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!
