My Favorite Real Life No Money Down StrategyAug 31, 2018
Hopefully, you have read my article on No Money Down Investing, so you know it's real, but you're also aware that money pretty much always changes hands in every real estate transaction. It just doesn't have to be your money. Thus began the term OPM or other people's money. There is some useful information in that article, so give it a glance before you leave our site.
"To be a great investor, you need to make good decisions without perfect knowledge.
The first step is not to wait until you have a huge sum of money.
The illusion is that when you have more money,
you'll invest and it'll be more worthwhile.
The most important thing to do is start investing now,
so you can unlock the power of compounding." – Tony Robbins
Why is this my favorite no-money-down deal? Because you get money on the front end, on the back end, and in between. Plus, you do all of this without ever owning the property. It's just a beautiful thing!
When would now be a good time? Ah, how about now? Yeah, now sounds good. Let's do it!
The Sandwich Lease
A Sandwich Lease is when you lease-purchase a property from Person A and then you lease that same property to Person C. You are basically the middle man of this scenario or Person B.
Fair Warning: This is no longer legal in all 50 States, so you are going to have to check your state’s laws. The reason why it’s no longer legal in some areas is that unscrupulous people took advantage of owners and renters alike. Do your due diligence, which means check EVERYTHING out yourself, and trust no information given to you by anyone other than your team. Go through proper channels, which means – in this case – using a Title Company to service your loans.
Begin by searching listings for homes for sale by owner. Key phrases to look for in these listings are “must sell quickly,” “moving soon,” “job relocation,” or “military relocation.” You are looking for a person who owns their home and must move out soon. You are going to call these people and talk to them. If you can meet them for coffee or at their home it would be best. The key is to listen and be interested in solving their relocation problem.
Here is an example of a sandwich lease that I did. I found a couple who needed to move because the husband’s job was relocating him to another state. After a long conversation with them, I learned he had had his home listed with a broker and it wasn't selling quickly enough. They needed to move soon. The owner wasn’t thrilled about the possibility of renting his home out. He didn’t want to be responsible for repairs. He needed $5,000 cash for moving expenses. He let me go through the home and make a list of repairs needed. The home was located near a hospital in a good neighborhood with a small HOA fee and a community pool.
I agreed to give him the $5,000 down as a non-refundable deposit on a three-year rent-to-own lease. A down gives me interest in the property, as well. I would cover his mortgage, insurance, taxes, and HOA fee totaling $795 each month through a title company that would add a monthly transaction fee of $12, which I would also pay. The title company would pay the mortgage company and the HOA directly. The title company also put a lien on the property so the owner could not sell the property from underneath me or use it as collateral in any way. This is important. I also had the right to be notified of any defaults or leans against the property, which would not only void our agreement, but he would then owe me all my money back and I would have a lien on his property, as this would put him in default. I agreed to be a month ahead at all times, which was no big deal. I agreed to buy the house within the next 3 years (I was looking for 5 years, but he wasn’t willing to go that far) for $175,000 which was slightly under market, but he had it listed for that. With repairs like paint and carpeting, it was a fair price. I agreed to make any and all repairs, so he would have no landlord responsibilities or obligations. This could be risky if his AC wasn’t newer or the appliances were old. I had my inspector go through and the AC was recently replaced along with the roof, so I felt safe. A house inspection is worth the cost and was the only money out of my pocket before the contracts were signed. I contract (not worded as "down payment") although I was asking for $10.000 and $1000 a month, which was slightly above the norm of $950 at the time. However, no money went towards the price of the home and no money went towards a down payment if she purchased the home, otherwise, it was mine. The selling price would be determined when she exercised the contract to buy, but could not be less than $175,000, my price. I used the same title company to service this loan with the same monthly service fees, which she paid on her end.
The home’s value was just over $200,000 in 3 years, but we settled on $195,000. I got my $5000 off the seller price of $175,000 making me a $25,000 profit. So I made, without ever owning the house, $3000 upfront, nearly $200 a month for 3 years totaling $6,948, and $25,000 at the close. The closing fees were split between the buyer and the seller, not me.
This is not to say that these are easy. They take a lot of work to find and negotiate, but they are beyond worth it. Remember to set money aside for taxes and repairs/expenses. Also, keep records of everything.
You must have a title company service these contracts in order to protect everyone involved. In this case, Person A (the Seller) wanted to renegotiate and have me buy sooner because he wasn’t able to purchase a new house without selling this one first. However, the nurse wanted to clear her credit and ride out the 3-year term, so he had to wait. I had done everything that he thought he wanted and needed when we drew out the original contract, so it was win-win-win at the time.
Now, what would have happened if the nurse didn’t want to buy or I couldn’t find another buyer to take her place or the house price went down? I would have just let the lease-purchase contract expire without executing it. I would have forfeited my $5000 down, but so would the nurse, Person C (the Buyer). I still would have made my monthly income, though. Person A would have to sell on his own, rent to someone else, or renegotiate with me. Either way, it was not a bad deal for anyone. His mortgage and credit were safe because he had 3 years of timely payments and his balance went down a little bit in those three years. We were all good.
Now in some states, you will need two separate contracts to do this: one with the lease and one with the option to purchase. It doesn’t really matter as long as you make certain that it’s assignable (giving your right to purchase the property to another buyer, hopefully, the same person who is renting, but not always) and the lease can be subleased or sublet. Also, make sure you use a title company so that property is kept free of liens and the owner can’t sell it from underneath you. You don't want the owner to use the property as collateral for anything. This also makes sure that the mortgage is paid every month and the taxes and insurance are kept current. You can also be placed on the insurance so if anything happens, God forbid, the owner doesn’t walk away with a check and you are left out in the cold. Also, cover yourself and your renter with renter’s insurance. You also want to make certain that you never get a "down payment" from whoever is subletting from you. If you say "down payment," you give up interest in the house.
Entire books have been written on this Subject
A Sandwich Lease has a bunch of little components to it and entire books have been written on the subject. I've seen multi-hour presentations given about Sandwich Leasing, so this short report is not meant to give you every detail and cover every worst-case scenario. It is meant to give you an overview: a place to start. It's as simple or as complicated as you make it, so keep it simple and do your due diligence.
P.S. Don't forget to purchase the correct insurance anytime you change the status of ownership and/or occupancy. You must have the proper coverage at all times.
Michelle R Russell
© The Prosperity Process, LLC
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