A Brief Description About the Sandwich Lease Option
A sandwich lease option contract is a viable option for those investors in real estate who do not have a license. You don’t need to own the property to sell it with these contracts. All you need to do is find a house that is for sale. This is a very important condition for the validity of this contract. You need to enter into a lease agreement with the owner and ensure that it gives you the right to sublet.
The next step would be entering into a separate rent-to-own lease with the tenant. You will receive a non-refundable fee from the tenant, which gives them the right to purchase the property once the lease period is over. The monthly rent that you receive from the owner will be used in payment of the lease to the owner.
When your contract with the owner of the house is over, you purchase the property, and then it is resold to the tenant. You should be transparent while dealing with the owner and let them know that the property will be sublet and resold thereafter. You must check the repayment capacity of the tenant and select only those with a high credit score as they will qualify for a loan and will not get evicted.
What Is a Sandwich Lease
This is an agreement between the three parties, the buyer, the seller, and the investor. The investor gets into an agreement with both the seller and the buyer. The investor profits from the price paid to the seller and the price received from the buyer.
Who Takes the Sandwich Lease Option? – People Involved
There are three parties to such contracts, the buyer, seller, and the investor (you). There are two separate agreements drawn, one with the buyer and another one with the seller. The investor enters into a lease agreement with both the buyer and seller.
Purpose of the Sandwich Lease Option – Why Do You Need It?
A sandwich real estate contract is essential when you want to deal in real estate without a license. You enter into two separate contracts with the seller or owner and the buyer of the property. For a valid contract, you must enter into a deal with the seller of the property before you enter into a contract with the buyer. If you enter contact with the buyer before having a property in hand, the lease will be null and void.
The owner of the property is aware that you intend to sublet the property. You make the lease payments to the owner of the property with the lease you receive from the buyer of the property. At the end of the lease with the owner, you buy the property. When the lease with the buyer ends, you sell the property to the buyer.
Contents of the Sandwich Lease Option – Inclusions
Here is the information that is included in sandwich lease options:
- The names of the buyer, seller, and investor
- The rent paid by the buyer and the seller: The rent payable by the buyer is slightly higher than that paid by the seller
- Buying and selling price: The price at which you buy from the owner is lower than that received from the buyer to make a profit
- The effective date of both lease agreements
- The duration of the leases
- Any security deposits or advances that need to be made
- The utilities that will be provided
- The utilities that are not included but need to be paid for
- Insurance on the property
- Liability for damages to the property
- Responsibility for compliance with all the relevant laws and regulations
- Disclosure by all the parties especially when it has to comply with the state and federal laws such as hazardous materials etc.
- Unencumbered no-objection from liens or other charges
- Rights of inspection of the premises
- Restriction on the activities on the premises
- Restrictions on the usage of the property
- Title transfer and encumbrance on the title
- Governing laws which will cover the agreement
- Termination clause when either party wants to terminate the contract prematurely
How to Draft the Sandwich Lease Option?
The sandwich lease option strategy provides the investor with an opportunity to make a profit from the difference between the purchase price and the sale price.
Here are the points to consider while drafting a contract:
- Eligibility to contract: All the three parties to the contract including the buyer, seller and investor need to be over the age of 18, of sound mind and not under coercion
- Consideration: The lease rentals payable to the buyer and the seller as well as the purchase price and the selling price need to be clearly mentioned
- Terms of agreement: Both the agreements must be drafted, keeping the interest of all three parties in mind. The seller should get a fair selling price, the buyer should buy at the market price, and the investor should make a profit
- Dispute resolution clause: The way in which disputes will be resolved, whether it is litigation or arbitration, the sharing of the attorney fees and the jurisdiction
- Terms of the lease: These are the parts of a lease option sale that include detailed aspects such as the price, utilities, maintenance, among others
- Severability of the lease and the period within which the notice must be given for a successful termination of the lease.
Negotiation Strategy
The investor should negotiate the buying price with the owner and selling price with the buyer before signing the sandwich lease option. All three parties should agree with the prices before the final agreement. The selling price is higher than the buying price. Negotiations generally happen over
- The price to be paid and the lease rental
- The duration of the contract
- The frequency of payments- weekly, monthly, quarterly, etc.
- The option credits
- The principal adjustment against the mortgage buydown on the property
- Whether the lease would be automatically renewed, and if yes, the period for which it would be renewed
Benefits and Drawbacks of the Sandwich Lease Option
The benefits are:
- Protection of interests: The interests of all three parties to the contract are protected by the contract
- Gains for all parties: The seller and the investor make a profit on the sale. The buyer gets the property at a fair price
- Legal remedy: If any party defaults in the payment of the lease, purchase or selling price, the injured party can take legal action
- Termination of contract: If any party wants to exit the contract, they can do so by providing a notice
- The landlord also benefits from several aspects such as
- He does not need to maintain the property. The maintenance would be taken care of by the tenant
- He does not need to incur showing expenditure because the middleman is responsible for that aspect
- He can save up on the advertising costs with tenants having automatic renewal period
- He can also save up on advertising costs with the middlemen investors taking care of certain things.
The drawback of a sandwich lease option is that if there is a default in payment by any party, no legal action can be taken
What Happens in Case of Violation?
If any party violates a clause in the sandwich lease option, the injured party can claim money damages and loss of profits depending on the nature of the breach. If fraud is detected, then the contract can either get canceled under rescission, or the court can draft a fresh contract for the parties under reformation. If any party is not competent to contract, then the injured party will have to be returned to any money or property given during the contract. In certain cases, money damages are not accepted, and the party has to fulfill the contractual obligation.
In case, the three parties need to agree on the respective selling and buying price before the contract is signed. The termination clause, dispute resolution clause(1), and signatures of the parties should be present in the contract.