A big question comes to mind when in the course of learning how to structure Lease Options…’When do I pursue a Sandwich Lease Option (SLO), or when to use a Cooperative Lease Option (CLO)?’
The question is a very good one, and worth pursuing in your understanding.
The very first thing to understand is that when beginning to speak with a seller – I always approach any prospective Sellers with the goal of doing a Sandwich Lease Option from the initial point of contact. And I do this with the simple goal of obtaining the most amount of equity in any given deal.
So let’s start Sandwich Lease Options (SLO’s)…
Sandwich Lease-Option Deals
In order for me to do a SLO, I have to have a minimum amount of equity in the deal to ‘stay’ in the deal.
For example – if I am going to be making the monthly payments and taking care of the maintenance on a property (even if I don’t have a Tenant/Buyer – or they flame out at some point in the future), then I have to have something in the deal in the form of equity.
In fact – the formula that I use and choose at some point in my business, is this – I must have a minimum of 15% or $20,000 – whichever is GREATER – to stay in the deal, by doing a SLO.
Example #1:
A property worth $100,000 needing no repairs – using my self-imposed formula if I were able to pick up the property for $80k on contract. That would leave me with $20k in equity, which is greater than 15%.
15% x $100,000 = $15,000
The $15k in equity is SMALLER than $20k – so if I could only get the house for $85k ($100k – 15%), I would be more cautious doing a SLO deal on this property, unless I knew that I could ‘bump’ the sales price by $5k, thus achieving the $20k minimum in this deal.
Remember – my formula is 15% or $20k – whichever is greater, and since $20k is greater than $15k, then I am likely to be leery of doing a SLO on this deal.
Example #2:
If a property is worth $150,000.
15% x $150,000 = $20,000
Since 15% is the same as $20k – I would definitely do a SLO on this deal.
Example #3:
A property is worth $200,000.
15% x $200,000 – $30,000
Since 15% is greater than $20k – by understanding the greater of the two – I would definitely do a SLO on this deal.
In your city or market where you live – you may choose to use a different set of criteria or figures for your minimum required equity on a deal. But these are mine, because in rural Michigan where I live, the median sales price in my county is $85,000, and these numbers work very well for me.
A simple understanding of your market will allow you to decide what minimum basis you want to have in order to pursue a SLO on a given property.
