How I Profited on a 2-BR Home By Switching from Sandwich Lease to Subject to

How I Profited on a 2-BR Home By Switching from Sandwich Lease to Subject to

4 min read
Chris Prefontaine

Chris Prefontaine is a real estate investor with over 27 years’ experience in the field.

Experience
Chris is the bestselling author of Real Estate on Your Terms and founder of Smart Real Estate Coach and host of the Smart Real Estate Coach podcast.

He lives in Newport, R.I., with his wife Kim and their family. Chris operates the family business with his son Nick, his daughter Kayla, his son-in-law Zach, and an amazing team. Together, they co-authored the book The New Rules of Real Estate Investing, released in 2019.

Chris has been a big advocate of constant education. He and his family mentor, coach, consult, and actually partner with students around the country, teaching them to do exactly what their company does. Between their existing associates nationwide and their own deals, Chris and his family are still acquiring five to 10 properties every month and control between $20 to $30 million worth of real estate deals—all done on terms without using their own cash, credit, or signing for loans.

Chris and his family believe strongly in giving back to the community. They currently support Franciscan Children’s Hospital in Brighton, Mass., 3 Angels Foundation in Newport, R.I., and the Wounded Warrior Project by giving a percentage of all deals to those causes.

Chris has been featured on Joe Fairless’ Best Ever podcast, discussing high-level investing.

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After a miserable experience coming out of the 2008 real estate debacle, I did what we now call AO deals—11 of them. “AO” stands for assign out. It happens when we control a home with a seller by structuring a lease/purchase and then after finding our tenant buyer (rent-to-own), we assign the buyer back to the seller for an assignment fee. I started to realize that if I can “stay in the middle” of these deals (sandwich lease in this case), I could create three or more paydays per transaction rather than focus on getting a check on a deal and then having to go find another deal.

Note: For those of you in Texas, don’t panic. No, you cannot do a sandwich lease, but you can buy via owner financing or subject to and then sell via one of the many options.

I started seeking deals I could stay in the middle of, and of course I wasn’t picky because I was enthralled by the fact that I could start creating three lucrative paydays per deal. Sometimes 2-bedroom homes can be more difficult to sell, and this happened to be the first sandwich deal I did. And then it got even more interesting as it turned into a subject to!

How Did it Start?

At the time of this deal, I didn’t have a virtual assistant or a team. I was making all the calls (we now have our family team, a great support staff, and a team of VAs), and I was the only person in the company. I called on an expired listing, and Deb answered. I found out that Deb and her husband were moving to Florida, and the real estate agent had tried twice to sell at $189,900 and could not get it done. Time was running out with the winter approaching in New England.

Related: 8 Tips for a Successful Lease Option Sandwich

I structured a 36-month lease purchase (with a built-in 12-month extension) with her contingent upon finding my tenant buyer (when you’re new, this is smart and safe so you’re not obligating yourself to take on payments) for the amount of the existing mortgage, which was approximately $167,000 with a monthly payment of $1,126 PITI (principal, interest, taxes, andinsuance). Now, you may be wondering why would the seller do this. Well, keep in mind that if she sold at full price for $189,900 (she had no offers) and paid the agent, she’d be at approximately $180,000 before paying closing costs, etc. My contract stipulated that our purchase price was the balance of mortgage at the time of cash out (so we’d capture the principal pay down throughout the term).

Untitled

The 2 bedrooms made it a bit more difficult to fill, but we found our tenant-buyer with a price of $219,900 and $,1450/month with a $9,000 deposit.

  • Payday #1: $9,000
  • Payday #2: $324/month (so if 36 months, $11,664)
  • Payday #3: $219,000 less mortgage of $167,000, plus back in the monthly principal pay down of approximately $300 (x 36 or 48 months; let’s use 36) or $10,800, less $9,000 deposit received, so our proposed payday #3 is approximately $53,800

So, we’d net over $70,000 on this deal if nothing changed (our average right now is just under $80,000 per deal all three paydays), but in real estate, things change and you’ll want to know how to change with them.

What Changed?

I received a call from the buyer that he and his fiancé were now separated, and she had moved out. He would be staying in the home. He had redone the basement, had added a nice fence around the property, and had never missed a monthly payment. This call came around 1.5 years into it, so I wasn’t concerned as long as he was making enough and could get financing on his own. He told me his dad would co-sign if necessary. All was good so far.

Related: Subject To Real Estate: Why Investors Should Add This Tool to Their Arsenals

Around the two-year point, I received a call from the seller from Florida. She informed me that she got a divorce and the loan was only in her name (the one I’d been paying down for two years), and she was wondering how the financing was coming (even though there were two years remaining in the term) because she just “wanted the home out of her name.” She was complaining that she had no money and was up against several challenges. Sometimes people just want closure. I told her if she was willing to transfer the deed (subject to purchase) I could send her $2,500 to help her out and pay for the closing costs and attorney fees. She agreed. My attorney drafted all the documents and handled the transfer, and we took over the home. Keep in mind, we now own it and have no clock ticking as far as cashing out the buyer.

A Combination of Strategies

I love taking a sandwich lease and converting it to subject to because I have full control, no clock ticking by which I have to cash it out, and I’m typically able to lower my insurance costs since I use the largest non-owner occupied agency in the country that has fantastic rates. Many sandwich lease sellers are not good to transfer subject to when they first meet you, but after you have been paying their payment for 6, 12, 18 months or so, your credibility and trust with them increases, and this becomes a possibility. If you are buying via lease/purchase currently, review your inventory every 12 months or so for this potential.

Fast forward almost exactly five years later, and we still own the home. The tenant/buyer is still in the property and has agreed that he’ll buy it when he’s ready for whatever the market value is at the time. Right now, as of the writing of this article, the home is worth $240,000, and our mortgage balance is approximately $140,000. This little 2-bedroom, tough-to-sell home has $100,000 equity right now, commands a new rent of $1,600, and has increasing principal pay down every month.

Have you used sandwiches leases and subject to deals with success?

Let me know with a comment!