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Posted almost 3 years ago

How to Find the Best Sandwich Lease Option Houses



Free and clear owners have 100% equity in their house. Free and clear homeowners have full freedom to do anything with the house as long as it is legal. Free and clear homeowners tend to be financially savvy. Being financially savvy means these people quickly understand the benefits that come from selling a house on a sandwich lease option!

According to the U.S. Census Bureau, 38% of homeowners are free and clear of a mortgage. These people own 100% of their homes. That means 1 out of every 2.6 houses is fully controlled by the owner!

Owner Equity Makes for Good Sandwich Lease Options

An owner with a free and clear house has neither a mortgage company nor anyone else with a contractual claim on the property. The only signature or agreement required to do anything with the property belongs solely to the owner. For instance, there is no clause in a mortgage contract that the house cannot be rented out or that the mortgage company has a say in who lives in it. Another example is the owner could decide to “seller finance” a sale without being concerned about a “due on sale” clause in a mortgage contract. The seller is literally free to do as they wish with the house. Including entering into a sandwich lease option.

However, a sandwich lease option is not dependent on the house being free and clear. Almost all homeowners have at least some equity and any owner equity is attractive to a sandwich lease option investor. Generally, the more equity the owner has, the better candidate it is for a sandwich lease option. But as long as the owner has some equity, the house is a good candidate for a sandwich lease.

For owners without equity, the “Get the Deed” method has real possibilities.

In fact, real estate investors still have an iron in the fire even if the owner doesn’t have any equity in the house. However, this usually isn’t with a sandwich lease option. The “no equity” solution is likely a “Subject to Existing Financing” arrangement 

Why Free and Clear Works So Well

At the top of the list of why free and clear houses make the best sandwich lease option candidates is that the owner doesn’t have to have any cash out of the deal. They will get all of their money but they don’t need it to start the sandwich lease option. The owner doesn’t have a mortgage balance that has to be paid off when the house sells. The owner isn’t even concerned about making a monthly payment if a rent payment is missed – which I never let happen but this is an extra layer of comfort for the owner.

Free and clear owners have fewer risks and more security.

A free and clear house is like a huge savings account the owner can use to earn more money. If the owner wants to, they can offer a longer lease period to collect a high monthly rental payment and still be confident of selling the house. This is a good way for them to defer and lower taxes owed if they are facing capital gain taxes on the sale.

A desire to defer and/or lower taxes also opens up the possibility of “seller financing” by the owner collecting installment payments. Installment payments lower and defer taxes because taxes are only due on the amount collected each year. This can be especially attractive to owners nearing retirement that will probably be in a lower tax bracket when a final lump sum payment is made. People nearing retirement are more likely to own a house free and clear.

It all works nicely together. Free and clear owners can lower their taxes with the right sandwich lease option!

Why So Many Other Equity Owners Also Qualify

If 38% of homeowners are free and clear, that leaves 62% with a mortgage. The total equity for owners with a mortgage on their house is about $18,720,000,000 ($18.72 trillion) in 2019 according to Statista. That is more than triple what it was in 2010 ($6.16 trillion). The real estate market has been phenomenal for a decade.

In 2020 alone, owners have again seen their equity increase an average of 10.8%, according to CoreLogic. That amounts to $17,000 per homeowner, the largest equity gain in more than six years.

Equity works well with sandwich lease options for many reasons. A biggie is that higher home prices also mean higher rents. A homeowner with a lot of equity is likely to have a mortgage payment much lower than what they will collect in rent. That means a sandwich lease option can create a healthy income stream for the owner each month. Clearly, sandwich lease options become more attractive to owners as their equity increases.

What’s surprising is that many homeowners don’t have an accurate understanding of how equity works or how much equity they actually have. This opens the door for you to help homeowners with equity understand the benefits a sandwich lease option has for them.

Many homeowners mistakenly believe that their home equity comes from the amount of money that they’ve already paid towards the purchase price. In other words, they mistakenly believe that their home equity on a $200,000 house purchase is equal to their down payment plus the total of principal payments they’ve made on the mortgage. On a $200,000 that might be a $5,000 down payment plus $5,000 in principal payments. The owner thinks they have $10,000 in equity. That is much less than what their equity actually is.

Determining equity is simple. Take the home’s fair market value and subtract all amounts that are owed on that property. The difference is the amount of equity the owner has.

Home Equity = FMV – (RP + OL)

FMV is the current “fair market value” of the home (commonly determined as the appraisal value).

RP is the “remaining principal” amount of the mortgage loan, the principal balance that has not yet been paid by the homeowner.

OL stands for any “other liens” on the property that may exist (perhaps a second mortgage or tax lien).

The big difference here is the starting point. The starting point to determine equity is the Fair Market Value. Not the original purchase price.

For example, if an owner has a property with a fair market value of $325,000 and the total mortgage principal balance still owed on the property is $125,000, then the owner has a total of $200,000 in equity. It has nothing to do with how much they originally paid for the house.

Many homeowners have much more equity than they realize!

How Equity Helps Sandwich Lease Investors

Owners with equity in their homes are in the best position for putting together your sandwich lease option deals. The more equity they have, the more likely you will receive option credits each month.

Option credits give you equity each month from the rental payment you are making to the owner. If your option price for the home is $200,000 and each month you are paying $1,000 in rental payments to the seller, ask the seller for a $500 monthly credit towards the purchase price. For example: after one month you owe $199,500, after two months you owe $199,000, etc. This works well with sellers who have equity.

This means you are building equity in the sandwich lease option every month. You agreed to pay $200,000 for the house and sell it to a tenant-buyer for $245,000. Without building equity, your big payday is limited to $45,000 ($245,000 – $200,000). When you build equity each month, you owe less to the seller at the closing table. In 18 months, that $500 a month credit becomes $9,000 less owed to the seller.

The math changes to $245,000 – $191,000. Instead of you collecting $45,000 at closing, you collect $54,000!

This is just one of the many ways to make the most with sandwich lease options. 



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