Sandwich Lease Option – Real Estate Investing In A Down Market

It’s no secret that the real estate market is in the dumps right now. Property values are way down and no one can sell their house for anything near what they want for it. Sounds like a perfect buyer’s market right? Well it is, unless you are one of those people who can’t get qualified for a mortgage loan, (HINT: a lot of people). This is where the sandwich lease-option comes in. This type of agreement is a win-win situation that benefits each party involved. The troubled homeowner is relieved from their payments faster, and the prospective buyer is able to get into a home even if they aren’t able to qualify for a loan right away. Real estate investors are being required to adapt and become more savvy than ever if they want to succeed right now, and using the sandwich lease-option method is one way to do it.

First, let’s start with a standard lease-option. A lease-option essentially just means you are leasing a property with an option to buy it at a later date. A purchase price and length of the term (usually 1-3 years) is agreed upon and a fee called ‘option consideration’ is paid (varies, but around 3%) that gives the buyer exclusive rights to buy the home for the specified term. The tenant/buyer then leases the property and must exercise the option to buy before the end of the term. The tenant uses the lease period for one of a few reasons including saving up for a down payment or cleaning up their credit in order to qualify for a loan. One advantage for the tenant/buyer is that the option consideration and a portion of the monthly rent will go towards the purchase. If the tenant/buyer chooses not to exercise the option to purchase the home, the only things that are lost are the monthly rent payments and the option consideration.

With a sandwich lease-option, you as the real estate investor, get control of a property using the lease-option method and then find an end tenant/buyer to re-lease/option it to. In this scenario, the investor is essentially acting as a property manager. The investor still makes the monthly rent payment to the owner of the property, but also collects rent from their leasee as well until the option to purchase has been exercised. Its probably easier to understand with an example:

Sandwich Lease-Option Example:

You find a vacant home with an owner who had to relocate to another state before he was able to sell so he is still making the mortgage payments on his empty house. His mortgage payment is $1000 per month. The house is worth $150,000, but he is willing to sell for the remaining balance of the mortgage which is $125,000. You sign a lease-option contract for a term of 1 year that states a $1000 rent payment to cover his mortgage and an option price equal to his asking price of $125,000. Next, you find a tenant/buyer who is qualified to buy a home but needs 6 months to save for a down payment. You sign another lease-option contract, this time being the landlord or optionor. This time the terms are for one year with a monthly rent of $1200 and an option price UNDER market value at $140,000. The tenant/buyer moves in immediately and leases the home from you until he has enough for a downpayment and closes on the purchase 6 months later.

Now let’s take a closer look at the numbers…

  • Your tenant pays you $1200/month for 6 months while you pay the owner $1000/month = $200 positive monthly cash flow for 6 months totaling $1200 profit.
  • Your option price with the owner is $125,000, but your tenant/buyer is closing at a price of $140,000 = $15,000 profit.

So that’s a total of $16,200 profit on this one sandwich lease-option deal.

This was just a basic example of this type of investing strategy to provide a visual of how they work. Each scenario will be different, but if structured correctly, using sandwich lease-options can be a very profitable form of investing especially in a soft market.