Lease Option Sandwich

in #real4 years ago

Who here loves real estate?

Well, I love real estate, especially because you can exchange creativity for cash! Real estate investing is full of opportunities for not only creative financing, but also creatively finding deals and structuring deals.

This short post is to introduce you to the "Lease Option Sandwich". One of my favorite new methods for structuring deals that I just learned about, and I want to share it with you, the steemit community. :)

Here we go...

First. The basic Lease Option:
There are two basic parts of the Lease Option. There is the Lease, or rent, and the Option.
1)Lease- The monthly rent you pay for a property.
2)Option- An exclusive right to buy or sell at a specified price for a specified amount of time.
If you are renting a home, that is your lease. However for example, you could also negotiate with your landlord to buy an Option for maybe $1,000 (negotiable) that gives you the exclusive right to buy the property for 5 years (negotiable).
If you buy the property within 5 years, that $1,000 goes towards the purchase price. If you do not buy the property, your Option expires and the landlord keeps the $1,000.

Now, before I go into the Lease Option Sandwich....

Why would a landlord be interested in this?

  1. A tenant who has an option to buy is most likely going to take better care of the property.
  2. If a tenant does not exercise the option, the landlord pocketed the extra cash.

Okay.. So, what is a Lease Option Sandwich?

This is where you negotiate a Lease Option with a landlord, YOU are in the middle, and you negotiate another Lease Option with another tenant. Let me explain...

Let's say you negotiate with a landlord to lease their property for $750 per month. AND, you buy an Option to buy the property for $1,000 that gives you the exclusive right to purchase the home at $100,000 for the next 5 years.

Then, you find a tenant that you can lease the property to for $1,000 per month. AND, you sell her an Option for $2,000 to buy the home for $110,000 that expires in 2 years.

Essentially, in exchange for being creative, working hard, and finding a great deal... You are making $250 per month cash flow. You just made $1,000 in cash when you flipped the option. And, if she executes the option, you made $10,000 for the sale of the home.

WARNING:

  1. Keep the Option money you made for a rainy day. If she buys the home, you have to apply it towards the purchase price.
  2. This IS considered a sale. And, COULD (not will) possibly trigger the "Due on Sale" Clause in most mortgages. This rarely happens, however. I have never heard of a bank calling a note because of a Lease Option, but they could.

Hope you learned something today that will help you on your next deal!

My best,
monopoly-man

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@monopoly-man you get an upvote for posting some real estate knowledge. That's not beginner stuff.

I do some real estate investing in addition to the equity and financial stuff I post here so am familiar with the Lease Option. Probably don't have the balls to try one though. Basic lease option is creative enough for me :)

@scaredycatguide. Thanks! My only other post was a paper that I had written on how robots are affecting the economy, but I think real estate knowledge may be of more interest. We shall see. I need to learn how people post pictures in their posts?

What kind of equity and financial information do you post?

Of course as the middle man, you take all the risk that you won't find a tenant. You're already risking 750$ a month till they move in, and on top of that you risk another 1000$ they don't want to buy the option. Gotta be careful with that.

@jrkirby, do you do any real estate investing?

No, not really. I bought my first house outright recently (cheap place in cheap city), but I'm not in a place to do actual investing yet.

Well, I completely understand that it sounds risky at first. But, just like any other deal in real estate, you shouldn't make it unless you know it's a good deal and you've done your homework. If you have, this could actually be less risky because you have not sunk a hundred thousand dollars in a property. You're only in for it for the amount of your lease. And, if you're buying in a good location, it shouldn't be too hard to re-lease.

A technique like this could offer people like you and I a deal who maybe initially thought couldn't "invest" or do real estate. Leveraging other people's money is easier than most people think. The hard part is finding the good deal.