Sandwich Lease Option for Beginners

[Mike D.]

The market is primed for sandwich lease option investors. People are losing their jobs, listening to the news (chicken littles), or are simply looking to cash out...selling would mean losing your shirt and pants and frankly the lending climate isn't what it once was...so the number of potential buyers is not there. Amid this perfect storm, how does an amateur investor find sandwich lease options?

[Mike C]

Heather,

As MikeOH says, sandwich lease options do have potential problems if a seller becomes uncooperative, IF you haven’t set up things correctly in the beginning. Speak to an attorney in your area about how to protect yourself and the seller. Mike is also correct that around 50% don’t exercise. But when you screen the tenant buyer up front you already know what the chances are of exercise. And I wouldn’t put someone in who couldn’t get a mortgage at the end of the lease. I have a potential tenant buyer screened by a mortgage broker and if they say they won’t be able to get a mortgage during the lease, they don’t get in. Period. Also, remember most of that 50% could exercise and qualify to get a loan but choose not to because they were transferred, got divorced, changed their mind, etc. (many of the same reasons why we bought from the original owner). Stuff happens. I allow people who want to own a home who can’t qualify for a loan now (almost everybody these days) to get the home they want now and get a mortgage down the road, at their convenience.

Now to answer your question, As far as putting a new deed in escrow, it is not too complicated but not all sellers will agree to it. If you explain what you are doing and why, they will usually be amicable because they are motivated to sell (now at least). Essentially, you are completing all the paperwork you would need to exercise your option; you are just doing it up front and saving the hassle of tracking them down later and getting them to sign all the docs required to close. All these documents are held in escrow and WILL NOT be released from escrow until all the contingencies have been met. The seller still has title and still owns the property and its requisite interest deductions etc. This is just step one. This allows you to close without having your seller sign anything again. I notify them and they are happy if they are getting some cash (but usually not). Step two is clouding title so they can’t sell it to someone else or try something funny. Here we have two choices. Ideally, I will have them put title into a land trust. That gets the title out of their name and makes it harder for them to get another loan if they decide to try something unethical. Banks don’t like trusts or anything else they don’t understand. My company is the trustee so they don’t have a lot of options to pull anything. They can’t do anything regarding the property without approval of the trustee (but that may not stop them from trying). Also remember, they are gone and moved on and are generally happy unless you don’t do what you said you would do. This is all explained to them upfront. Never deceive about what you are doing and why. They still own it, they just don’t have title (they have the beneficial interest). My company as the trustee, manages the property for the owner, i.e. dealing with the bank, tenants, etc.

This will solve almost all potential problems. If they won’t put it in a land trust, your other option is to just record a memorandum of option to cloud title. Using this route, there is still risk they could get sued and a judgment added, mechanics lien, etc. to the property (they still have title remember) but my contract says if that happens it is subtracted from what they get. This is a reason you don’t do a lease option with someone who is not stable or laid off. I generally won’t do a lease option with someone who won’t allow me to do the land trust option. Remember, no deal is better than a bad or borderline deal, especially in the beginning. It would have to be a great deal to entice me to just use a memorandum of option as my only protection. Make a business decision in that case.

It is not as complicated as it sounds in writing. Get competent legal advice and do as they advise you. In practice, explaining it in person to the seller is much easier. There are many ways to invest. Use the tools you like best.

Good investing to all

Mike