How I Profited on a 2-BR Home By Switching from Sandwich Lease to Subject to

by | BiggerPockets.com

After a miserable experience coming out of the 2008 real estate debacle, I did what we now call AO deals—11 of them. “AO” stands for assign out. It happens when we control a home with a seller by structuring a lease/purchase and then after finding our tenant buyer (rent-to-own), we assign the buyer back to the seller for an assignment fee. I started to realize that if I can “stay in the middle” of these deals (sandwich lease in this case), I could create three or more paydays per transaction rather than focus on getting a check on a deal and then having to go find another deal.

Note: For those of you in Texas, don’t panic. No, you cannot do a sandwich lease, but you can buy via owner financing or subject to and then sell via one of the many options.

I started seeking deals I could stay in the middle of, and of course I wasn’t picky because I was enthralled by the fact that I could start creating three lucrative paydays per deal. Sometimes 2-bedroom homes can be more difficult to sell, and this happened to be the first sandwich deal I did. And then it got even more interesting as it turned into a subject to!

How Did it Start?

At the time of this deal, I didn’t have a virtual assistant or a team. I was making all the calls (we now have our family team, a great support staff, and a team of VAs), and I was the only person in the company. I called on an expired listing, and Deb answered. I found out that Deb and her husband were moving to Florida, and the real estate agent had tried twice to sell at $189,900 and could not get it done. Time was running out with the winter approaching in New England.

Related: 8 Tips for a Successful Lease Option Sandwich

I structured a 36-month lease purchase (with a built-in 12-month extension) with her contingent upon finding my tenant buyer (when you’re new, this is smart and safe so you’re not obligating yourself to take on payments) for the amount of the existing mortgage, which was approximately $167,000 with a monthly payment of $1,126 PITI (principal, interest, taxes, andinsuance). Now, you may be wondering why would the seller do this. Well, keep in mind that if she sold at full price for $189,900 (she had no offers) and paid the agent, she’d be at approximately $180,000 before paying closing costs, etc. My contract stipulated that our purchase price was the balance of mortgage at the time of cash out (so we’d capture the principal pay down throughout the term).

The 2 bedrooms made it a bit more difficult to fill, but we found our tenant-buyer with a price of $219,900 and $,1450/month with a $9,000 deposit.

  • Payday #1: $9,000
  • Payday #2: $324/month (so if 36 months, $11,664)
  • Payday #3: $219,000 less mortgage of $167,000, plus back in the monthly principal pay down of approximately $300 (x 36 or 48 months; let’s use 36) or $10,800, less $9,000 deposit received, so our proposed payday #3 is approximately $53,800

So, we’d net over $70,000 on this deal if nothing changed (our average right now is just under $80,000 per deal all three paydays), but in real estate, things change and you’ll want to know how to change with them.

What Changed?

I received a call from the buyer that he and his fiancé were now separated, and she had moved out. He would be staying in the home. He had redone the basement, had added a nice fence around the property, and had never missed a monthly payment. This call came around 1.5 years into it, so I wasn’t concerned as long as he was making enough and could get financing on his own. He told me his dad would co-sign if necessary. All was good so far.

Related: Subject To Real Estate: Why Investors Should Add This Tool to Their Arsenals

Around the two-year point, I received a call from the seller from Florida. She informed me that she got a divorce and the loan was only in her name (the one I’d been paying down for two years), and she was wondering how the financing was coming (even though there were two years remaining in the term) because she just “wanted the home out of her name.” She was complaining that she had no money and was up against several challenges. Sometimes people just want closure. I told her if she was willing to transfer the deed (subject to purchase) I could send her $2,500 to help her out and pay for the closing costs and attorney fees. She agreed. My attorney drafted all the documents and handled the transfer, and we took over the home. Keep in mind, we now own it and have no clock ticking as far as cashing out the buyer.

A Combination of Strategies

I love taking a sandwich lease and converting it to subject to because I have full control, no clock ticking by which I have to cash it out, and I’m typically able to lower my insurance costs since I use the largest non-owner occupied agency in the country that has fantastic rates. Many sandwich lease sellers are not good to transfer subject to when they first meet you, but after you have been paying their payment for 6, 12, 18 months or so, your credibility and trust with them increases, and this becomes a possibility. If you are buying via lease/purchase currently, review your inventory every 12 months or so for this potential.

Fast forward almost exactly five years later, and we still own the home. The tenant/buyer is still in the property and has agreed that he’ll buy it when he’s ready for whatever the market value is at the time. Right now, as of the writing of this article, the home is worth $240,000, and our mortgage balance is approximately $140,000. This little 2-bedroom, tough-to-sell home has $100,000 equity right now, commands a new rent of $1,600, and has increasing principal pay down every month.

Have you used sandwiches leases and subject to deals with success?

Let me know with a comment!

About Author

Chris Prefontaine

Chris Prefontaine is the bestselling author of Real Estate on your terms – Create continuous cash flow now, without using your cash or credit and real estate investor with over 26 years of experience in the field. He is also founder of Smart Real Estate Coach and host of Smart Real Estate Coach Podcast. He lives in Newport RI with his wife Kim and his family.

14 Comments

  1. Charlene McNamara

    Just to be clear, the seller was willing to sign the deed over to you without receiving anything more than $2500 and you simply agreeing to continue to make your monthly payments?! Or did you then restructure an owner finance sale with her? I’m curious because if there was an outstanding mortgage of $167k, how was she able to sign a deed over to you, considering that a mortgage lender would normally also be on the deed and not allow this without paying off the loan. Also, why did the renter agree to change his contract for future purchase from $219,000 to “whatever the market value is?” That’s seems rather fool hardy on his part! Both those circumstances seem to be quite extraordinary! We’re considering offering a lease option and I’m interested in learning about these types of issues in a transaction.

    • Egan Lohman

      @CHARLENE MCNAMARA

      I could be wrong, but as I understand it the original contract “…stipulated that our purchase price was the balance of mortgage at the time of cash out.” So in other-words, at the end of his 36-48 month term, he just had to pay off the mortgage. The seller would not receive any additional cash. The sandwich lease basically just allowed her to move to Florida without having to worry about paying her mortgage. The subject to provided the same terms, but now she’s no longer on the deed, so basically she just gets peace of mind (+ $2500 so actually a better deal for her than the sandwich lease).

      As for the mortgage lender – this is a risk when doing subject to. The lender can always call the loan, and Chris would be on the hook to pay the entire balance of the mortgage immediately. However, if payments are on time and in good standing, this typically doesn’t happen.

      Regarding the tenant/buyer – he had two choices, either respect the original terms of the contract, or be willing to renegotiate the contract with less favorable terms. Apparently he was unable to perform on the original contract at the time, but didn’t want to lose the house – after all he’d been making repairs on his dime. It’s a risk for him, but possibly could work out in his favor as @ANDREW ZIEBRO pointed out – if the market takes a downturn, he could end up purchasing at a better price.

      The reality is, most tenant/buyers don’t perform on their original contract. Which is why subject to deals or lease option deals get a bad rap. The tenant/buyer often coughs up a hefty down payment, makes repairs, and then can’t get their financing together to actually purchase. The owner can then find a new tenant/buyer and do the whole thing again – i.e. new down payment, etc…

      • Chris Prefontaine

        I could be wrong, but as I understand it the original contract “…stipulated that our purchase price was the balance of mortgage at the time of cash out.” So in other-words, at the end of his 36-48 month term, he just had to pay off the mortgage. Yes that is the case with all our Subject to and all our Lease Purchase. The seller would not receive any additional cash. Sometimes they do and sometimes they do not. If they do at the end they will receive any promised equity that was agreed upon up front as well as us paying off the actual mortgage balance. So up front you agree on their cash out and that’s locked in. Mortgage balance of course goes down and we benefit. The sandwich lease basically just allowed her to move to Florida without having to worry about paying her mortgage. Yes a common reason a seller will do this is debt relief and/or closure in their life for other reasons like this. Multiple homes, etc. is also a repeat reason we see. The subject to provided the same terms, but now she’s no longer on the deed, so basically she just gets peace of mind (+ $2500 so actually a better deal for her than the sandwich lease). In this case, yes.

        As for the mortgage lender – this is a risk when doing subject to. The lender can always call the loan, and Chris would be on the hook to pay the entire balance of the mortgage immediately. However, if payments are on time and in good standing, this typically doesn’t happen. You are correct. There is a due on sale clause on most conventional mortgages. We’ve never had a challenge with them, ever, nor has anyone I know but if the lender were to hypothetically you have other legal options with your attorney for sure, as well as with your past seller.

        Regarding the tenant/buyer – he had two choices, either respect the original terms of the contract, or be willing to renegotiate the contract with less favorable terms Not necessarily “less famorable” but he/she does lose some of their negotiating ability on their side of course.. Apparently he was unable to perform on the original contract at the time, but didn’t want to lose the house – after all he’d been making repairs on his dime. It’s a risk for him, but possibly could work out in his favor as @ANDREW ZIEBRO pointed out – if the market takes a downturn, he could end up purchasing at a better price. We wouldn’t sell at a lower price- we’d wait the market out.

        The reality is, most tenant/buyers don’t perform on their original contract. OK this is a big issue. This is incorrect. We have approximately 95% of ours cash out because of our up front pre screening and mortgage readiness work we do. Many educators prefer they don’t so they don’t prescreen and prep like we do. Morally and ethically that doesn’t work for us. We want to see them to the finish line. Which is why subject to deals or lease option deals get a bad rap. Not in our company or with our students around the country. Again, some mentors are teaching that way and I think it’s wrong and incorrect. The tenant/buyer often coughs up a hefty down payment, makes repairs, and then can’t get their financing together to actually purchase Our process insures they will unless they really mess up or . have a life event because we don’t accept them without a clear mortgage ready date. That’s part of our strict process and a big differentiator for how we operate and how we then teach that to others.. The owner can then find a new tenant/buyer and do the whole thing again – i.e. new down payment, etc…

    • Chris Prefontaine

      Just to be clear, the seller was willing to sign the deed over to you without receiving anything more than $2500 and you simply agreeing to continue to make your monthly payments?! Yes we do them all the time for $0 consideration. Or did you then restructure an owner finance sale with her? I’m curious because if there was an outstanding mortgage of $167k, how was she able to sign a deed over to you, considering that a mortgage lender would normally also be on the deed and not allow this without paying off the loan. A mortgage lender is never on a deed that I’ve seen in 27 years. Also, why did the renter agree to change his contract for future purchase from $219,000 to “whatever the market value is?” His contract expired and we agreed to let him stay.That’s seems rather fool hardy on his part! Both those circumstances seem to be quite extraordinary! Actually both are quite common having done a few hundred of these. We’re considering offering a lease option and I’m interested in learning about these types of issues in a transaction. Fantastic comments and questions and you can learn more via our FREE webinar.

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