Negotiations- Have the Answers Before the Seller Asks the Questions

Negotiating with the Seller- The Beginning

First and foremost,when you sit down with a seller to begin negotiations for a sandwich lease option deal, you are asking someone to give you control of their house with little or no money down. It is of utmost importance that the seller feels comfortable with you. Do you think a seller will warm up to you quickly when you visit them at their home and start the conversation with, “I don’t like your choice of carpet or wall color. You’re going to have to replace it.” Or… will your relationship get off on the right foot if you start with, “I like the layout. I see there‘s a small ding on this wall. You don‘t mind if I fix that, do you?”

Tell them what you like about their house, not what you don’t like.

Pretty much a no-brainer, right? You’re starting a conversation that will hopefully lead to a  long term sandwich lease option relationship with this person. You need to start it the right way.

Talk to the Seller About Making the Mortgage Payments

One of the most important benefits you are offering is to make the monthly mortgage payment for the seller. You want to mention this a few times early in the conversation. As the conversation and relationship progress into the details, you have at least three payment options to discuss.

1. 1. Pay the seller directly each month.
2. 2. Make the payment directly to the lender.
3. 3. Set up a 3rd party escrow account.

Your preference would be to make the payment directly to the lender each month so that you do not doubt that the payment is made. However, when the seller has a decent amount of equity in the house, you can have more confidence that they will continue to make the mortgage payment. If there is a good reason, it’s acceptable for the seller to make the monthly payment under these circumstances. But you still want to be able to verify the payment is made at any time you chose.

Preferably, you make a direct payment to the lender.

Setting up a 3rd party escrow account is usually the investor’s second preference when it comes to negotiating a sandwich lease option. In almost all cases, the seller is willing to pay the small cost for an escrow account if your preference is paying the lender directly. The seller doesn’t usually have an objection to you paying the lender since they will be notified almost immediately if you miss a payment, because they are still legally responsible for the loan. However, if the pick #1, you won’t be notified if they miss a payment unless another step in the process is added, such as an escrow account.

Without equity, the seller might have walked away from the house if you hadn’t stepped in to help.

These options all work when the seller has decent equity in the property. But you should be concerned if they don’t have any equity. Normally, if the seller has no equity, you (as the investor) should be looking at another arrangement such as Subject to Existing Financing Deal. Without equity, there is usually not enough reason for the seller to stay current with the payments, especially if they are having financial problems or a small hiccup happens with the sandwich lease option.

Go Long Term on the Sandwich Lease Option Contract

Talk about the fact your tenant/buyers are “nearly qualified” to complete the purchase of the sale of their home. The average time to complete a Sandwich Lease Option deal is 18 to 24 months( please check with your state). But there is no guarantee when the buyer will actually cash out the seller. A long term sandwich lease option is a contingency in case an unknown problem comes along. Things happen in life like job transfers, divorces, or a job loss from COVID-19.

Both you and the seller want to complete the deal as soon as possible. A longer contract creates flexibility to find another tenant/buyer if the first one doesn’t work out. The seller should accept the longer contract because, as the investor, you will continue making the monthly payments and taking care of the maintenance.

As the investor, you will continue making the monthly payments!

The seller on a lease option might say they are willing only for three years on an option contract, but you should first ask for five years. It’s okay if you accept three years but you should start by asking for five. If you operate with integrity, you probably won’t lose the deal if something does go wrong. If the deal hasn’t closed in three years, you ask the seller, “What do you want to do?” “I may have some suggestions.” In almost every case, your integrity and the fact that the payments are being made on time  will carry the deal through to the final closing.

If you have a tenant moving out, you should assume the seller knows about it. Chances are  the tenant told a neighbor and that neighbor is still occasionally talking with the owner. This is another situation where your integrity comes in. Even if you have plenty of time to move in another almost qualified buyer, call the seller and let them know what is going on. This is a good time to remind the seller that you’ll still be covering the monthly payment and maintenance. You can also assure the seller that you’ll be doing any cleanup if it is needed.

All of this improves the chances that the seller will extend the sandwich lease option if needed.

Remember that you don’t lose even if the deal falls apart towards the end of the sandwich lease option period. You’ve collected the large upfront tenant/buyer option fee. And you’ve collected the difference in the rent you pay to the seller compared to what you collect from the tenant. You’re controlling the property without owning it. The worst possibility is you walk away with the money but without any more obligations or responsibilities. The seller will walk away with more of their mortgage being paid down.

You minimize your risks by negotiating the terms.

How Does the Seller Know You’ll Get the House Sold?

This part of the negotiation doesn’t take much more than letting the seller know you’ll be putting as much of your professional resources into the deal as it takes to complete the sale of their house because you want to be paid as much as they want to be paid!

By now, the seller should be clear that you’re offering a sandwich lease option deal because you’re convinced that everyone will come out a WINNER! It’s as simple as you guaranteeing the monthly payment and maintenance until the deal is done. You want a qualified tenant/buyer in the house ASAP so they cover your costs. You know how easy it is to have a tenant/buyer in place in less than three weeks. You also know that the average time to finalize the deal is 18 to 24 months. Weave this information into the conversation before the seller even brings up the subject.

I’m Paying You – I’m Taking the Risk – I’ll Get the Deal Done!

Bonus TIP: Ask for one month of vacancy before you start making the payment for the second month. Explain to the seller that mortgages are paid in arrears and that rents are paid in advance. They are paying for the last month they were in the house and you’ll prepay the rent starting the month after they move out.