How do we rehab during a sandwich lease option?

9 Replies

I have a seller agreed to a 5 yr. lease option, and have equity in the house based on the FMV. The house needs paint, new or cleaned carpet, and new shingles/roof. (Seller has been in it for 15 years.)

How do I market this without rehabbing, and still find and keep a tenant buyer?

Or if the tenant buyer wants to have things fixed, how do we structure this and keep everyone protected?

I want to make this a good win-win-win. Please help.

Leasing a house, not owning it and rehabbing it is dicey, and fraught w liability issues, insurance is tough.

@Bill Gulley may want to chime in.

Probably better to find a tenant buyer who is okay with waiting until after they purchase to do the rehab. But what if it needs work to qualify for the mortgage?

Jimmie, as Brian pointed out, rehabbing a L-O has issues. A lease or an option doesn't give you the equitable interest to make repairs as an installment purchase would have. You probably can't obtain any permits unless you're a contractor and do so under a construction agreement. If you're not a contractor I doubt you could even get insurance for the job.

How to:

If you can get the seller to order the work done you could pay for it. You might find a contractor to do the work after you have a buyer and have the roof done and paint the house after contract and before settlement, you can pay the contractor from settlement.

If the seller won't go there, you may take your option and buy Sub-To, then contract with your buyer, contract for the work to be done, upon completion go to settlement and again pay the contractor.

A buyer obtaining a mortgage: The appraiser will note the deficiencies to be repaired, work can be done and the appraiser will do a final inspection so you'd work that into the Sub-To mentioned.

Lastly, a buyer can agree to buy and pay for repairs needed for the lender, still accomplished as mentioned, paid upon completion of work or through settlement. You would need a sale contract from the seller, rolling over your option and assign the sale contract to your buyer. While this is done, it may be hard finding a buyer with cash for repairs.

Your sale contract can provide for repairs to be made by the seller (you) in your assignment of the sale contract, the buyer's down payment could be used to pay for repairs made prior to closing.

Sandwich lease options have issues, they are not the best arrangement to sell especially with significant repairs needed, these are better suited to sub-let as a landlord, if you must go there at all.. You are in a convoluted situation trying to sell with a SLO. I'd try to get a Sub-To to conclude this.

You said you have equity, it needs to be significant based on the FMV as your buyer needs to go into the property at the FMV, especially if the are getting a loan. Good luck :)

Thanks @Brian Gibbons and @Bill Gulley, that was very helpful. I will see if I can go sub 2 with the seller. Thanks again!

This is probably the best post re thinking about sandwich lease options and needing repairs.

@Bill Gulley and I agree...

1. dont do sandwiches with repairs

2. get the deed sub2 first and make a deal with the seller that is a win win.

Great post Bill.

If you can, pot your buyer in and have them ready to buy, qualify them. They can live there with a roof being done and exterior paint. Then do the Sub-2, by the time any bank kicks about it, you'll be going to closing. Again, have your buyer prequalified. Good luck. :)

I really can't add to anything @Brian Gibbons or @Bill Gulley said here....

SLO's are not for the newbie (not sure if you are or not but just saying) just as a Sub-2 is not for a newbie...

With an assignment, (assuming it's executed and drafted correctly) there is really no risk, or about as little as you could hope for...

When you are responsible for making payments better know what you are doing..

Combine a SLO with a house that needs repairs, and it's a bad combo.

Sure you can do it, but I wouldn't put the $$$ into a property I don't have the deed on!!

Also...that whole "work for equity..AKA sweat for equity" doesn't work... you get no sweat and no equity

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