you approach the owner of a property and negotiate a lease option on the property with favorable terms, i.e. no future valuing, no upfront option payment, rent credit, etc. you want to make sure the contract has right of assignment. then........

you find a lease option tenant, a person that either cant qualify for financing traditionally, or that want to try out a house before buying it, etc. then you negotiate with them for better terms on your part. upfront option payment, usually 2-3% of the property value, non refundable, future value the house, etc. but be sure to offer rent credit and apply the option consideration (the down payment) to the final purchase price, this way, you can make sure they qualify for financing. you'll also want to have a lender pre qualify your tenant based on their situation in two years.

basically, in essence, you make a sandwich, original owner on bottom, you in the middle, and new buyer on top, hence sandwich lease.

hope that helps

Why would an owner go for a sandwich deal instead of doing a straight lease option themself?

It depends on the seller and the deal.

With a Sandwich lease you are basically dealing with a motivated seller. If the owner doesnt want to discount the price, and negotiate good terms that benefit you then a straight lease option is the way to go. Of course, I am smarter than that so i will tell him.

"Listen Mr. Seller, i consult on a one on one basis. If you would like to do the deal yourself, you need the right contracts. Lets consult for a $500 consultation fee and I will show you how to do it yourself and protect yourself also".

There are several techniques within a Lease Purchase.

1. Sandwich Lease
2. Cooperative Agreement (for non motivated sellers who want control)
3. Pure Option
4. Live in it myself

In a Sanwich Lease you will use 1 contract with the seller and 2 contracts with the tenant buyer.

On a cooperative agreement you will use 1 contract, find the tenant and by seller's approval get a tenant in and collect a fee which could be used towards the purchase price.

On a pure option is an agreement absent a lease. Excellent to flip wholesale deals or when the seller wants all cash. You will basically help him move his property, sell the contract, collect money or create notes!

I WOULD NEVER DO A DEAL THIS WAY!

I did this in the past and was screwed.

Turns out the original seller NEVER paid his
mortgage despite my buyer paying me, and
me paying the seller.

Many diff. options!

Best,
Jeremy Blunt

Why wouldnt you just pay the lender yourself?

You don't pay the lender yourself because you haven't yet bought the property. That is not what you agreed to. Maybe you're thinking of subject to deals.

Are sandwich lease options generally a good way to go on terms deals or are they too risky? I've heard some bad things about the renters not paying and having to sue them and having to evict them etc. Are these worth the risk?

Is there a lot of money to be made targeting investors who just want to get out of their properties and doing sandwich leases that way?

I guess it differs for everyone. I have a friend who does alot of deals with lease options. Alot of them have been pretty good to him.

With his first lease option the tenant never bought the home but rented it and paid on time for over 2 years.

With some of the houses it attracts people who either do not have the financing or aren't really sure and when you advertise it as "rent to own" they end up getting into the house and never buying it but become decent tenants.

Obviously I am still learning , but just seems like alot of things in REI. You can get burned but you can also make some money. Just do your homework and put yourself in a good position so that your ready for whatever happens.

Be very careful with consulting relationships. You might call it consulting and a judge might call it practicing law without a license. Or they could call it practicing real estate without a license.

It appears you are offering advice on contracts and brokering a RE transaction (a lease or rental contract).

John Corey

would it be better to do a sandwich lease/option over a subject-to with a lease option?

If you want a lot of info on subject to/lease options and when to use them check out wendy patton's book.

Wendy has a number of books and courses. I have read one of her books and she knows a lot about lease options and sandwich leases. She has done something like 1,000 in the past.

As to big monster's question...

A subject-to deal is not a lease option and a lease option is not a subject-to deal. With subject-to you are buying subject to the existing financing remaining on the title. You are legally and economically the owner of the property. With a lease option deal you are leasing (renting) a property that someone else owns and you have a specific right to buy that you do not have to exercise.

Note the earlier point about getting screwed if the owner of the property does not keep the mortgage current. You can address that one point by agreeing to an escrow account so that the payment for the mortgage is handled by a 3rd party. You still have other issues if the owner declares bankruptcy, gets sued and other such things. In many cases it makes sense for you to record you lease or otherwise indicate an interest in the property. Something that appears on the title and will precede future events that might attach to the property (judgments).

If you are going to do lease options you need to study up and understand how title works in your state.

John Corey

Sorry about the confusion. Most people who buy properties subject-to often use lease/options as an exit strategy on those properties. My question is, which would be better? Have the property in your name, and then use lease/option as your exit strategy, or just use the sandwich lease/option strategy?

I agree with John to use a third party escrow arrangement to make sure the payments are made.
Also, you don't have to record your contract at the court house, just a notice that there has been an agreement between you and the owner. No details need to be given, just your contact info. if there is a question. In doing this, it keeps the owner from going out and refinancing the mortgage, or selling without you knowing.

In a "subject to" agreement you have the deed in your name. You don't need the seller to come to closing when you sell.

With a sandwich lease you need the seller to come to a closing table, when you sell.

I am posting some of these topics on my blog right now.

When you are doing a sandwich lease option as an investor YOU should always make sure the mortgage payment is made directly to the lender. I make my payment out to the lender and not the seller. I got burned 1 time on this years ago and now this is the way I do them.

Even if you have the seller pay the lender directly you will want to make sure they are paying it on time. Make sure you always get a mortgage authorization filled out so you an always track it with the lender. Then make sure your contract has a provision to start paying it directly if they do not pay it on time.

Well, I see this is a promo bump! The only post above to consider without corrections is that made by John Cory, now I have to say IMO!

Some of this is simply dangerous now/

Applying part of rent credits is strictly against HUD regs and can cause the loss of Section 8 entitllements.

Not paying an option price may invalidate the option in many states. There is no considertion!

Significant equities can be established in a lease option and in many instances, will require a foreclosure if the optionor fights you on an eviction under a contract proposed above.

You need to remember that everything about real estate is local and what is customary for the area is what will be accepted. There is nothing wrong with leasing a property and sub-letting it. There is nothing wrong with taking an option on a property and then giving an option on it subject to your first option, or even ASSIGNING the option for a fee. But doing them together as one contract and as has been proposed above is totally dangerous.

Funny too that all the psosts above were new posters, except John's, solooks to me like a bit of marketing going on.

Bill, you didn't catch this thread correctly. All posts before "Wendy Patton" are from 2007 or earlier; Wendy resurrected this one ... possibly for the reason you mention in your last sentence - but it's hard to say for certain ...

How many have actually performed a successful sandwich lease option recently? I'm trying work out the issues with the double close and seasoning.

Also, has anyone ever worked with realtors? How did you make it worth their while to bring you leads?

Has anyone ever heard of having to get a rental appraisal in order to credit back part of the tenant-buyer's rent as a seller concession? Our mortgage broker told us we would need this.

Hi Babs. Yes, this is a requirement of some lenders. Only the amount in excess of the FMR can be used as seller concessions (rent credits). If the rent being charged the tenant-buyer is FMR or lower, no rent credits are allowed. A good broker can tell you if this is required and get you in touch with someone who can do the appraisal for you.

I will let everyone else explain it, ( I am too lazy to type a novel this late) LOL! I will just say, too much risk. I would put a lease option together and assign it to to the third party for a fee. Much cleaner and less liability. Feel free to contact me if you would like me to explain it in detail.

Our payment to the Seller goes into escrow to pay the mortgage, taxes and insurance on the property.

With a lease purchase, would I be able to exercise my right to purchase the property at any time, indefinitely? Say many years go by and a lot of equity has built up through all those mortgage payments, would I be able to purchase the house at the price listed in the agreement, minus the equity that has built up. If I purchased with lease a house for 200k, and 7 years go by and 100k in equity, can I purchase the property for 100k then retail it, or, could I assignment my lease contract to another investor? Is finding a tenant buyer the only way to go through a sandwich lease, or would a regular tenant, without an option to buy, be possible?

@Tim Ivory, 

First, most of this thread has been about a lease and option transaction and you're asking about a lease purchase.  Even though many use these terms interchangeably, there is a difference.  A lease purchase obligates the buyer to purchase of the property.  A lease and option gives the tenant the RIGHT, but not obligation, to purchase.  And no, you would not be able to exercise your right - indefinitely.  There is a specified time limit in the contract during which you may exercise your option/right.  Once that period expires so does your option.  During the option period you have the right to purchase at the contract price - any equity buildup is irrelevant unless it is addressed in the contract. And finally, yes, you can do a "sandwich lease" with an option to buy as long as YOUR lease agreement with the seller gives you the right to sub-let.

Hope this helps.

Thanks, I think I will remember to distinguish the "option" part when discussing lease options. So, the profit centers with doing sandwich lease options, for instance, are the optional, non refundable, deposit, any monthly spread, and a payoff if the tenant buyer decides to purchase the home, by renegotiating the final price of the home since you would be able to cash them out. Is this accurate? Generally, the accrued equity that has built up within the option period through the tenant buyer is of little concern, can't be capitalized on? The major point of profit interest after having collected the downpayment and receiving a monthly spread, then, would be to hope and assist the tenant buyer to purchase the property within the time period I have the option to purchase so I can collect a fee. Is this accurate?

What happens after the lease option expires? Is the contract cancelled, ie , I can't collect a monthly spread and am completely out of the picture? Is it possible to renew the lease option for another two or three years, and continue to do so? If so, the accrued equity would be of greater importance then. Can you expand on having this addressed in the lease contract so it would be possible to benefit from the equity? Thanks so much for your previous answer, and apologies if I'm asking boring and/or very basic questions. I am very grateful for any answers. 

@Tim Ivory, 

The profit centers with a SLO are: non-refundable option fee, monthly cash flow, and backend profit when the tenant exercises his option. (I'm not sure what you mean by "renegotiating the final price." The price is set when you sign a lease and option agreement with your tenant. There usually is no "renegotiating."

Why are you concerned with, what you call, the "accrued equity?" Perhaps you are still confused about the process. Remember, you negotiate a purchase price with the seller. That is fixed. That's what you pay for the property when, and if, you exercise your option. You negotiate a price with your tenant that, in most cases, will be higher than the price you set with the seller. That is fixed. That's what your tenant will pay, when, or if, he exercises his option. The difference between the two is known as your "backend spread."

Once the lease and related option expires without being exercised the deal is done. Yes, you are out of the picture - unless you are granted an extension by the seller. And yes, that IS possible. But don't forget, the "seller" wants to get rid of his property. Why would he want to continue granting you extension after extension and continue to be a landlord?