But do you ever wish you could make more on a wholesale deal? After all, you’re not doing anything to increase the value of the property, so you’re limited in how much you can really make, right?
Wrong.
And now it’s time for a sandwich.
Welcome to the Sandwich Deal
It is possible to make 4x or 5x what you would make in a typical wholesale deal, if you think outside the box.
Any wholesale deal is like a sandwich: The seller and the buyer are two slices of bread, and you connect them with your sandwich-filling goodness.
Usually, the “sandwich” doesn’t last long… you set up a contract with the seller. You sell the contract to the buyer. The deal is done.
But imagine the possibilities if you formed a more long-term relationship with wholesale leasing.
When you offer a seller a wholesale lease option, it’s still a wholesale deal. You (the investor) don’t own the property, you own the contract. But instead of finding a buyer for the property, you find a rent-to-own tenant for the property.
Why Is This a Good Deal?
Sellers love this option because they can set the price for the deal. This is especially appealing for sellers who don’t have much (or any) equity in the property, because they can get the full value of the property back.
A particular group of buyers also loves this option, and this is where wholesale leasing is most different from traditional wholesaling… but know this: It’s critical that you find the right buyer and that you help them through the whole process in order to make this deal successful.
The best buyers for wholesale lease options are people who don’t quite qualify for a mortgage, but who are on track to qualify soon. If you target the right properties, you’ll have no trouble finding potential buyers, and the price and terms will be a win-win for both the seller and the buyer.
Wholesale leasing is also a win for you. You don’t own the property, so it’s a low-risk deal. It’s a relatively easy investment. Since the seller gets to set the price, you don’t need to negotiate. And you don’t need any funds to do these deals.
Wholesaling this way does involve a bit more long-term work than traditional wholesaling because you need to make sure the buyer is supported through the whole process of renting to own, but given the significant increase in your profit, that little bit of extra work is definitely worth it.
Profit? What Profit?
How does this actually make you more money?
It depends on the deal option the seller chooses…
After you talk with the seller and get the basic information you need, you should make an offer with at least 3 options, showing the seller how much they can make with each option. Your options should look something like this:
Option 1: Cash Offer
The cash offer is a traditional wholesale model. It gives the seller a comparison point for the deal. This is going to be your lowest offer.
In this case, your profit is the difference between your deal with the buyer and your deal with the seller.
Option 2: Sandwich Lease Option
With this option, you offer the seller a lease to the perfect tenant—you. You are responsible to pay the rent and cover maintenance and repairs under $500. To do this, you sublease to another tenant-buyer, but you stay in the middle.
Offers like this typically have a term of about 5 years, but the tenant-buyer can always choose to buy more quickly.
This is going to be a higher offer than Option 1. That’s because in this scenario, you have 3 paydays:
You make money up front- You make a monthly income on the tenant-buyer’s rent
- When the tenant buys, you get the appreciation of the property
Option 3: Lease Option Assignment
The lease assignment gets the seller the highest price. In this case, they can choose how much they want to ask for the property. Lease option assignments typically have a minimum term, for example, a minimum of 2 years.
This is more like a traditional wholesale deal, except that you look for tenant-buyers instead of other investors to purchase the property. Unlike Option 2, when you do a lease option assignment you do NOT stay in the middle. The seller can make more, but they also take on more risk.
Like a traditional wholesale deal, you make a profit up front, through the 3% option deposit collected from the tenant-buyer when they move in.
How Does this Actually Work?
Let’s go through the steps of a wholesale lease deal so that all of this is clear…
Step 1: Find a Seller
You’re looking for a property people want to buy. That means you want to find properties in nice neighborhoods in good school districts. They should be in the median price range for the area.
Your ideal seller doesn’t have much equity in the property. The easiest way to find these sellers is to look for them in for rent and for sale by owner ads online. You can look at for sale by owner sites and at sites like Craigslist. You might also try your local newspaper’s website or printed classified ads.
Once you’ve got a list of potential sellers, follow your marketing plan to contact them and send them an offer. You don’t need to spend much time on the phone with them; you just need some basic information in order to make an offer.
Find out about the seller’s situation… Is the seller current on the mortgage? Would they be consider renting the property? If the seller is motivated and interested in renting, it’s time for Step 2.
Step 2: Contract
Remember, with wholesale lease options you don’t need to do any negotiating. Send the seller a simple letter with clear options. You don’t even need to meet the seller in person. Just make sure the seller understands how each option works.
Once the seller chooses one of the options you’ve offered, get the paperwork in place. Work with an attorney to make sure you’ve got all the necessary details in your paperwork.
If you’re not doing this deal in person, you can use a notary to get all your documents signed. Make sure you don’t start making payments until you’ve got a tenant-buyer in place. Then it’s time to move on to Step 3.
Step 3: Find a Buyer
Rely on your marketing plan here. Use whatever methods you’ve found most effective, whether that’s Craigslist, bandit signs or online advertising. For example, you might put a sign on the property that says:
“Rent-to-Own. Only 3% down to move in. Call 555-5555.”
However you market, make sure you’re targeting the right buyer.
Screen potential buyers to make sure they have a realistic chance of being approved for a mortgage within the terms of your agreement. Do a background check. Also, use your 3% option deposit to confirm that the tenant-buyer really is serious about the deal.
Step 4: Final Paperwork
Once you’ve found a buyer, make sure you get all the paperwork in place. Have an attorney take care of or review all your contracts.
Make sure both the seller and the buyer understand how the contract works. If the seller chose the lease assignment option, make sure the seller accepts liability for the deal.
Set up the deal so that a third party collects rent and pays the mortgage. The tenant-buyer will be protected this way, and if the deal is a sandwich deal with you in the middle, you won’t need to worry about this happening each month if you’ve got someone taking care of the rent and payment for you.
Step 5: Follow Up
The goal of this wholesaling method is that the tenant actually buys the house. This goal doesn’t change once all the paperwork has gone through. Make sure the tenant-buyer has support to reach the goal of purchasing the property.
If the tenant-buyer needs to repair their credit, make sure they get into a good credit repair program. And make sure they have the contacts they need, such as a broker who can help them buy the house.
A Final Note
Wholesale lease options do require some extra legwork, but that doesn’t mean you need to break a sweat over every one of these deals.
Find team members who can make each step easy to execute. Establish a relationship with an attorney you trust. Find someone who can collect and distribute payment. Maybe even hire some property scouts to find the kinds of properties you’re looking for.
When you’ve got a solid team in place, you can do even more deals.
Whatcha Think?
Have you done any wholesale lease option deals? What do you wish you would have known before you started? Let me know below.
