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Get the Sandwich Lease Option Strategy Right, Every Time 

My favorite way to make money with real estate is with this sandwich lease option strategy. If you need a quick refresher on options to purchase real estate or an overview of the sandwich lease option, use these links then come back for here for the sandwich lease option strategy that wins motivated sellers every time. You're going to love this!

This will be short and sweet, because the strategy behind a sandwich lease option is simple.

You probably already know how valuable a sandwich lease option can be to your monthly income. Multiply that by however many you want to negotiate each month and you are in passive income heaven.

Negotiating a sandwich lease option with the seller, after he was pre-qualified to be open to the proposal.

When is the best time to propose your sandwich lease option?

I start with by proposing a lease option, and see where the seller is at, by listening to the words they use.

You'll know it's the right deal, when the property has lots of equity and the seller isn't anxious to get cashed out.

When the seller has to move due to divorce, job change, perhaps pre-foreclosure, or a handful of other reasons, they are highly motivated. Most of the time, it's the payments that are weighing them down. Much more so than being cashed out right away (especially if there are tax consequences).

Once you have pre-qualified the seller, it's time to sit down with them and discuss all the options open to them as a seller. It's important to listen carefully as you initially talk to the seller, they will give you clues as to how you can best address their immediate needs.

Key steps to this sandwich lease option strategy

To start, you'll want a signed option to purchase the property from the seller. Next, you will request that the seller to lease the property to you for the length of the option. The longer the term you can get the seller to agree to, the more choices you'll be able to present to the seller.

If the property is already vacant, that's terrific. If not, the lease will begin when it's ready for a tenant.

You'll want these in two separate documents, because if it goes sideways, separate documents (not combining the option with the lease on one form) this strategy will help you legally.

Why would a seller give you both an option AND a lease?

Often the seller intimates that they should just list it with a Realtor. And to them, that statement makes sense.

What you could point out to them is that a Realtor won't make their payments while trying to find that qualified buyer, and you will (that's the lease part). Keep in mind that their payments are weighing them down, and you are their hope so they can move on with their plans. When their credit is at risk, having their payments covered is a gift you can offer.

And whom ever leases the property will be taking care of all the maintenance, too. This is a bonus for any seller who is moving away from the area.

Getting the most from a sandwich lease option strategy -- time

Determining how motivated your seller is will dictate the terms of your deal. Realistically, I find that you really need a full 3 years on the option to purchase you have with the seller, and the same with the lease. 

That's because it might take up to 6 months to find a qualified tenant-buyer for you to sub-lease to. And if the first tenant-buyer doesn't work out, you'll need to find another. Again, that's extra time

The longer term you can negotiate, the better and bigger your paychecks.

The sandwich lease option strategy In a nutshell

  • Seller gives you an option to buy the real estate (Best deal is 3-5 years or longer if you can negotiate it).

  • Seller also gives you a lease on the same property with the right to sub-lease for the length of the option.

  • You sub-lease the property to a tenant who intends to purchase that property. This lease is much shorter in term, just long enough for the tenant to clean up any credit issues and save for the down payment.

  • A new option to purchase is executed for the tenant-buyer to be executed when their lease is up, or earlier.

As you can see, the sandwich lease option strategy isn't complicated, however not every motivated seller is ripe for this plan.

When to choose to stay in the deal -  The ideal sandwich lease option strategy

When I have the chance to lease a beautiful home, in a nice neighborhood  -- and where there is ample equity for profits upon cashing in my option to purchase, that's simply a golden opportunity. Especially when the seller gives me an option to purchase for a minimum of 3-5 years. My purchase price is built in, and I can exercise that option anytime before it expires.

Combine lots of equity (little or no debt on the property) and a long term lease where the monthly rent income I will get from a tenant/buyer is more (at least a hundred or two over and above the payments I make to the seller) -- that's an automatic monthly paycheck, too. 

When we do close the on transaction, 2 or more years down the road, the equity (appreciation) will have grown.  That means your option spread is that much greater. That's more money on the "back end".

Pulling it all together - option, lease with option and sandwich lease options

After a few deals, you'll have natural instincts of which type of deal you are looking at. There are more option to buy deals out there then lease and option to buy.

You'll take an option to buy the real estate if the seller isn't agreeable to leasing the property to you. While you are actively looking for a qualified buyer for this property, the seller is responsible for all repairs and all debt payments. 

An option to purchase plus a long term (at least 2 years) lease is best when the seller is agreeable to having someone live in the property, since they have vacated or soon will. During the lease period, you will be responsible for all repairs and making the underlying debt payments on the house. 

When you locate an acceptable tenant/buyer, and they move into the property, their payments will cover the underlying debt and more. Plus, you will have an agreement in their lease providing that they are responsible for all repairs (effectively taking you out of the loop with repairs).

You'll stay in the deal with a sandwich lease option strategy when there is plenty of equity, so that when the tenant buyer finds their own financing and buys the house your option spread is substantial.  And then there is the monthly income, too. Sometimes, if it's the right type of tenant, I will owner-finance the property to them, insuring a good down payment plus passive income better than the rent I was getting.

A good sandwich lease option strategy is all about the numbers, and sometimes it pencils out and sometimes it just doesn't.

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