What is a sandwich lease option and when should you do it?

by | Uncategorized, Indy Anna, Real Estate Investing

BigReia.com - Sammich Lease Options

What is a sandwich lease or a sandwich lease options?

A sandwich lease is when someone (likely you as the investor) leases a property (with option to purchase) from a seller, and laterally leases the property (with option to purchase) to another party.  You being in between, or the meat of the “sandwich”.

(BigReia Trivia: What revolutionary digit did Persian mathematician Al-Khwarizmi determine in 800 B.C.?  As always the answer is below in the comic.)

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Okay back to you in between the seller and buyer, the ‘sammich…

Therefore ‘sandwiching’ the first lease holder, usually you, in between the seller and the other party.

Why would an investor do this?

The investor ‘take away’ here is the monthly income difference between the terms of the first lease and the second lease, as well as the income from the difference in purchase price between the first and second lease.

The investor could come into this transaction with little to no money into the deal and move forward without having a large amount of capital or resources invested in the deal, yet the potential for capital growth.

Why would a seller do this?

A seller who is having difficulty selling their home, or simply wants to move it  faster, that isn’t interested in being a traditional landlord, would gain the ‘freedom’ of having a deal with the property, monthly income coming in, and ultimately end up with the full asking price for the property.

Example of a Win-Win-WIN Sammich Lease Option deal:

Becky is selling her home and enters into a lease with option to purchase agreement with Erin, where Erin will pay Becky $800/month for two years, with the option to purchase the home after two years at $100K.

Erin laterally leases the property, with option to purchase, to Mark for two years, with Mark paying Erin $1K/month, and a purchase price of $120K.  To close this deal Mark also paid Erin $10,000 as a down payment.

That means…

Erin, as the investor, would make $10,000 up front.

Then $200 a month for two years (the $1,000 from Mark minus the $800 Erin is paying the owner Becky) which adds up to $4,800 from the cash flow.

On top of that if Mark buys the property in two years for $120,000 from Erin, who pays off Becky for $100,000, the Erin makes another $20,000.

That is about $34,800 in profit for Erin.

All without using any of her credit, no loans, no banks and without putting a single penny at risk.

Here are some helpful resources:

First of all make sure you go through my video on assigning lease options and also the post here because you can still make good, regular income without being in the middle and just by assigning the leases.

In Conclusion Remember…

The only time a sandwich lease option makes sense for you to is when you know there will be a monthly spread and money on the back when they refinance, we don’t recommend being involved or doing a sandwich lease unless at least one of, preferably both, of those criteria in place.

Remember there are three kinds of money; money now, money later and money over time (in between the other two, like a… sandwich…) so you need to make sure there is enough for you to make every month and/or enough on the back end with the refinance that it makes sense for you.  

Sandwich Lease Option Paperwork and Contracts

Here are some examples of documents you can use, you definitely want to build your legal team and then use them to do more deals, you can go through Azam’s suggestions on how to build your team of “Legal Eagles” for more on that.

Here is an example of lease with an option to purchase contract.

You want to use a rental application for just about any type of tenant, even if it is a tenant buyer.  The more information you have about a potential client, the better decisions  you can make.  Do this even if you are renting or doing a rent to buy or lease option, you need to know your tenant buyers’ background info.

Here is a basic rental application.

In some states like California or Texas people think lease options are illegal, that is not true and has never been true but sometimes it does make sense to do a standard rental or lease and do the option part separate.  In these cases you can do the rental part separate from the option.

Here’s an example of standard rental contract for the state of California.

Here’s a standard rental agreement contract for the state of Texas.

Also in places where they are weird about lease options and maybe it makes sense to do shorter term rental and lease agreements, you can use a contract like a month to month or a standard rental agreement.  If you use the month-to-month contract below you can just change the dates and expand it as much as you can to six or nine months for example.  Of maybe you can just use the standard rental contract for one year or more.

Here is a month-to-month rental contract.

Here is a  standard rental or lease agreement with no option to purchase.

Here’s a standard lease with option to purchase contract, I think this is one we use in Ohio or it may say that but we just change the name of the location and use them all over too.

Also keep in mind that in order to do a sandwich lease option you will need permission to sublet the property and since most standard lease agreements do NOT allow for that you may need something like this:

Sublease agreement

Or this Landlord Sublet Consent Agreement.

Here are some other helpful places…

https://www.contractauthority.com/sandwich-lease-option-contracts.php 
(sandwich lease with option contracts)

https://www.mtgprofessor.com/calculators/Calculator6b.html 
(Free lease to own calculator)

https://lease-purchase-agreement.pdffiller.com/ 
(online lease to purchase contract)

Be sure to check out the comic below.

Also make sure check out our EPIC post on 100 FREE ways to find motivated sellers.

Thanks everybody!  = )

~ Indy Anna

Want more (brilliantly) EPIC posts of real estate investing and bidness badasssery...?

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~ Indy Anna
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