Lease Option a Lease Option...Sandwich?

Question

I've personally never executed a sandwich lease option...thanks in advance for the input.

The story:

• Motivated landlord
• Asking $65k
• ARV $80k
• Renovation ? assume $0 to hold...property is in good condition
• 10-yr tenants @$770/mo. (tenants keep maintenance and pay all utilities)
• 1st & 2nd Liens ($650/mo. combined note payment...PITI)

Acquisition

• Lease Option (48 months)
• $60,000 option purchase price
• $3,000 Down (5%)
• $650/mo. PITI paid through third party debt servicer. 
• $120/mo. to operating expenses/reserves- (not interested in cash flow- don't need it)

The play:

The current owner has indicated tenants want to purchase the property but have bad credit...but, they have $25k cash on hand...

Can I execute a lease option with the existing tenants while holding equitable title?

• Collect a $10,000 option fee (36 month option)
• $70,000 option price
• Monthly rent increase to $800/mo....contribute $30/mo. to purchase price to justify the rent increase.

Everything else remains constant

• $6,500 cash on the front end
• $10,000 on the back end if they exercise the option...if not, plan B...

Thoughts?

Joe Villeneuve · Answer

@Brandon Sturgill Just following up to see if what I wrote made sense.

Let me add a couple of things:

1 - There is actually a 3rd contract...the Purchase Agreement.

2 - If you want to give credit towards the purchase from the rent, there is a way to do it without tying the Lease and the Option together.  Here's how I do it.

If you want to give $100 credit each month towards the purchase, instead of giving credit to the Purchase from the rent payment, just add up all the credits they would have gotten (if you were giving them monthly credits), and subtract that from the P.A. price...from the start.

So if you were selling the property at $100k, and wanted to give $100/month credits ($1200/year) over a 3 year period, just subtract $3600 (3 years of $100/month) from the $100k value, and sell the property to them for $96,400.  The end result is the same for them if whether they exercise their "Option" or not, but you're not tying the two agreements together.

Joe Villeneuve · Answer

No.  Simple math here.

Seller sells on MLS and...:

1 - pays RE Commissions, closing fees, etc...

2 - gets ONLY the purchase price as income

3 - has higher, and immediate tax issues

Seller sells on a LO, and...:

1 - There are no commissions (usually), or closing fees until the option is executed.

2 - gets, as income, the purchase price AND...rent payments (cash flow)

3 - delayed large tax impact

Brandon Sturgill · Answer

Thanks @Joe Villeneuve

Joe Villeneuve · Answer

Parts are right, but a couple of very important things negate this a viable.

1st, as long as the seller has a lien(s) on the property, you can't have an option to buy...and even if you could, would you really want it?  Simply adding you on title just adds more complications and doesn't fix what's wrong.

2nd, never, and I can't stress this enough, NEVER give rent credits towards the purchase.  This can easily (I've seen this enough to know this as fact) opens the door too easily for a judge to declare this a Land Contract and then the door to H**L opens for you.

There is a much better way to accomplish the same thing.

The key is to never (again I use that word strongly) ever, combine this as a Lease Option Contract.  These are 2 separate contracts, a lease and an option, with the same person (either direction, so two sets), with neither one referring to the other.

Joe Villeneuve · Answer

It appears as though you are taking that part of my statement out of context.  That statement was made specifically for the property/deal in question.

Joe Yobaccio · Answer

@Joe Villeneuve, a bit earlier in the thread you posted: "1st, as long as the seller has a lien(s) on the property, you can't have an option to buy...and even if you could, would you really want it?  Simply adding you on title just adds more complications and doesn't fix what's wrong."

Does that mean you only buy on lease option if the seller owns the propety free and clear?  I've not heard, prior to this, that you can't put an option on a home with loans or liens, so I wanted to make sure I understood that aspect.

Joe Yobaccio · Answer

@Joe Villeneuve, You have added a new twist in my studies on this subject!   So, in trying to find acquisitions and use options or lease options to acquire property, I have been studying what seller would agree to this.  I thought, sellers with little equity, was one target and that's why they might sell to me on a lease option. But, you are saying that an option can't be given if their are existing loans/liens?    If that is true, then is my only seller, one that owns free and clear?  If so, they are better off just selling on the mls, don't you think?

Brandon Sturgill · Answer

@Jason Dillard Estimated at $60-65k...he financed these in 2005...and then pulled the second...not certain when...

Lease Option a Lease Option...Sandwich?

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