Hey there…
Did you know that sandwich lease option deals are a great way to get into real estate?
It’s partly because you need very little down, and you can actually start making money right away.
Well, Peter Vekselman with you to explain. But, I’m going even further… sharing how escrow accounts protect your sandwich lease option deals — in other words: protecting yourself from the possibility of foreclosure on the owner of the property.
Let’s get to it…
Yes, foreclosures are a reality in the real estate industry… but I still encourage this REI technique I’m going to tell you about regardless of the type of other deals you’re doing because it just makes good business sense.
When you go into a sandwich lease with a purchase option, you’re essentially creating an informal business partnership with the property owner you’re leasing from and the leaser who leases the property from you.
The 2 biggest calculated business risks that you’re taking are:
- That the owner will make their mortgage payment.
- That your leaser makes their monthly payment to you.
So, you want to do a thorough background check on the person who’s making the payments to you, to make sure they have a history of timely rent, lease or mortgage payments.
Once you have a sandwich lease option in place, you’re already making a profit on the deal… but, your biggest profit comes when your leaser agrees to purchase the property, which in turn triggers you to activate your option to purchase it from the current owner.
So, to be certain that you can complete the deal, you need assurance that the owner pays the current mortgage on the property for the duration of the lease agreement.
Watch out for this…
If, for whatever reason, the owner becomes delinquent on the mortgage, and it goes into foreclosure, there are several negative consequences to your deal. These are the 2 biggies…
#1. The Bank
First, the bank will then own the property and is not obligated to honor the lease made between you and the previous owner. Once the bank owns the property, it means you no longer have the ability to sell the property to your leaser unless the bank voluntarily agrees to allow you to do it…
But if the bank knows you’re going to turn around and sell it for more to another buyer, they may very well not agree to allow it because the bank would likely want to sell it to someone else for more. (Obvi.)
#2. Refunding
So in that scenario, you have no way of fulfilling your obligation to sell to your leaser. And the consequence of that is you almost certainly will be obligated to refund your leaser:
- the nonrefundable deposit that was to be applied as a down payment
- any rent amounts above the market rate that were also to be applied toward the down payment
Now, you do have a couple of options to protect yourself from this scenario.
#1. Contract Clause
In the lease purchase contract with the owner, you can include a clause requiring them to disclose the mortgage information necessary for you to contact the lender’s automated payment system, so each month you can verify the owner made the payment. (That may sound a smidge Big Brothery, but it’s simply part of doing business with this type of deal.)
At a minimum, you’ll need the telephone number, account number and PIN, which lets you verify that payments are made.
If the owner defaults, these are your options:
- start making the payments yourself, using the money that your leaser pays to you
- let the whole deal fall apart
But there is an even better solution…
#2. Escrow Company
Every city has escrow account companies. So, your better option is to have your monthly payment made to an escrow account that in turn makes the owner’s mortgage payment before turning over any profit due to the owner.
Doing this ensures the mortgage payment is made each month without the headache of making calls to the lender’s account system, where you’re only able to verify the mortgage is current.
Look, working smarter is always working better than harder.
I love lease option deals… and maybe now with this extra security measure in place, you’ll consider doing a sandwich lease option deals, too.
Good luck!