Archive for the ‘Seller Financing’ Category
Sandwich Lease Options — Pros and Cons
Sandwich Lease Options
Today’s topic will be the use and how to use a Sandwich Lease Option to your investment portfolio. To my knowledge this is the only technique where you are guaranteed a positive cash flow without actual ownership of a home. It doesn’t matter if you are buying in San Francisco or in a medium sized town in the Mid-West.
Over the past 6 years of helping owners find lease option tenant/buyers for their investment homes, I have strongly considered doing a “Sandwich Lease Option” on some of these homes. Let me begin by explaining the basics of a lease option and then the sandwich variety.
When a buyer wants to do a lease option with an owner the buyer is ideally saying he wants to buy the rights to buy a home at some later time frame (i.e., do a lease with the option to buy). This is not a transference of ownership; it is merely buying the rights to buy within a time frame, much like options in the stock market.
When this buyer does a lease option with an owner then the buyer has to provide some form of consideration (usually in the form of money) and a contract is drawn up between the two parties. Frequently there will be a monthly rent credit paid out of each of the monthly rental payments. This credit is considered an incentive for the buyer to buy.
The term of the contract is open to whatever terms the two parties will want but is often set on annual terms. In strong appreciating real estate markets the term can be one year or less and weaker non-appreciating markets the terms can be two to three years or longer.
Prices can be negotiated within an infinite number of ways. The most common is to set a specific price and that is the price. The second way is to set it at some appraised value (or appraised value minus some percentage discount) in the future. Either method or a combination of the two can be desired. A combination would be at an appraised value with a minimum or maximum value also placed into the pricing terms.
Thus, as you can quickly see there are a lot of variables when doing this rent-to-own process. Adding in a Sandwich Option takes everything stated above and then doubling the complication.
In a sandwich lease option there is an additional investor thrown into the mix as a forced middleman. This investor not only does a lease option with the owner of the home, but he also does a second concurrent lease option with a tenant/buyer. Of course the first option must allow for assignments or subleasing.
This is how it works. The investor goes into contract with an owner with very specific set of terms. These terms will include: 1.) A set purchase price; 2.) A set timeframe which is as long as possible; 3.) A set amount to be paid monthly; 4.) The best rental credit she can get; and 5.) The lowest option payment possible.
Then the investor enters into a similar agreement with the end user (tenant/buyer). Except in this case she is doing the exact opposite terms as she had with the owner. This means the tenant/buyer gets terms that are not as favorable as she made with the owner. The reason for this is that the difference is where the investor makes her profit.
Thus, in relation to the terms with the investor the end user’s terms are:
1.) A set purchase price – but higher than what the investor agreed upon with owner.
2.) A set time frame but shorter than with the owner. This way the investor can have time to find the end user or another client if the first tenant/buyer does not exercise their option.
3.) A monthly payment. This can be set $100+ higher than what the investor has with the owner.
4.) The rental credit needs to be equal to or less than what the investor has with the owner. This term will greatly depend upon the aforementioned monthly payment. Ideally, the rent credit should be less.
5.) The highest option payment the investor can get from the tenant/buyer. This is how the investor gets reimbursed for her option payment and where she can make some initial profit
Obviously, the terms will widely vary depending upon the part of the country the home resides. Monthly rents and purchases prices in Mississippi will not compare to Hawaii or California.
Let’s show a basic Las Vegas, NV deal.
Terms between Owner and Investor
Set Purchase Price: $145,000
Option Payment: $3,000
Monthly Payment: $1,100
Rental Credit: $200
Length of Contract: 3 years
Terms between Investor and Tenant/Buyer
Set Purchase Price: $155,000
Option Payment: $4,000
Monthly Payment: $1,200
Rental Credit: $150
Length of Contract: 18 months or 1.5 years.
Assuming the Investor is savvy and finds a tenant/buyer prior to actually initiating the contract with the owner then this is how the cash flows at the time the contracts are signed.
Tenant/Buyer pays $4,000 to Investor which pays $3,000 to Owner and pockets the $1,000 difference.
First month rental payment collected from Tenant/Buyer is $1200 and Investor pays $1100 to owner. This will continue for the next 18 months. I would suggest only giving the tenant/buyer a 3 day grace period while the Investor has a 5 day grace period with the owner.
If the tenant/buyer does not buy after the 18 months and decides to vacate then the investor can either find another tenant/buyer for the remaining 18 months or less. OR the investor can cancel the deal and walk away. Assuming the latter case then the investor made $1000 + 18 * $100 = $1000 + $1800 = $2800 on a property she never owned.
If the tenant/buyer were to buy in this case at the 18th month then the investor made:
$1000 credit on the option payment + 18 monthly payments cash flow of $100 per month + 18 months of $50 difference in the saved rental credit + $10,000 on the price difference. This becomes $1000 + 18 * $100 + 18 * $50 + $10,000 = $1000 + $1800 + $900 + $10,000 = $13,700. Not bad for never owning a property.
The dangers of a sandwich option comes mainly during the vacancy periods. If your first tenant/buyer vacates how quickly can you get the second one in there? Granted, you will be getting a second full option payment which you keep for yourself. What if it takes 3 months for you to do so. In the above scenario you paid three monthly payments of $1100 to the owner and thus paid out $3300 to get the second $4000 option payment. This means you only received $700 and you still have to credit the full $4000 if they were to buy. This can be dangerous if the new tenant/buyer exercises early.
If you are wanting to get into an unique method to invest in real estate with no money out of pocket and a guaranteed positive cash flow then the sandwich option may be your ticket. Make sure you know your numbers, though.
Happy Investing!
Kevin A. Dunlap
Trident Investments Group
Office: (702) 516-5698
Cellular: (702) 591-1784
New Lease Option Home in Las Vegas
We have another home available for our lease option (rent-to-own) program in Las Vegas, NV.
Our rent-to-own program works like this. There will be an option payment due upon taking occupancy of the home. This entire option payment will be applied toward the purchase of the home if you decide to exercise the option.
There is also a rental credit which is applied toward the purchase of the home, again only if you decide the exercise the option.
Here are the basic details on this new home.
It is located in the heart of the city, very close to many strip malls, restaurants, and parks. Very easy access to Hwy 95 which is only walking distance away. The major cross streets would be Lake Mead and Hwy 95 / Tenaya.
Address is 7209 Sun Cove Cir., Las Vegas, NV 89128.
Details of the home:
4 Bedroom / 2.5 Bathroom / 2 Car Garage
1641 square feet
2 story
Built in 1991
Financial Terms on this Home
2 year lease option, extensions possible
Purchase Price: $180,000 (2 year locked price)
Option Payment: $4,000 (this is the payment to secure your right to buy and is not a down payment)
Monthly Payment: $1,450
Rental Credit if you decide to exercise the option: $200
The owner of this home will be moving out around Valentine’s Day 2010. The home will then be ready for immediate occupancy.
New landscaping will be put in prior to Valentine’s Day. Touchup painting and other minor repairs will be finished soon.
Call Kevin Dunlap with your questions.
Office: (702) 516-5698
Cell: (702) 591-1784
Lease Option Home — Beautifully Renovated Home in Las Vegas.
We have just received a freshly renovated home for our lease option (aka, rent-to-own) program in the Las Vegas, NV market. This home has brand new paint, new 16” and 18” flooring throughout the entire home. New carpets overlay this new tile in the bedrooms and the new owner can go either way. Stove and refrigerator come with this lovely home. It also has an entertainment gazebo in the back yard with desert landscaping in both front and back yards. Countertops are granite tile. Brand new kitchen cabinetry also abound.
Terms are quite simple:
Address: 1017 Magnolia Ave.., Las Vegas, NV 89108
Purchase price locked for two years at $99,000.
Lease Option Payment: $4,000 (which is fully applied toward the purchase)
Monthly Payment: $1,395
Rental Credit: $200 (which is also applied toward the purchase)
Home Details:
3 bed
1 bath
1386 square feet
Built in 1954
0.16 acres
1 story
To see our marketing page for locations, pictures and further details:
http://ifindproperties2.fmgateway.com/trident/details.php?id=14080
Our lease option program has been assisting to connect owners with qualified tenant/buyers for their homes. Trident Investments Group has been assisting people since 2004 and have successfully helped a number of people become home owners again or for the first time.
Contact us today:
Kevin A. Dunlap
Trident Investments Group
Office: 702-516-5698
Cell: 702-591-1784
Fax: 866-900-7452
kevin@tridentinvestmentsllc.com
http://www.tridentinvestmentsllc.com
Happy Investing!
Flipping vs. Buy and Hold — Basic Exit Strategies (Part 1 of 2)
A question that I am beginning to get asked a lot is what I should do with my homes after I have bought them. Let’s assume you did buy in bulk from a REO package or simply found them through a Realtor or other personal contact. For the purposes of this article, let’s assume you bought them at 70 cents on the dollar.
There are always two schools of thought on the debate of should a person flip or hold onto a property or group of properties. Also, if you are going to “hold” a property, then what will you do with that holding time. If you “flip” a property then you need to be aware of any additional charges that you will acquire with the flip.
There are benefits to both strategies and there are cons to each as well.
In this article we are going to explore both and other potential “exit strategies”.
What exactly is an “Exit Strategy”?
An exit strategy is a term used to determine what you will do with a property once you have acquired it. This is a critical part of doing any type of real estate investing. If you know what you will do with a property (long-term or short-term) depends greatly on how you buy. As an example, if your plans are to flip a property then you will want to buy using a Title Binder. This will save you money on title insurance on the sale.
Some of the most common exit strategies include buying a home or group of homes and then:
- Renting them out.
- Flip or sell quickly for profit
- Rehab and flip
- Rehab and rent
- Lease Option
- Seller / Owner Financing
- Seller / Owner Financing and then selling a Performing Note
Let’s discuss the basics by using a simple mathematical example. Repairs are included in purchase price. He will assume the following information is accurate and purchase was in cash.
Purchase Price: $100,000
Market Rent: $1200
Purchase Price to Value: 70%
Actual Value: $143,000
Equity Value: $43,000
Local Appreciation Rate: 3%
Estimated 1 Year Future Value: $147,300
Short-Term Strategies
Only a few of the exit strategies are short-term. These would be:
- Flip or sell quickly for profit
- Seller / Owner Financing
- Seller / Owner Financing and then selling a Performing Note
In the first scenario of “flip or sell quickly for profit” you are seeking an End User who will purchase your home from you at or near market value. With the new FHA guideline of holding onto a property for over 90 days before selling to someone using a FHA loan being temporarily lifted can make this a very desirable solution.
Here is a link to the FHA website showing this.
http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-011
Pros & Cons for Short-Term Strategies
Flipping
The biggest advantage of flipping is that you are getting all of your money back and a profit, almost immediately. Thus, you can use your original monies and buy that same type of house again and do the same over and over again. Thus, within a short period of time you have flipped a few homes and made a decent profit.
Of course, in a down market you can sell at below market value and still come out ahead. The holding time should be less because you are offering a lower price than your competitors. For example you can list at 90 cents on the dollar and sell the home for $128,700. This is a profit of $28,700 minus closing costs. Not bad for a few months work.
The biggest con is that since you held onto the property for less than one year you are subject to short-term capital gains tax. The normal American is taxed for long-term capital gains tax at 15%. Short-term capital gains tax is at 33%. Of course this may vary and you should consult your CPA for more information. We will use these numbers for ease of use.
Your profit now becomes only 67% of your total profit (33% in taxes). Thus, the incredible $28,700 you just made is reduced to $19,200. Not too bad, though. You still made a 19.2% return on your investment or if you annualized this three month deal over a year it becomes four times this or 76.8% annualized return.
You may be asking what about the other two short-term strategies? Well, I am glad you asked. The remaining two actually may give you more profit AND more potential buyers.
Seller / Owner Financing (keeping the note)
As we all know in today’s worldwide recession many people have been stricken with poor credit, job losses, divorce and even foreclosures are commonplace. Who are these people suppose to turn to when banks are being very strict on lending practices and requiring substantial down payments. The answer can be you the investor.
Seller Financing (aka Owner Financing) is a common way investors can buy properties without having to use their credit or worry about having too many loans in their name and not qualifying for a new loan due solely to a high number of loans.
The average buyer can also participate in a program like this, but only wanting 1 home for them and their families. A family who was hurt by the recession will need help in getting back into a home either as a first-time buyer, or one who lost their home to short sale or foreclosure and wants to become an owner again.
Here is how it works. Since you are buying the property with cash you have a lot more options available to you (this still does work if you have a loan on the property but you need to really know your numbers first). You buy the home for $100K (repairs included). Then you shop around for home buyers who have bad or no credit. They put down at least 10% to 20% and they move into the home. The home is deeded to them. I would suggest you keep the deed in the name of a trust or LLC for your protection in case of missing payments. Sometimes you can do a Land Contract or AITD.
The purchase price will be set at today’s value, not a discounted value. Thus, in this scenario they are buying the home at $143,000. You will also charge the 20% down payment and now you are getting an interest rate on the unpaid balance. Try to keep the interest rate competitive to a low credit score conventional loan. Maybe 9% to 12%. This should make this deal very attractive to both you and the buyer.
Notice that 20% of $143,000 is $28,600. You have already surpassed your profits from the flip deal and you pay none of this on taxes because you are still owed the remainder of the $100,000 out of pocket expense from buying the home.
The remaining balance on the home is now $114,400. At 10% interest only rate comes to $1000 per month positive cash flow and they pay all interest, taxes and HOA payments since they are the owners. You are the bank. $1000 over 12 months comes to $12,000. In your first 12 months you have made $40,600! Thus, you have exceeded your profits from simply flipping the deal.
When creating the note you should put in a balloon payment so you are not carrying the note for 30 years. The most usual is 5 to 7 years. This means the family will have to sell the home or refinance the home in that allotted time. You can even put in an extension clause in case they do need more time.
Now let’s assume they have made all of their payments and they are ready to buy after 5 complete years in the home. Remember the bulk of your taxable income comes at the time they buy since they are paying off the loan.
This calculation is quite simple (we will ignore taxes on interest earned):
Down Payment + 5 years * $12,000 + remaining balance – 15% taxes on $43,000
$28,600 + 5 * 12,000 + $114,400 – 0.15 * 43,000
= $28,600 + $60,000 + $114,000 – $6,500
= $196,100 return
Subtract off your original $100,000 investment and that gives a $96,100 PROFIT
Seller / Owner Financing (selling the note)
You may also want to sell the note. Maybe you keep the note for one year to show good performance history and then sell the note to a note buyer. This will be a Performing Note and you can get top dollar on it. You will sell at a discount maybe 90% of face value but the note buyer is gaining all of those future interest payments, too!
Let’s maintain the same example and sell the note after 12 months of ownership.
The buyer still follows the same example as in the above subsection and this is only for 1 year instead of 5. Let’s see how the math works out.
You still sell at 10.5% interest with 20% down from the buyer (thus the note is secured by 20% equity position). You receive twelve payments of $1000 from the buyer. Then let’s say you sell the note at 90% to face value because it is a performing asset with equity.
Face value of the note is: $114,400 (we are using an interest only note)
Discounted by 90% gives a note purchase price of: $103,000.
Your profit will be the sum of all monies which came in over the year.
Down Payment + Interest Payments + Sales Price – (Purchase Price)
= $28,600 + $12,000 + $103,000 - $100,000
= $43,600
Don’t forget you are paying taxes on the principal gain which is the above value minus Interest Payments and Original Purchase Price. Thus,
$28,600 + $103,000 – $100,000 = $31,600 for capital gains tax.
Your tax rate of 15% says you will pay 0.15 * $31,600 in taxes = $4740.
Your total profit would be $43,600 – $4,740 = $38,860
In theory all three of these short-term (or near short-term) techniques can be very beneficial to the investor. The first technique explains the Flip Process. It may appear that the money is not too great in this average deal, but one can not forget that you can do multiple deals. Thus, it comes down to the Flow of Money.
This can be summarized in saying that once you close a deal you already have another deal coming along. You simply buy another property and repeat. Although this does require a lot more effort the actual reward can be astounding. It can also be equally detrimental when you make one or two bad moves.
For a quick sale you must have multiple Exit Strategies. In our next article we will discuss Long-Term Strategies.
Happy Investing!
I hope this helps everyone in explaining the Basic Exit Strategies. For more information visit us on the web at: http://www.tridentinvestmentsllc.com.
Kevin A. Dunlap
Mgr. Trident Investments Group,
Office: (702) 516-5698
Cell: (702) 591-1784
Email: Kevin@TridentInvestmentsLLC.com
Kevin is a real estate investor for 8 years with specialties in lease options, creative investing, bulk bank purchases & sales, apartment complexes, and buying outside your region of residence. He has operated over 4 investment companies over this time and is currently residing in Las Vegas, NV.
