How Do You Cash Out a Sandwich Lease?

How Do You Cash Out a Sandwich Lease?

6 min read
Chris Prefontaine

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

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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Having done hundreds of lease purchase deals—most of them whereby we stay in the middle or our partners stay in the middle, called a sandwich lease—I’m asked weekly how the deal actually cashes out at the end.  So, I wanted to share some thoughts and simplify the process for those who are curious.

What’s a Sandwich Lease?

As a review, we use the term sandwich lease when we’ve taken a home under contract via a lease purchase agreement and then placed a tenant buyer in the home via our rent-to-own program with a definitive on or before cash out date.

(Note: Presently, you cannot do such a thing in Texas, but you can still do all other purchases and exits that we teach.)

When the process is followed properly, your buyer has a mortgage ready date that has been established. At or before the end of the term you’ve established with your seller, your buyer will be ready with their own mortgage. Now what?

Buyer Process

First, it’s worth revisiting how to properly bring your buyers through the process. You should be setting them up to succeed versus setting them up to fail. There are certainly educators in the industry who will tell you it’s alright if a buyer doesn’t close—just collect another deposit from another buyer and do it again.

Although his or her agreements may call for that, it doesn’t sit well with our team morally or ethically. I want to put my head on the pillow at night knowing that we did the best for our buyers.

As such, before a face-to-face meeting with a buyer ever takes place, the buyers need to take specific steps.

We walk them through the process like this. Buyers must:

  1. Watch our buyer Q&A videos before viewing the home, so they understand they are buying—not just renting—and how the rent-to-own program works.
  2. Speak with our tenant screening company to make sure they pass all our checks.
  3. Work with our mortgage specialist for a mortgage ready plan with dates that include credit repair or credit enhancement and/or proper income reporting, as well as their income and housing ratios. This way we know they can not only afford the home but also can eventually have their own mortgage.
  4. Meeting face to face (buyers’ meeting) with us, so we can both see if we fit together.

couple signing real estate closing documents

Related: 8 Tips for a Successful Lease Option Sandwich

After all that is done, we simply make sure the mortgage ready date is inside of the term we have set with our sellers and that the buyers understand everything. Of course, we’ll leave a buffer so that we have an extra six to 12 months with the seller beyond the dates with the buyer.

Hey, life happens. Challenges could come up along the way.

Now, when it’s nearing the six months that remain until the close out point in the process (prior to the buyers’ cashing out), you’ll want to check in with them and their mortgage representative. (We use one that not only knows and understands rent to own but is also an investor himself and an expert at cashing these out.) Is everything on schedule?

Some banks are experienced and can use your original lease purchase document you signed with the buyers at the beginning. More times than not, and also to simplify the process, a new purchase and sales agreement will be drafted, reflecting the sale price, the deposit that has been paid to date, etc.

By the way, it’s critical that the buyers document all of their deposits (mortgage representatives will call that “sourcing”) in order to match what they did with what’s listed on the agreements, so that they get proper credit.

Who’s signing this agreement? You?

No, not in this case. Instead the purchase and sales agreement will be signed between your buyer and your seller directly.

When you installed your buyer, you placed a notice of option on record (recorded at the registry of deeds), which clouds the title so that the property cannot be sold without your sign off and corresponding option release fee. Your attorney will speak with the sellers’ attorney and the bank attorney. Your attorney will then provide them a release of your notice of option, so that they can transfer with clear title.

This will only happen after you’ve reviewed the settlement statement and all of the line items to make sure they’re properly credited or debited to the seller or buyer.

How Do You Know if the Numbers Are Correct?

This is where the confusion often lies. Most attorneys are used to the customary adjustments between buyer and seller.

Your rent-to-own agreement is different. For example, your buyer is responsible for taxes, so any tax adjustments that were for the term during the lease period (rent-to-own term) would go on the buyers’ side of the settlement statement.

There are other things to watch for on the settlement statement, too, such as recording fees and tax stamps. In our agreements with the seller, we determine ahead of time who is paying the seller transfer tax. It’s sometimes us off of our option release fee and sometimes the seller.

After all those adjustments are made, you simply make sure your option release fee is listed on the settlement statement as a line item/expense to the seller. The seller will get what they were promised via the lease purchase contract (if anything is due to them).

Businessman signs contract

Related: Buying? Selling? New to the Business? Why You Need a Lawyer Now

Does It Sound Like Buyers Actually Get Cashed Out With Your Deals?

That’s because indeed they do. We cash out approximately 90 to 95 percent of our buyers. Keep in mind that life events (death, divorce, job change, and relocation to name just a few) can, will, and do happen. So, you are not likely to cash out 100 percent if you’re doing 10 or more deals yearly—roughly speaking.

But it’s always great to hear from happy buyers!

“After a bad divorce and a foreclosure looming, I thought I would never be able to buy a home again. They made it possible and now I am living in my dream home. Easy to work with. Communicated with me throughout the process.”
—Michele M., Webster, Mass.

“[T]hey made our experience of getting into a home easy and hassle free. They were there to answer any questions we may have had and made the experience very positive. We got into our home within a few weeks and they went above and beyond. Truly an amazing group of people. Don, the gentleman we were working very closely with, knew we were closing on my husband’s birthday and gave us a bottle of wine to celebrate both moving into our beautiful home and his birthday. Thank you for getting us into a lovely home and going above and beyond for us!”
—The VanHoesen Family, Dallas, Pa.

I could list many more, but the cool part of the business is helping families succeed! Enjoy it.

Look at the Solution, Not the Problem

We had plenty of challenges in real estate in 2008, and we learned as we moved forward. If we had sat and whined and listened to others and listened to the media, we’d be complaining for years to come.

Instead we actually refocused on solutions, new ideas, and moving forward. That’s what brought us into the terms business—buying and selling via lease purchase, owner financing, and subject to for the past seven or so years.

Since starting our terms and investment business, even though we’d been working in real estate for 21 or 22 years prior, we have made mistakes. What do we do with them?

We say, “How much did that cost us? How did that happen? What can we do to fix it so it doesn’t happen again?

“Do we have to change any of our forms internally, our checklists, our agreements with the attorneys? What is it that we have to do to only focus on solutions?”

And as a result, our business is rock solid. We’re able to share that with our partners so that they don’t have to make the same mistakes.

I’m not saying they’re never going to make one. But if and when they do, they have the answer at their fingertips.

Finding the Right Attorney

Of course, having the right attorney on your side does wonders. They will be handling buyer signings, seller signings, and so much more. They are worth every dollar.

We charge our buyers a $595 transaction processing fee at the buyer meeting stage when they sign a buyer letter of intent. We hand off $450 of that to our attorney, and all buyers sit with our attorney to sign—even though signing a lease purchase does not require that.

There are many reasons for doing so:

1. We want the buyers to feel like it’s a closing, and it’s a big deal and a big first step.
2. They go through the documents with the attorney and they are notarized, so if ever there are questions in the future, you have an attorney as your witness. Can there be a better one?
3. This makes the process much more professional for you, your buyers, and your business in general.

Do not let any forms, agreements, or uncertainty slow you down. Get the right education, and surround yourself with the right team.

Now, go get those deals done!

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Do you have any additional questions about sandwich leases? Or about anything else? 

Fire away in the comments below. 

Having done hundreds of lease purchase deals—most of them whereby we stay in the middle or our partners stay in the middle, called a sandwich lease—I'm asked weekly how the deal actually cashes out at the end.  So, I wanted to share some thoughts and simplify the process for those who are curious.