Sandwich Lease Options: Rent to Own 101
August 17, 2016 by Marty Orefice | Rent to Own
Understanding a sandwich lease option on a rent to own home can be confusing.
A sandwich lease is when an investor decides to lease a home out that he is already leasing himself.
General rent to own leases are already a bit tricky.
You might be asking yourself: What is a sandwich lease and how do I know if I am or will be a part of one? The answer is simple when you think of the leases as an actual sandwich.
What is a sandwich lease?
A sandwich lease is basically a sublease. A sandwich lease is when a landlord rents a property to a tenant and then that tenant rents the property to another tenant. Not all landlords allow sandwich leases.
Many people decide to sandwich lease because they signed up for a long lease term and unexpectedly had to leave. It is very common among students who rent an apartment for a year but may need to take a semester off for an internship or study abroad.
Some investors do this when they believe they can charge a higher amount for rent than the landlord is currently charging.
What is a sandwich lease option?
A homeowner options a property to what we will call “the middleman.” The middleman then options the property to you, the person ultimately leasing the property. Your payments in a sandwich lease may be a little bit higher because a middleman is getting paid too.
This is important to know when you are leasing a home. You should find out who owns the property and who will be collecting your payments.
The most basic explanation of a sandwich lease is to compare it to an actual sandwich. Think of a sandwich:
You have two pieces of bread and the meat in the middle.
The meat in the middle is the middleman. They are doing the most work, but they are expecting the greatest profit overall.
This may seem dangerous for the person who is leasing the property, but in reality, this is an easy way to obtain a property. Rent to own homes are a smaller market than traditional real estate.
By participating in a sandwich lease option, you can be sure that you are getting a property when you need one and that you are able to have the option to purchase the home after you are done leasing it.
How Does a Sandwich Lease Option Work?
Let’s look at a scenario where a sandwich lease option would be beneficial to someone who is looking to lease a home without credit.
Say you are looking for a rent to own home but you are limited to just a few homes in your desired area. The sandwich lease option could provide more potential homes for you to lease.
The middleman leases the home to you. Often times, people who participate in these types of leases don’t actually know the original homeowner.
If you are planning to do a lease option on a home, you should always ask who the current owner of the home is so that you know all of the parties involved.
When the home is listed, it will only be listed by the middleman and it won’t be advertised as a sandwich lease.
In fact, most of the time the final person who holds the lease on the home will have no idea that they are a part of this situation.
That is why it is always important to ask who the homeowner is and who will be collecting your payments.
These types of leases require little investment for the middleman, so you want to make sure that the price you are paying for the home is still accurate.
Basically, the middleman options the house from the seller. The middleman, or the investor, then options the house to you. So, in the end, there are two separate options, but one final buyer.
Sandwich Lease Terms:
Setting the terms and conditions when dealing with a sandwich lease is one of the most important parts to making sure that you are benefiting from the deal.
There are some basic things to consider in a sandwich lease:
First, always remember that everything is negotiable.
The most important part of any lease is making sure that all parties are benefiting. A lack of credit on the end buyers part can often lead to a large down payment when creating an option, but be sure that the amount you are paying is still fair.
Every lease term can be negotiated, including price, the amount of money you put down, how long you have to pay that money back and your monthly payment.
Contact a real estate agent or a lawyer to help you with your contract. While this may cost more initially, it is worth the money to invest in legal advice before you put your savings into a home.
Be sure you view all of the forms the seller drafts during the process as well and feel free to ask about the lease that the current seller and the middleman have together.
Be sure to check out our list of questions that buyers frequently have about rent to own contracts before you sign.
Pros and Cons of a Sandwich Lease Option:
The pros and cons of rent to own homes are not always obvious. Many times, deciding if rent to own is the best option for you requires a lot of consultation.
As if deciding to rent to own isn’t confusing enough, adding things like sandwich lease into the process doesn’t make it any easier.
Thankfully, sandwich leases really don’t affect the end buyer that much.
That is the major pro of becoming involved in a sandwich lease: often times people don’t even know that they are in one.
The cons of being the end buyer in a sandwich lease option are that you are generally paying more to lease the home than the middleman did to lease the same place.
You must be wary of this, but it can also work to your benefit.
Because if you, the end buyer, suffer from a really poor credit score, a sandwich lease may allow you to obtain a place that you may not otherwise qualify for.
This means if your financial situation is poor, you can still qualify for a home.
The most important thing to remember is that your agreement still must be beneficial and fair for you. This is when hiring a lawyer to review your contract comes in handy.
Sum It Up: Sandwich Leases
Sandwich leases allow someone who is looking into rent to own homes to find access to a home in their desired location with ease.
The sandwich lease has three parties: the original homeowner, the middleman and the prospective buyer.
The middleman options the home from the homeowner.
He then seeks out someone to rent the home with the option to purchase.
This person rents the home but is often required to put down a larger payment than the person who originally optioned the home.
The payments this person makes may also be higher too, but should still be fair.
The person making the final payments is the one with the final option to own the home.