Pronto Pollo Scone Sandwiches
Today’s topic will be the use and how to use a Sandwich Lease Option to your investment portfolio. To my knowledge this is the only technique where you are guaranteed a positive cash flow without actual ownership of a home. It doesn’t matter if you are buying in San Francisco or in a medium sized town in the Mid-West.
Over the past 6 years of helping owners find lease option tenant/buyers for their investment homes, I have strongly considered doing a “Sandwich Lease Option” on some of these homes. Let me begin by explaining the basics of a lease option and then the sandwich variety.
When a buyer wants to do a lease option with an owner the buyer is ideally saying he wants to buy the rights to buy a home at some later time frame (i.e., do a lease with the option to buy). This is not a transference of ownership; it is merely buying the rights to buy within a time frame, much like options in the stock market.
When this buyer does a lease option with an owner then the buyer has to provide some form of consideration (usually in the form of money) and a contract is drawn up between the two parties. Frequently there will be a monthly rent credit paid out of each of the monthly rental payments. This credit is considered an incentive for the buyer to buy.
The term of the contract is open to whatever terms the two parties will want but is often set on annual terms. In strong appreciating real estate markets the term can be one year or less and weaker non-appreciating markets the terms can be two to three years or longer.
Prices can be negotiated within an infinite number of ways. The most common is to set a specific price and that is the price. The second way is to set it at some appraised value (or appraised value minus some percentage discount) in the future. Either method or a combination of the two can be desired. A combination would be at an appraised value with a minimum or maximum value also placed into the pricing terms.
Thus, as you can quickly see there are a lot of variables when doing this rent-to-own process. Adding in a Sandwich Option takes everything stated above and then doubling the complication.
In a sandwich lease option there is an additional investor thrown into the mix as a forced middleman. This investor not only does a lease option with the owner of the home, but he also does a second concurrent lease option with a tenant/buyer. Of course the first option must allow for assignments or subleasing.
This is how it works. The investor goes into contract with an owner with very specific set of terms. These terms will include: 1.) A set purchase price; 2.) A set timeframe which is as long as possible; 3.) A set amount to be paid monthly; 4.) The best rental credit she can get; and 5.) The lowest option payment possible.
Then the investor enters into a similar agreement with the end user (tenant/buyer). Except in this case she is doing the exact opposite terms as she had with the owner. This means the tenant/buyer gets terms that are not as favorable as she made with the owner. The reason for this is that the difference is where the investor makes her profit.
Thus, in relation to the terms with the investor the end user’s terms are:
1.) A set purchase price – but higher than what the investor agreed upon with owner.
2.) A set time frame but shorter than with the owner. This way the investor can have time to find the end user or another client if the first tenant/buyer does not exercise their option.
3.) A monthly payment. This can be set $100+ higher than what the investor has with the owner.
4.) The rental credit needs to be equal to or less than what the investor has with the owner. This term will greatly depend upon the aforementioned monthly payment. Ideally, the rent credit should be less.
5.) The highest option payment the investor can get from the tenant/buyer. This is how the investor gets reimbursed for her option payment and where she can make some initial profit
Obviously, the terms will widely vary depending upon the part of the country the home resides. Monthly rents and purchases prices in Mississippi will not compare to Hawaii or California.
Tags: Pronto Pollo, Pronto Pollo Scone