In my last post I explained the basics of lease option in selling and buying.  There is another aspect to a lease with option to purchase, which can be valuable to real estate investor's, called a "sandwich lease option”.

     When a real estate investor purchases a property by lease option, many of the principles of a lease option are the same.  One of the main differences are the terms of the length of the lease option.  The length needs to be set at 3 to 5 years, for the investor.  Another difference is that the contract needs to state, and the seller needs to be completely aware that the home will be re - lease optioned to another party.  This is the sandwich part of the lease option.  SELLER-INVESTOR-TENANT/BUYER

     There are similarities to "subject to", but in a "sandwich lease option" contract, the investor does not take the deed in their name.  It stays with the original seller until the end closing.  This type of dealing is called "having an interest in", "control of the property".  This makes it legal to sell, rent, lease, improve, the property without having ownership.  The problem that can come up is that if any of the parties do not follow through on what was agreed.  There is a contract, but not having the deed could put more bearing on the outcome.

     Sometimes there may be a problem with the seller staying too involved in the day to day activities, and interfering with the best judgment of the investor.  Or the investor may not act in a way that has the best interest of the property, or seller in mind.  This could be in the case of letting the property get run down.  Another source of problems could be who should make the payment to the mortgage company, and, how to know if it isn't made, or made on time?

     The payment problem can be solved by having a third party, (often an attorney, or company set up for it), to handle the payment made to the mortgage company, and staying on top of reporting that payment was made, to all parties involved.

     Another problem can be at closing of the tenant/buyer.  Depending on your closing attorney, title company, or others involved, the original seller may have to be at the same closing table, with the investor, and the tenant/buyer.  This can make it uncomfortable when the seller sees the investor making money.  Also, make sure that who pays what in closing costs are already spelled out at the beginning of the contract to avoid confusion, or arguing at the closing table.  A simultaneous close is the preferred way to close a "sandwich lease option".  This is when the papers are completed in one room with the seller and investor, and then in another room with the investor, and end buyer.  Clearly you have to have on your investment team a closing attorney who understands the process, and knows what requirements are for the process.  Not all real estate closing attorneys, understand, or have done the process.

     My very first real estate investment was by a "sandwich lease option".  I wasn't entirely educated on all the details, but it worked out to be a positive experience for me.  I saw a townhouse that had a sign saying it was for sale or rent, with an out of state phone #.  I called the seller, and asked if they would consider doing a lease option on the property, and I would re-lease option it out to someone else.  The seller agreed, and the details were worked out.  The asking price was $95,000 and I agreed to $91,000 in three years, or whenever it was sold.  I paid her $3,000 for the option consideration, and took over the property.  I did a little painting and cleaning, and did a lease option to a tenant/buyer.  The rent was always paid on time by the tenant, and I sent the amount that was the mortgage payment to the seller.  (It was only about a $50 spread).  The seller paid the mortgage.  In nine months I was notified by the tenant/buyer that she would not be able to get the home financed in her name, and it was proving to be to much for her financially.  I found out that even though she always paid her rent on time, her car had been re-possessed on one occasion.  I released her from her lease with no penalties, but the option amount was not refunded as agreed.  Then I put out a sign for another lease option buyer.  At that time I got inquiries to buy the home, and to rent the home.  With the seller's approval, the home was sold, and with the buyer's permission, the home was rented on the same day.  (The buyer was buying as an investment property to rent.)  The closing attorney required all parties, the original seller, investor, and end buyer to be at the same closing table.  Everyone was well aware before closing of the process.  Most closing costs were paid by the original seller, and the buyer.  The seller got the agreed to price of $91,000 gross, the house was sold for $103,000, and I received the $12,000 gross.  This does not show a great deal of bargaining, but was in a time of good  appreciation, and wasn't bad for my first deal.

     The meat in a "sandwich lease option" can be very satisfying, but can lead to indigestion if precautions are not taken to make the process go smoothly.  Wendy Patton's book highlighted above and to the left is a very valuable resource to having complete knowledge of the process.

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