lease option with agent.....yes

First you would sign a lease with an option to purchase contract with the sellers. It will contain 3 financial items: a) the deposit, b) the monthly rental payment, and c) the price you would pay if you exercise your option to purchase. Remember to negotiate all three, especially the sales price. This contract will contain a section allowing you to sublease the property. You could even put in a contingency that this contract is subject to you finding a renter and allowing you to show it.

Then you will sign a lease option contract with your buyer. The deposit, monthly income, and purchase price will be higher so that you make a positive spread.

Good luck.

How would the agent stay in the transaction? They gave you the seller lead, so they clearly deserve some kind of compensation, but... If you L/O to someone, they won't "close out" that deal until they buy it with their own mortgage. This would happen several months up to several years down the road. Would the agent have to wait until then? Do they really have any other choice? L/O a place through a "sandwich lease" is easy. Paying the agent who brought you the seller? That's the hard part...

You make it sound easy. I hope it is because that seems to be all I'm running into with FSBOs. Yesterday, I looked at a house that was inherited (I'm assuming...since it belonged to her deceased mother) and it is free and clear. She is asking $86,900 and it is in a good established neighborhood. The comps come in around $69k - 75K. She said it was listed before but didn't sell. It has been empty about a year but she has kept the power on and maintained the yard. So basically, she's paying for 2 places. So I know she's motivated, but when I asked her what she would take if I paid cash, she said not much less than the asking price since she had already reduced it. After talking with her awhile about the market, comps, etc. she said to make her an offer but she was not going to give it away. I was thinking of offering around $55000, but before I said anything she said she certainly would not go as low as the $60s. So.. I started talking to her about a lease option. She said that sounded good and she would consider it, but her ad in the paper would run out in 3 weeks. In the meantime, I am looking for a buyer who wants to l/o. I want to do a sandwich l/o, but want to make sure I do it correctly. Could you give me some tips? The right contracts to use, etc?

thanks,
Shirley

Of course, how you compensate the realtor is negotiable. Rule of thumb in this situation is for you to give him/her a month's rent out of your option fee.

The contract that they have with the seller is between them and the seller. That is up to them to figure out how that will be handled.

Karen

Maybe you could comment on #3? I know you do these a lot, but I didn't know you were available right now. It really does sound easier to me than I thought at first. Or maybe there's already a forum where you explained a lot about it. do you know?

Shirley

Since you had addressed it to Brett I didn't want to step on any toes.

IMO a sandwich L/O is only the way to go if you can negotiate a really good price on the house. (like a wholesale price)

If you are going to have to be paying almost full price you are better off doing a Co-op or wholesale L/O.

The reason is you will be adding your option fee to the price, which you get up front. If the house is already paid for, you may be able to negotiate low enough monthly pmts that you could make a couple of hundred per month but don't forget about the rent credits that are very important so that you are setting your buyer up to be able to pay their closing costs. In a sandwich deal, your big payoff would normally come at the end when the buyer gets their new loan to buy out the original seller.

If you have raised the price of the house too much, so that there is a lump pmt for you there, in this economy, the house will probably not have appreciated enough for the house to appraise at that level, so your deal will fall through.

You want to make it a win for all three of you.

The contracts you will use are between you and seller- Lease with Option to Purchase and a Rental Agreement. between you and the Buyer-An Assignment

Hope that helps.

Karen

I don't yet if it will come to fruition, but she was very positive about doing a L/O when we talked about it. If the asking price is $86900 and I can get her to lower it to say $70,000, then I could l/o it for $85,000 and make a profit of $10k when the option is exercised.. She made the comment that rents would go about $700, but I'm not so sure about that. But say that is correct and if I could get $850-$900, that would be a good cash flow. What do you think a good option fee would be---5%? That would be $3500 upfront and I could use $5500 for my option fee making it $2000 profit up front. Am I in the ballpark at all?
Shirley

If the comps are$69-75, I think you are pricing it WAY too high to L/O it for $85K. The house will more than likely not appraise for that when the time comes to refi. So you would be setting them up for failure.

And what are similar houses (Same # of BR/BA) renting for in that area. That is what you will base it all on.

I know you want to make this a sandwich deal but sometimes that JUST won't work. You have to use the technique that works with the situation, not try to fit a square peg into a round hole.

Plus, keep in mind that w a sandwich deal, if for any reason that tenant quits paying, you are ethically responsible to make that pmt. With a co-op, you are in, do the deal and you're out. It is between the seller and the buyer after that.

Karen

The majority of realtors do not even have a clue how to do a L/O.

So how is a co-op or wholesale option done?

for the refresher on 'Sandwich Lease Option 101'

great stuff!

This is an article from off of Wendy Patton's website. It is much easier for me to put this on than to try to explain it all myself.

Cooperative Lease Option vs. Sandwich Lease Option

First it is important to understand the definition of both a cooperative lease option and a sandwich lease option.

A cooperative lease option is another way to say a wholesale lease option. I call it a cooperative lease option because the seller and buyer need to "cooperate" to make the deal work. In a cooperative lease option the seller sells their home to you, the investor, on a lease option and then you flip or wholesale the deal to an end tenant buyer for a fee, usually the option fee. In a cooperative lease option you are selling the lease option contract and not the property (technically). It is just like any wholesale deal where an investor flips the paper or contract to another person for a fee. In a cooperative lease option you are done once the contract is assigned to another buyer, unlike the sandwich lease option where you stay in the deal until the very end.

A sandwich lease option happens when you lease option a home from a seller and then sublet the home to another person on a lease option for a higher price, monthly payment and option fee. You stay in the middle of the deal, therefore the name sandwich lease option. In a sandwich lease option you do sell the real estate (not the contract like in a cooperative lease option) to an end tenant buyer.

Situations and Types of Sellers for :

Cooperative Lease Option or a Sandwich Lease Option

There are basically three types of sellers you will encounter as you try to find your Cooperative Lease Option or Sandwich Lease Option deals, no matter whether it is a homeowner or an investor selling, no matter how motivated they are, and no matter where in the country they are located. These three types of sellers are:

Sellers who are upside down
Sellers who are break even
Sellers who have equity in their home
Let’s take a look at each and see how you might be able to put together a cooperative lease option or sandwich lease option deal and how to Protect Yourself in each of these situations.

Sellers Who are Upside Down - NOT good for either a Cooperative Lease Option or a Sandwich Lease Option
Unfortunately, it seems that there are many sellers in today’s market that are upside down. If a seller owes more on their home than it’s worth, they are upside down. Their home is not worth what they owe on it.

As a Cooperative Lease Option or Sandwich Lease Option (or Subject To) real estate investor there is very little you can do for someone who is upside down, or there is little you “should” do for this type of seller. No matter how moving their story, no matter how desperate their situation and no matter how motivated they are as a seller, this is not a position you will want to be in for either a cooperative lease option or a sandwich lease option. The absolute best way to protect yourself is to not do the deal with a lease option or subject to. This situation is ONLY good if you want to do a short-sale with their lender or have the seller pay down their mortgage balance (assuming they can). There may be the very rare occasion when you find a seller that can cover enough equity difference and subsidize monthly payments to actually make the numbers work, but these instances are so rare that I’m not going to waste time here chasing pipe dreams.

This is a great time to say “NEXT” if you are looking for little or no money down deals - like sandwich lease options or cooperative lease options allow for.

Sellers Who are Break Even or Have Little Equity - Good for a Cooperative Lease Option
Sellers who are break-even have been sellers I have in the past said to walk away from for a Lease Option. Not anymore! Can you do Lease Option deals with these sellers? YES! There is a new strategy I am using and it is growing like wild fire. It is called a Cooperative Lease Option.

The average break-even seller is going to be someone you can’t help for a Sandwich Lease Option, BUT they might be a perfect candidate for a Cooperative Lease Option. Let’s define both of these types of Lease Options.

A Sandwich Lease Option - is when you purchase a property from an owner on a lease with an option to buy. You then find a buyer who will buy from you on a lease with an option to buy. You are in the middle, hence why it is called a Sandwich Lease Option.

When are these good? When the seller has equity and will allow you to get part or all of it over time with your lease option terms. This is what I call my “Big” Money Strategy.

A Cooperative Lease Option – is when you purchase the property from the owner on a lease with and option to buy. You then find a buyer who will pay you to step in your shoes. This is a wholesale deal. You sell your contract to a buyer. It is called a Cooperative Lease Option (aka Wholesale Lease Option) because both the buyer and the seller are “cooperating” with you and know exactly what is going on. They know you are selling the contract (deal) to a buyer – it is usually for the option fee. How much? Usually around 3% of the purchase price can be negotiated. Example: The price of the home is $100,000 – you would get approximately $3,000.

When are these good? When your seller doesn’t have much equity for you as an investor to get. This is what I call my “Small” Money Strategy.

How many more deals can you do now with a Cooperative Lease Option that you might have walked away from before? Would earning $3,000 - $10,000 per deal excite you? What if you could do most of this from the Internet? One of my students lives in India. He does Cooperative Lease Options in the Chicago area. It is all done on the Internet and he does 5+ deals each month. What would that mean to you and your family?

Sellers Who Have Equity - Good for either a Cooperative Lease Option or a Sandwich Lease Option
Sellers who have equity in their homes are in the best category for putting together your Lease Option deals (whether it be a cooperative lease option or a sandwich lease option), however, when you find someone who has equity in their home and is willing to do a Lease Option deal you mustn’t throw caution to the wind. You still want to evaluate the deal. When they have more equity though, you are more likely to receive option credits each month. Option credits give you equity each month from the rental payment you are making. If you purchase the home for $200,000 and each month you are paying $1,000 in rental payments to the seller, ask the seller for $1,000 a month credit towards the purchase price. For example: after one month you owe $199,000, after two months you owe $198,000, etc. You are getting the entire monthly rental payment credited towards the purchase price. This works well with sellers who have equity. Make sure you don’t get them upside down (with their equity) by doing this. For instance, if they owe $185,000 and you do this deal for 20 months, you would owe $180,000 ($200,000 - $20,000 = $180,000). Be careful, if you get them upside down they might not want to, or might not be able to, close on the property when you are ready. Will all sellers give you 100% credit for your payments? No, of course not, but will some? Yes, some will. If not, negotiate something less than 100% credit. No matter what you negotiate it is part of your profit for later. There are many other things you can negotiate also with a seller when doing a Sandwich Lease Option.

How many people own their home free and clear? In the U.S., more than 30% own their homes free and clear. How about the sellers with equity, but not free and clear, plus the ones that are at a break-even point? Add these all together and you will find a very good percentage of home owners are candidates for one of these lease options strategies.

Is it all “doom and gloom” in the market? Heck NO! I live in Detroit and the cooperative lease option deals are everywhere. You just have to know how to find them. Learning when to apply each type of option strategy is the key. Learning when to walk away is another key.

Are you wanting to earn and extra $5000 - $10,000 in the next 29 days? Try a cooperative lease option - check out my Cooperative Lease Option webinar at: www.wendypatton.com/coopreplay or a broader lease option webinar covering both cooperative lease options and sandwich lease options at www.wendypatton.com/wendyreplay

Enjoy Lease Options!

By: Wendy Patton
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