Sandwich option lease

18 Replies

Hello everyone! I have been doing a lot of research on sandwich lease options recently. I feel this is something I want to give a shot. Pros cons ? I currently invest on the west coast of Florida. Property is hot in some areas. How do I find someone willing on my terms for a lease option ? * I currently was speaking to someone that I received an inside tip was moving rather quickly and is trying to sell his house By Owner. It’s a 2/2 1221 square foot. Comps I think it’s worth 205k. I was going to offer 190k/ 3-5year / 1000a month / 1000 down. Find a tenant 205k min sell what appraised for/ 1 year /1500 month / 5k down. Tenant responsable for Maintenance. Simple Conservative numbers. How do I really know how much the house is worth should I get it appraised once I have it under contract? thoughts ? Thanks for the help.Happy hunting.

You don't put up a down payment when you Lease Option.  You're not buying the house...yet.

You are paying 100% of the "option" to buy the house, and the "option contract" costs 5% of the ultimate agreed upon purchase price of the home you will be paying.

Example:

Ultimately buying house for = $200k

Option Contract cost = $10k (5% of ultimate purchase price)

You know own the first right of refusal to buy the house at $200k, at any time within the term agreed upon...such as one year.  If you "exercise your option", you will be paying $200k at closing.  You will need a down payment at that time, just like any other purchase of a property.  The Option Consideration is NOT a down payment, nor is it a "partial" down payment.  It is the "TOTAL COST" of the "Option to buy the property".

@Joe Villeneuve *not a down payment. Mistype that 1k would be the nonrefundable payment same as the 5k from the new lease to buy holder.
Originally posted by @Ralph Dixon:
@Joe Villeneuve

*not a down payment. Mistype that 1k would be the nonrefundable payment same as the 5k from the new lease to buy holder.

 There are 3 people involved with a Sandwich LO:

1 - Seller/Owner = Bottom Bun

2 - Investor = Meat and Spread

3 - Tenant/Buyer - Top Bun

There are 2 Relationships:

1 - Between the Seller/Owner and the Investor

2 - Between the Investor and the Tenant/Buyer


There are also 3 SEPARATE and completely disconnected contracts for each of the 2 relationships:

1 - Lease

2 - Option the Buy

3 - Purchase Agreement

There is a connection between the Option to Buy and the Purchase Agreement.  However, there is absolutely NO connection in any way, shape or form, between the Lease and the other 2 contract/agreements...and this is critical, with no exceptions. 

Originally posted by @Ralph Dixon:
@Joe Villeneuve thank for the advice! Everyday you aren’t learning something you are just cheating yourself !!

 I tell people all the time.  When someone tells me, I'm "thinking outside the box", what they are really saying is I'm thinking outside "their box".  The "box" is your knowledge base, and it is the only thing in life that has no limits.

@Joe Villeneuve You might want to reword your first comment. The way it reads right now it sounds like it's standard practice for the investor to pay 5% of the agreed price as option consideration.

@Ralph Dixon Personally I wouldn't pay $1k for the option, but that's up to you and the seller. I would also suggest shooting for $10k from your T/B. Also...in nearly every jurisdiction it's illegal to make the tenant responsible for repairs on the lease. You can make the optionee responsible for maintenance for their option to remain valid though.

Originally posted by @Doug Pretorius :

@Joe Villeneuve You might want to reword your first comment. The way it reads right now it sounds like it's standard practice for the investor to pay 5% of the agreed price as option consideration.

@Ralph Dixon Personally I wouldn't pay $1k for the option, but that's up to you and the seller. I would also suggest shooting for $10k from your T/B. Also...in nearly every jurisdiction it's illegal to make the tenant responsible for repairs on the lease. You can make the optionee responsible for maintenance for their option to remain valid though.

 5% is standard with me.

@Doug Pretorius been reading more and more. Just started Wendy Patton. I would try to keep as much money in my pocket but looks like 2-3% purchase price. Example I’m looking at Value 200k Me buyer tenant 180k 200k min / price goes up onmarket 1000 month 1500-1700 month 5-7 years 1 -2 year 1000 down 5,7,10k 0 credit 25,50,100 credit Something kinda like that ? These are loose numbers just trying to get a feel and if this is something I might dabble in.
That didn’t come out as clean as I wanted. Value 200k I’m getting it for 180k, 1000rent , 5-7 years , 1000 for first month maybe none if I can pull it off , 0 credit. Tenant buyer 200k min depending on market ,1400-1700 Depending on option payment , 1-2 year , credit 25,50,100 also depending on option payment.

@Ralph Dixon Any of that can work, there are lots of ways the numbers can go. If the seller wants a higher price you can trade higher rent credit. If they want higher rent you can trade lower price, etc etc.

Here's what I'm doing right now:

IN:
Term: 2 years
Price: Market value
Rent: $2,000
Credit: $1,000

OUT:
Term: 2 years
Price: Market value
Rent: $3,000
Credit: $1,000

Originally posted by @Doug Pretorius :

@Joe Villeneuve Are you offering 5% or is that what sellers are asking from you? The reason I ask is that sellers very rarely ask for anything upfront here.

 It's the way I analyze.  The actual deals, like any other deal, is negotiated

@Doug Pretorius so your deal you are making 24k passive from rent. What if the house doesn’t appreciate within 2 years or your tenant buyer doesn’t buy the property within the 2. You also don’t collect a option payment ?
What about preforeclosurer for a L/O ? Get mortgage uptodate? I feel like this would be an easier win/win/win. Sorry for all the Qs

@Ralph Dixon Many tenant/buyers want a lower monthly payment, so I'll let them prepay rent. I might get half or more of that $24k upfront.

The nice thing about both buying and selling at market value is it doesn't matter what happens to the price. And if the tenant/buyer doesn't close the option expires. If the seller is interested in continuing, we can always extend too.

Preforeclosures are extremely rare here in Canada so I don't deal with them at all.