Sandwich L/O-so Many Risks, Couldn't I Just Take Myself Out Of The Middle?
I've read about how many problems you can run into trying to do a sandwich lease option. I agree, it seems to put you in a fragile position. I'd much rather get the deed and sell on a L/O.
However, for those sellers that aren't into handing over the deed and like the idea of L/O instead I was thinking, couldn't you just take yourself out of the middle and collect a small fee?
I could negotiate a fair deal with Mr. Seller to pay $1000/month for 2 years with an option to purchase his house at $100,000...full asking price!!
I could then approach my potential tenant buyers who were more than willing to pay a $3000 option fee, $1200/month, and $120,000 for this type of home. Instead, I say you can get this home for $1000/month and just pay $100,000!!!
All I want is that option money - $3000 to me. I was thinking I could assign my L/O agreement over to the T/B for that $3000 amount.
I would be upfront about everything to the seller. I think my fee shouldn't be much of a problem consider he would be getting everything he wants, if he was sufficiently motivated.
What do you all think? Is this doable...is this in any way illegal?
I would save this tactic only for those sellers I can't pitch a subto on. A small fee is better than nothing in my book.
You could do that but what's the point? Where is the seller going to be when the TB doesn't exercise their option (and they usually don't)? The "risk" invovled with a LO really aren't risk if you set the deal up right. I mean, just recording a Memorandum of Option at the court house protects your interest if the seller defaults for any reason (most of the time). Not only that but just walking away from the deal creates a whole bunch of other problems for the seller. Now, he has become a landlord. If they move to California and the house is in Florida that could create a problem. Not only that but they have to worry about collecting the rent, making the payment, if the TB you put in sucks they might have to evict them--which means they will still have to cover the mortgage payment until THEY find a new person and guess what! They don't know how to set up the deal, that's why they called you. Doing what you asked is great for you but where is the benefit for the seller? Sure there might be an initial benefit but in the long haul, its not a very good deal and they really won't like you very much two years from now. Trust me, you don't want to have a reputation of being someone that makes a quick buck off some poor unsuspecting homeowner and leaves them high and dry.
I mean checki it: When I sign a LO with someone I make it clear that I am helping them sell their house and because of that I don't pay a dime until I install a TB. Most people are cool with that but some raise a stink so I just tell them to sell through realtor and then ask the realtor to pay their mortgage while they find someone to buy the house. Think they'll go for that? Yeah, I didn't think so.
I record my option, find a tenant/buyer, collect the option deposit and pay the seller. Now I have a house and I didn't have to use my own money to aquire it. Also, I don't worry about unexpected repairs like a water heater or AC because for the first year the TB is in the house I take out a home warranty for them and then they are responsible for all the repairs after that expires no if's, and's, or but's about it. Or they can fork out another $350 for another warranty. The insurance is a landlords policy and I'm placed on it as property manager so I can talk with the insurance company, I can talk to the mortgage company because I have a limited power of attorney, blah blah blah. I mean, the "risk" really aren't that bad and if I get tired of the house I can assign my lease to someone else and I'm done with it. So I don't see why you wouldn't want to hold on to it? I'd much rather take the 3K and the 4800 in cashflow and pocket the back end then just take the option deposit and walk away (most of my deals can potentially earn me a min. of 15K or more). Besides you get a couple of those 200-300+ cashflow houses and you really don't have to work anymore. And I don't collect the rent because I send it through a loan servicing company. All I do is just wait for my check every month.
Peace,
Mitchell[ Edited by kingmonkey on Date 04/22/2004 ]
That's great, I'm glad it works for you. I've read everything you just posted plenty of times. Your right, it sounds great and if it works that way no problem.
BUT, there are plenty of veteran investors that say to steer clear of this type of deal. My whole post started with mentioning problems associated with this type of deal. I didn't write this post asking how do do a sandwich. I already stated I have no interest in that. I am after the deed, and if I can't get the deed I was proposing using this method.
I've read enough posts from people like John Locke and other veterans that advise against this sort of thing. Record your interest? That's great, I don't really have any interest in a legal battle to force a seller into handing over the deed. I don't have any interest in explaining to my tenant buyer that they can't get the property...uh, I don't own it and the seller won't sell....sorry ?
Please, no replies that this is working for you and that you've had no problems. I believe you, and I believe a lot of people also have success with this. I PERSONALLY don't want to do these deals. I respect your choice, respect mine.
I respect your reply as to it not helping the seller. However, I already posted that I would be upfront. It would be up to them to accept it. I made no reference that I was targeting people moving out of state, so I really didn't need that example.
They don't want to be landlords...great, isn't the whole "selling on lease option" technique suppose to eliminate that? That's how they teach it in the books right? Collecting the rents, making payments, etc... I think they also preach to use a loan servicing company.
Hey you make it sound so horrible, I wonder why YOU even deal with it =)
Again, it's up to them. They don't know how to set it up, you're right. That's why I'm setting it up for them.
You seem to have the seller's best interest at heart...until you get tired of the house and assign the lease to someone else?
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Anyway, can someone else chime in the validity of this technique? Please no replies on why I'm so foolish as to not see the beauty of sandwich lease options. I've looked into it, not interested=)
Yes yes, no money outta my pocket, it's easy, no risk, etc.
Snek,
From what I've read in other places, you need some kind of license to charge fees for this kind of service. A realtors license or something, I'm not sure. Some of the veterans here should know.
It seems to me that if you are not putting yourself into the deal as a principal, you are an agent. If you are simply taking a fee for performing a service, it sounds like you are an agent. You've put a buyer and a seller together for which you get paid, it sounds like you are an agent.
Bob
Did I say it sounds like you are an agent? Consult state laws on this; you may be an agent without a license.
Isn't this the same as a wholesale assignment?[ Edited by chicagonewbie on Date 04/23/2004 ]
No because with a wholesale contract you sign a contract to purchase, which means you have full intent to purchase the house, unlike a Realtor who simply signs it up to list. The key difference between a wholesale and a lease option is that with a wholesale you are (kinda) obligated to purchase the home (unless you assign your contract to someone else). But, with a lease option you are simply leasing the home and you have the option to purchase it, but not the obligatin to do so.
Peace,
Mitchell
If you characterize your payment as a negotiating fee in any way then you probably have to be licensed to collect.
If on the other hand what you are doing is assigning your contract (in this case a L/O you negotiated and signed in your name) then a mark-up on that contract or an assignment fee paid by the end buyer is probably not something requireing a license.
Trot thyself down to the library and read the section on Commercial paper and the Uniform Commercial Code in any good college-level business law course.