For investors, the sandwich lease option remains a great way to control a property for a profit with very little money of your own money in the deal but it can be a little difficult to close the transaction. You generally have two problems when your name never appears on the title or only for a moment during a simultaneous closing. First, is when you become involved with an unscrupulous seller. A seller that tries to take the profit you have built into the deal when he or she learns you have a future sale for more than they sold it to you for.
The first seller may well approach the tenant/buyer and offer slightly better terms for the same price and close the deal without you. There are two ways you can deal with this and it’s best using both. First, be completely transparent with the seller from the beginning about what you are doing. Let them know before you enter into the first purchase option that you will be bringing in a tenant with their own purchase option. That’s why you are in the deal. This should weed out any seller that intends to go around you before closing with your end buyer.
The other thing you want to do is cloud the title. This gets a little tricky to fully explain because state laws vary considerably. A common way is recording a deed of trust with a performance rider. The performance rider requires the seller to pay you the difference between your buying and selling prices if you don’t receive it from a third party. However, some state laws require monetary compensation to record a deed. There’s nothing illegal here, it’s just complicated by different laws in different states. Be sure to use the services of a competent real estate attorney setting up and completing your first several sandwich lease options.
Besides being completely transparent with the seller, also be fully transparent with your tenant/buyer. With the options in place and a good relationship with both parties, you can have the seller directly contract with the buyer for closing and have your profit paid as a referral fee on the HUD 1 form.
Using this latter method also helps you get around any FHA seasoning requirement. FHA seasoning requirements change over time but historically for a buyer to qualify for an FHA guaranteed loan, the seller has to be on the title for a minimum of 90 days. That is to protect the end buyer from a scam where a mortgage broker, realtor, and appraiser get together to artificially inflate the price of a house and sell it multiple times, eventually leaving the FHA holding the bag as the loan insurer when the end buyer stops making inflated mortgage payments and the sellers walk away with huge profits from multiple sales.
Of course, not all lenders (those not using FHA guarantees) require a seasoning period or they have different seasoning requirements. As a real estate professional, you should have relationships with trusted and knowledgeable mortgage brokers that can arrange your buyer’s mortgage through a lender that has a workable requirement. With that in place, you can also use an escrow company or closing attorney that you have a relationship with to do simultaneous closings (if needed). You never have to have substantial money in the deal when both deals close simultaneously and you collect your check for putting it together.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.