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Hi Scott
As Paul & Karen say, a Sandwich Lease/Option (or SLO) is what you are asking about.
You ask "what about…?"
Can you be more specific as to what you actually want to know? There are plenty here who will be happy to answer your questions once we know what you want.
This is a very powerful strategy to control many properties with minimal outlay (but usually you need some money). As you can appreciate, powerful tools can be dangerous to the user (and bystanders!) if used inexpertly. There can be a lot of precise legal paperwork involved, and a slip-up can be costly, so I'd advise you get properly educated before you try it. Also, find and use a knowledgeable solicitor who's up to speed on SLOs. I am not at all trying to put you off, this is in your own long-term financial best interests!
Having said that, to whet your appetite, I will answer your original question "can you share the details" by telling you probbaly more than you wanted to know, about one we put together this week (the LO purchasers moved in yesterday).
Divorcing seller has new job and wants to move out of state. Mortgage and other debt servicing is eating him alive. Owns house in his own name. It is large, in good position, but in disrepair. He listed it with RE Agent at 260k. We made offer through Agent to pay him a little upfront to help with his bills and then to rent it at a high rent for a time until we settle the purchase. Declined. Then as he got lots of lookers at that price, but no buyers, he realised that although it will eventually sell at 260k, it was overpriced for a quick sale. The seller himself rang the agent and said he'd let us take it at 220k (10k below our previous offer) if we acted NOW. It was Thursday.
We did. First I spoke that night with some potential clients who were about to L/O another smaller house we own. I suggested that they might prefer this larger one. They went to the agent on Friday and he took them through the house. They loved it. They are in the building trade, the repairs are a minor thing to them, and they appreciated the opportunity to use some "sweat equity" to help buy their own home.
I met seller Saturday and we signed a Lease with Option to Purchase. 13-month Lease $1900/month, Purchase 220k. He also signed prepared letters to his providers that gave us total control of his loan, insurance, rates. Also an agreement that says we will pay all of these out of his lease, and deposit the balance in his account each month. And that we will hold over any excesses until the following month so he never has to put his hand in his pocket again. He loves it that he walked out of there a free man, and this house will no longer be a burden in any way. Welcome news, since debt relief was his big motivator. I also gave him a cheque for the Option Fee (3,000) and another made out to the agent for half his commission. This was previously negotiated with the agent: half now, half on settlement. Both amounts are deducted from the sale price on settlement. By the way, he bought this house for 185k only about a year ago, so he made a tidy profit of his own even though he decided to sell it under market.
Next day he flew interstate to put his affairs in order there pending the move. Meantime I insured the property listing both his and our company's names as beneficiaries (Because his previous insurance was only in his name, and in case of a claim we need some control so our client gets their house). I also submitted the various letters to his bank and council, and arranged for the DDR to come out of one of our accounts. From next week we are paying his mortgage.
The day after the seller signed, I met with the new purchaser. They know values in the area, and were happy that we are selling them this house for 265k. The house they are vacating was sold by their landlord for more, and is not as large/well-positioned, although in better condition cosmetically. They were going to L/O our smaller house for 450/week (250 rent, 200 credits toward purchase every week the rent is paid on time) but as they only had 2k deposit, I said they would have to pay more per week for the larger house. They were happy about this, and agreed to pay $550/wk (250 rent, 300 towards house).
Their intention is to renovate within 6 months, and then get a loan. We will assist with the loan process, using our contacts with capable mortgage brokers. They have FHOG eligibility, so at that time will have 2k option fee+ 7k FHOG+ 7,800 rent credits = 16,800 towards the house. They will also have saved other finds to add to this. The property should value at about 320-350k by then (post renovations, based on current comps) and they will need a loan of only about 245k, or about 76% LVR using the lower val. A capable broker can find them a lender who will lend based on val instead of purchase price.
So to summarise the figures:
Our outlay:
3,000 Option Fee (non-refundable)
3,272.50 Option Fee (agent's commission, half paid upfront)
720 (Insurance, refundable by withholding lease payments over the next few months)
660 solicitor (for both ends of the SLO)
-2,000 less Option Fee from purchaser
6,600 approx.So now we have total control of this property, income of 2,365 less 1,900 lease, or a cashflow of 465/mo.
When the purchasers complete their purchase we have our payday. This could be up to 12 months. Since we are crediting 300/week towards the house, we prefer earlier rather than later, but even at 12 months, our payday is 265-220-15.6= $29.4k. (less solicitors etc.). You can add the original 6272.50 lease option fee, that we get back at that time as well. We want our solicitor to manage the transfers to ensure we get our markup.
The "etc" does not include the usual $7260.40 for stamp duty, mortgage duty, transfer, mortgage rego, since our Option Agreement allows us to substitute our purchaser as the buyer. We never own the property, and do not need to qualify for a loan. There is a small Stamp Duty payable on the Option.
By the way, the L/O paperwork between us and the seller is quite different to that between us and the buyer. e.g. we don't allow the buyer to sub-lease, but the seller mandatorily gives us the right to sub-lease.
So you see Scott, Sandwich Lease Options are very powerful, and the rewards can be very good. But there are a LOT of traps for young players, so please, please: get educated first!
Hope this helps.
There's also Group Title, (in QLD at least) which allows separate ownership without actual subdivision. In our shire a lot of 20-acre blocks were converted to Group Title so they could be sold in 2-5acre parcels.
In practice there is joint ownership of common land like roads, (and the parties have to maintain and insure that), then there are "owned" areas (which are treated like your own yard) and smaller "exclusive use" areas where you can put a dwelling or sheds.
I personally live on such a Group Title, and we have yearly meetings just like Strata Title, and occasional "Working Bee" days for road maintenance.
Although some valuers are wary of GTP (Group Title Plan) because they don't know whether buyers will value them less because they are not freehold, when our neighbour on 2 acres sold for $400k it made for a very good val for our place on 5 acres.
Cheers
Hi Tony
We too were using MS Excel to track Rent-to-Owns, and similarly found it a little cumbersome. Especially when they paid odd amounts or were late with their payments.
However, we recently altered the way we do our Rent-to-Owns, and now it's a breeze. We still use Excel, but it takes less than ten minutes per customer per month to prepare their statement and print it ready for posting.
If you need more info, just PM me and I will tell all.
Cheers
Rick's course worked for me. Bought the home study course a few months ago – have now done a few Lease Options. They are a little easier than Wraps, and have some advantages. Less profit, but quicker profit (e.g. one year instead of 3-5) and the "Sandwich" L/O means you may be able to structure deals where you don't need much (if any) cash up front and everyone benefits.But it's horses for courses: I see what will suit the situation of the client best and go with that. e.g. Last week had a customer who started with wanting a Lease Option (Rent-to-Own) but after talking to them it turned out to be better for them to go with a 2nd mortgage carry-back. Much cheaper way to home ownership for them in their particular situation.I guess the main benefit for me from Rick's course is the mind-opening process of seeing what other creative possibilities there are. I made an offer (through a Real Estate Agent) today which is basically a 6-month option on a property, allowing us to renovate it to add enough value that we can then borrow at 80% LVR the entire purchase price by settlement. Not Rick's way of doing things, but with our little dedicated team it's quite a practical deal and relatively easily funded. I would not have thought of that before.The cost of Rick's course was recovered many times in the very first deal, so I don't have a problem with it.As an aside: I bought a few online PDF courses from USA real estate people over the last 6 months (about USD97 each) and have myself adapted the ideas learned to Aussie conditions. Those insights gained added a nice little sideline to our business, attracted so many more houses than we can deal with, it thus enabled us to even wholesale them to other investors. See, the investment in information was again easily recovered in the first of these deals.I watched Mark Rolton's introductory DVD a couple of nights ago. I had a similar reaction: i.e. a mind-opening to different ways to create deals. I will probably buy the home study course, not because I think a partnership with Massland is for us, but because I can see that a few techniques and suggestions learned there will easily pay for the course in the first development/option deal (without going into a partnership arrangement with anyone). To use Steve's expression I heard him use at one of his seminars in Sydney: "The right tool for the job." Interestingly, we were already looking at a number of development projects, so even Mark's introductory DVD had some useful insights for me.Several above mentioned time. I agree, time is precious. That's why I buy it via courses. I don't have time to make all my own mistakes and learn the slow way. I prefer to learn from the mistakes others.
Since I was considering Mark Rolton already, I have found the comments above of great interest. Thanks guys!Our solicitor tells us that with a Developers License in QLD you need to deposit the installments with the government until the final payment when you are selling a property you own without an agent being involved.
That's why at his suggestion we now have three separate entities, that allow us to do six times three _new_ wraps per year.
Another way to meet the legal obligation is to get friendly with an agent and put your wraps through his office. You'd normally negotiate a substantially reduced commission for this. Or even get your wife/friend to become a Licensed Real Estate Agent.
But getting back to the original question, plus subsequent ones…
Banks were negative about wraps in the past, but they seem to be less so now.
Before you get the loan, treat it like an ordinary IP. The bank will ask to see a rent appraisal from a RE Letting Agent. For the purpose of establishing income from the property they will initially base their estimate on this, with an allowance for vacancy.
Then wrap the property, ask, and show the bank the contract if they want to see it. We have done so with several banks over the years and they have not objected. e.g. Bank of QLD, Bankwest, Westpac, CBA.
However, when you buy the next property, you can show the bank the income statement for the earlier wrapped house, and they will take the actual wrap payment as the income. Some banks want to see the actual wrap contract (and they seem content with that), others are happy with a statement showing the income. If you use Ezidebit (or similar) to collect the payments from your wrappee you can print out a nice payment history and send it to the bank. The amounts will match up with your bank account where the payments are deposited by Ezidebit.
So it's a little tough in the beginning unless you have a high income separately, but it gets easier as you go on.
We have many houses wrapped using loans from the CBA (NB: Important! Separate mortgages!), and the CBA knows exactly what we do with them. In fact, our banker often asks "Is this one going to be a Wrap or a Lease Option?" But they still ask for a rent appraisal and use that as the basis for the new loan. Of course, as I said above, when the next loan is created this is adjusted to the real income from that property. The exception is where we are renovating a house and there's no one in it yet, and we buy more in the meantime. In that case the bank uses the rent appraisal as before for that particular property. (These days there are so many good buys around that we seem to have a number "in the air" at any one time)Hope this helps a little.
Cheers
You are in for some fairly advanced calculations, but…
I'd go through the TOTAL savings of paying down your home loan, over, say 3 years…
then see how that amount stacks up against what else you can do with it.
Personally, with 60k I'd try to control about 6 houses that return $100/week each (clear) plus a lump sum of about $30k each within the 3 years. If you are good at negotiating you might be able to control more than 6 with that cash, but I tend to use about 10k to get control of a house via a Lease Option when using a real estate agent. However, [1] you'd need to know what you were doing so as to minimise risk to virtually zero (this knowledge costs about 3k to get quickly), and [2] your wife would need to be comfortable with it, otherwise it's not worth the exercise. Wives are more important than money!
I'd calculate the total income over the three years (less tax), compare it with the pay-down-home-mortgage scenario and make my decision then. Then use the gross profit to purchase a buy-and-hold type property (a "keeper" with low maintenance high yeild etc). This is a lot more messy and difficult that paying down the home loan, so you need to decide if it's worth your effort and time.
You, however, may prefer to purchase one property in the "normal" way using the 60k as deposit, and then wrap or lease-option it to return at least 100/week over your payments, plus a lump of profit of around $30k within three years.
All depends on where you are in your investing career, your expertise, time available, and tolerance to risk.
…but you did ask us what WE would do.
Cheers
Mr Fair Go
Hi Boshy
Maybe this helps…
We have moved through the CBA system over the years. First we started with 5 loans at once via the regular "retail" route. Well, I guess it wasn't quite "regular" in that a friend who is a mortgage broker introduced us to the bank manager and suggested he write up the 5 loans for us… which he did.
We stayed with the man when he moved to a different branch. Then when he took the Golden Handshake (and became a broker!) we stayed with CBA, but this time we were with a sort of "mobile 'ender" who was at several different branches. Then he left, and we were back in the "standard retail" scenario. The lady who was trying to cope with our loans (about ten by this time) suggested we move to "business banking"
This was a great step, because we got into an area where we didn't have to explain ourselves from the beginning every time. (e.g. No more explaining what a "wrap" or a "Lease option" is and why they should give us money for it!) We had one specific person who understood our situation thoroughly. For a payment of $300/yr we also qualified for their "Wealth Pack" which has a lot of benefits including no account-keeping fees on any accounts. As we had about 20 accounts including 17 loans at this time, this was a saving of over $200/month in itself.
And this year we moved to a Portfolio Loan, which gives us great flexibility, easy to add and remove properties, and are generally happy with it. It does not cross-collateralise if you stipulate that is how you want it. Make sure your wishes are understood.
Now the point for you is, during all this time, we kept a careful eye on the charges.
> "they won't actually charge me for all of them but if they aren't on the letter of offer they can't later charge them if they need to. Doesn't sit well so let's hope they are trustworthy."
We also in the beginning were a bit concerned over the list of charges presented, and we got the same explanation as you did. We have now had over 30 loans with CBA and in our experience that explanation has turned out to be true.
Sometimes there would be charges applied that were not really relevant. It seemed to us that this was not deliberate, but a "feature" of banking's "tick the box" mentality. Since we generally operate outside the box from the standpoint of a regular homebuyer or buy-and-hold investor, erroneous charges do creep in. Especially, it seems, at the time you pay out a loan. And often we were slapped with a $35 overdraw charge when funds were advanced from our cheque account. However, this is a charge that is automatically applied by the computers controlling the accounting. In EVERY case we were able to easily get the fees reversed by a phone call or email to our business banker.
We have found that the further up the levels you go with CBA, the more flexibility the bank person you are dealing with has. Even at branch level however, they can have a little discretion in the charges – especially if you are borrowing a substantial amount of money. Ask, ask, ask. Ask for explanations of the charges, ask for refunds of those you believe they levy in error. If you don't get joy, be polite with the person you are dealing with (to keep their job they must abide by the set of rules for their level) and go higher. BTW we have never had to do this (go higher) with CBA although we have with other banks.
As I said above, we have found the CBA to readily refund any charge that is in error. In fact, our business banker keeps an eye on it and does it for us automatically now, since she knows I will ask her to anyway.
Hope this is of some assistance…
I was certain there's be plenty of people on this forum who used Hedge Funds to protect their overseas investments!
Is it a secret? Will no-one tell me where to learn how to do it?
