up some very good points. I believe that based on what you have stated here, you should be able to use the Deed of Trust method in your state. The face value on the DOT should always be above your $5,000 min. if you're finding good deals. Its performance rider carries the intent of your option to purchase and since you're never on title, you can never file a lien against yourself. There would be a distinct separation of interest between yourself and the property seller, no collusion here. There should be no imputed interest as it is not a note but rather an obligation to pay in the future if the terms of the agreement are carried out. From my point of view I think you're safe here.

I am by no means a newbie at real estate but you guys know your stuff. With a lease option sandwitch you think I can get into a deal with say 5K cash or less when lawyers are paid and the total expenses are calculated.

can you send me a sample marketing ad that you may use to find people to do lease option sandwich? [EMAIL REMOVED]

can you send me a sample marketing ad that you may use to find people to do lease option sandwich? sean@cnyassetmanagement.com