For beginners and experienced investors alike, lease option investing is one of the lowest cost and lowest risk ways of investing. There are several versions of lease option investing. Here we deal with what is known as the sandwich lease option.
In a sandwich lease option, you place the property under contract to lease it with the option to buy it without the obligation to buy it. Your intention is to sell it to a retail buyer, often allowing them the option to purchase. On the wholesale market, you can often negotiate a lease option for a few hundred dollars. The lease option prevents the owner from being able to sell to another buyer. That means the value in the lease option is based on time. If you’re looking to sell the property fast, you only need a short lease option purchase period. Maybe 90 days. If you are going to allow the potential buyer to hold a lease option, you’re lease option period will need to be much longer to cover your potential buyer’s lease option. Probably a couple of years. You’ll end up paying more for the longer lease option.
Why Seller’s Will Agree to a Lease Option
While the real estate markets across the country are showing positive signs, buyers are still having a very difficult time qualifying for loans. That makes the pool of qualified buyers much smaller than it has been historically. It artificially keeps home prices low. When you open the sale up to lease options, the pool of potential buyers increases significantly. More people willing to pay a higher price for the house.
Not every seller will agree to a lease option but a motivated seller looking to maximize their profit will. The most difficult part is getting them to listen to your proposal long enough to clearly understand it and agree to allow you to make a profit on the deal.
How a Sandwich Lease Option Works
There are many variations but here is one of the best. You place the house under contract for 90 days for a couple hundred dollars with the option to extend the lease if you find a buyer. Part of your option is to buy the house for $100,000. You then find a retail buyer for $120,000 on a lease option.
When you find a buyer, you pay the owner $700 a month in rent and collect $900 from your buyer. Your buyer has the option to purchase the house any time over the next two years. When they purchase the house, you pay the seller the $100,000 and pocket the $20,000 difference in the two prices. If your buyer never exercises their purchase option before the option period expires, the house goes back to the seller and everyone goes their own way. You don’t pocket the $20,000 but you have been collecting the higher rent for the months your renter was in the house.
About the author: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 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 in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.