How to create a lien as an optionee

Question

I am looking into a method for cashing out as the (middle) investor in a sandwich lease option. It was discussed on this forum that you could record a lien on the property as an optionee.

The lien amount is the spread between your and the tenant buyer's purchase price in the respective options.

Then during a single close with the tenant buyer, the seller's sale proceeds are used to pay the lien and cash you out.

Can anyone point me in the right direction on how to record a lien? I know how to record a Memorandum of Option in the county I invest in, in Ohio. I have no experience making or recording liens. If this is something that should be done with an attorney I will, although if either can do it I would prefer to learn myself.

Chris Seveney · Answer

@Ned Carey

Correct.

In the example above if you can buy it for $100k and the option you sold is for $150k then sell your option to your buyer for $50k.

The issue most likely is that person doesn’t have that type of money to buy the option and as mentioned by Ned sandwich lease options are not for faint of heart and require significant cash or credit to capitalize on them. They also typically are not liquid.

As a note investor we have bought a few dozen lease options and we have never had the option exercised.

Wayne Brooks · Answer

That sounds like junk theory.  You have no lien rights in such a case.

Chris Seveney · Answer

@Brian Kempler

Does you agreement allow you to assign your lease option?

You could assign your lease option for a fee which would be the profit split.

If you are in a situation where your buyer is not ready to commit to executing the option I do not believe there is anything you can do except sell your lease options.

Ned Carey · Answer

@Brian Kempler     I can, but assignments make less than sandwiches (no back end profit). I think what @Chris Seveney is saying is that you can assign the original lease option to your lease optionee.  If your end buyer is willing and capable of exercising your option then they can probably exercise the option with the original seller.

Going through the threads you mentioned I only see casual mentions of liens without clear indications of how they are used or how the lien is justified.

I think you are trying to put a square peg in a round hole. You are finding out lease options are not as easy as the gurus want you to think. Sandwich lease options are perhaps the riskiest of all real estate investments.

Brian Kempler · Answer

@Chris Seveney, did you have a credit repair process in place (mortgage broker or required credit repair)?

I think the cooperative lease option may be an impediment to helping the TB get the mortgage. i could be wrong but I doubt you can write an option to have any assignments on it credited towards a down payment. It is clear the assignment is a fee to a middleman.

The sandwich lease/option doesn't have that issue. Option consideration can deduct the purchase price at minimum, and perhaps partially fill the down payment (some investors disagree with this). More complex agreement, sure, but I don't see that as a negative.

Brian Kempler · Answer

Hi Chris, I can, but assignments make less than sandwiches (no back end profit). Hence looking into liens to capture that extra profit.

Jesse LeBlanc · Answer

Yes, you 100% can create a note and record it.  I also HIGHLY suggest wholesalers doing this when wholesaling to end buyers.  It helps you to create long term cash flow, you can collect higher fee and or interest.  The pro for the end buyer is that they are allowing the tenants rent to cover their mortgage, meaning the cash flow covers their mortgage AND what would have been your assignment fee.  This allows the investors to utilize their capital for other investments and buy more deals and in return you get one or both higher fee or interest.My response was in general for wholesalers, but not directly digging deep into the "Option" part of the previous post.  However, if at any point the end buyer refinances or sells, then your recorded note MUST be paid off, similar to what I believe you were mentioning as the "middle man" on an option.  Which means if you truly are a middle man in a lease option, UNLESS you can sell your rights for a fee.

Brian Kempler · Answer

Hi Ned,

Sure thing:

https://www.biggerpockets.com/...

Originally posted by @Alexander Gonzalez:

The other way is to get the seller to sell directly to the buyer and you put a lien on their home for the amount of your profit. All parties still get what they want, but it does take a little more creativity on your part. There are ways around most everything, when we use our creative minds. This last idea also helps with ―seasoning requirements set up by many lenders today.

https://www.biggerpockets.com/...

Originally posted by @Brian Gibbons:

To avoid a double close at a title company on a flip or a sandwich lease option, research a "reverse assignment" where you use a buyout agreement and put your profit on a 2nd or 3rd lien.  Property closes and you get paid.

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Thanks for any feedback on this or the mechanical question of how this is actually implemented!

Ned Carey · Answer

@Brian Kempler, @Wayne Brooksis a man of few words but usually right.

I’m not sure I understand what you are trying to do. If I do understand, you have no basis to record a lien. You can record your option but an option is not a lien.

Can you refer us to the thread you saw this? It sounds bogus to me.

My guess is it is Guru double talk of something simple and basic designed to sound like some creative new strategy.

How to create a lien as an optionee

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