why the neg on sandwich L/O's??? - Posted by Sam

Real Estate Investing Real Estate Law
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Posted by MB(Ga) on June 08, 2006 at 07:53:32:

The point you made about who will make more money makes great sense. Slowly but surely I’ll be that person with money AND credit.

I think the road to success will be leveraging. My cash reserves are low and part of it will be accessed via personal borrowed funds. I have to be gauarded in how it’s spent. MH and Assignments will be my first choice of investment. Wholesales are possible at the right opportunity. In the beginning being conservative could save me money, I cannot afford to do much more than cosmetic improvements to a property.

My credit is marginal. Given my scores, I was told I should be able to get financing but the expectation would be I’d be subjected to higher rates.

Thanks for the Feedback

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why the neg on sandwich L/O’s??? - Posted by Sam

Posted by Sam on June 05, 2006 at 13:52:33:

Wow, I hear over and over from people on here that sandwich L/O’s are not the way to go and there are “Too many things that can go wrong and you are in the middle waiting to be sued”. I say, sued by whom and For what??
Can anybody out there who has actually had real problems with these post and let me know what is the big deal?
I can’t see why it is so “risky” if one has good contractual agreements betwen both the seller and the T/B.
Also, anybody who is a fan of sandwich L/O’s lets hear some success stories!
Sam

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There are some ways to protect your deal here - Posted by Marc Donovan

Posted by Marc Donovan on June 07, 2006 at 03:57:17:

First, use a performance mortgage. This acts as a lien. If any other liens show up, they are junior to yours. Randy (SD) has posted a simple PM here that you can use as a template. Do a search and you will find it.

Second, have the deed to you held in escrow. Have it notarized and ready to record. When you show up to close, you put up the cash and the deed gets recorded. If the guy dies before the term, buy the place and record.

BK is always a problem, even if you get the deed. If they gave up significant equity with the deed (why else would you take it) it can be reversed and the trustee takes the house. As far as I know there is no magic bullet for BK regardless of how you structure the deal.

For the buyer side, provide an escape clause for you to back out if you can’t close with the seller for any reason. Pay the option fee back plus a penalty if you can’t get the deed. Plus make the lease subject to your lease with the seller.

Truth is, options are very cheap and easy if you use proper protections. The savings in closing costs alone will pay for a good attorney to consult with and to draft this stuff.

Im sure there are more what-ifs to cover here, but that’s your job to discover and fix. Since I don’t do these, Im not right on top of the curve here, but I believe this will cover most of the problems listed in this post.

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Re: why the neg on sandwich L/O’s??? - Posted by Sean

Posted by Sean on June 06, 2006 at 08:23:12:

Sadnwhich L/O and SUB2s are indeed potential land mines.

There are many risks with both these types of deals.

Now with that said, I do sometimes use L/O deals when the situation is right for them… SUB2ing in a state with a 3-4% transfer tax isn’t a no money down deal… L/O with a $10 option consideration is about as light as you can go.

L/O is certainly a way to get into a property incredibly light and quickly.

However, I NEVER EVER EVER L/O a property that I know I could not not actually buy myself if I had to… I also don’t L/O or SUB2 properties with ungodly payments attached that my finances won’t afford.

What happens with SUB2 and L/O deals is often, newbie goes to a seminar, learns one of these techniques… goes out and builds a nice house of cards in a year or two… and then most of those deals wind up falling apart, he gets stuck on the line for tens of thousands of dollars of mtg payments he can’t make, get sued by the original sellers and or buyers… spends all his time fighting those fires so that he can’t keep bringing in more cards to keep the pile upright, and crashes and burns in a glorious mess.

Or your original seller winds up in some sort of financial mess? I know they tell you trusts will shield you from this… but don’t believe it… If they wind up in trouble, and file BK or get a judgement against them… etc etc etc… that house will become part of the mess, one way or another.

I am not against the technique, but it is often used by folks who don’t have a clue, making themselves a huge mess.

Can you get a L/O on a pretty house, get a nice big down payment from a T/B and make a spread? Sure… but most folks go spend that down payment, and when T/B walks or the deal falls apart for some other reason, and they have already spent that deposit, and have to fill the place again and can’t do it quickly enough they can’t make the payments… not to mention fight the fight if they get sued for something, or the tenants trash the place and now it must be repaired before it can be marketed…etc etc etc…

It IS a valid technique, but like buying and holding, I would not recommend it to folks who have no money and no credit to be building their businesses around.

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No fan of the sandwich (L/O that is…) - Posted by Lyal

Posted by Lyal on June 06, 2006 at 07:14:50:

Sam,
Your statement “I say, sued by whom and For what??” demonstrates your ignorance (I don’t mean that in a bad way.) You must understand that anyone can sue for any reason. It doesn’t matter if you have a “good contractual agreement” or not. You’ll still need to pay an attorney to defend your side. That cost can quickly run to thousands of dollars. Nothing about the law is clear cut. I have seen judges rewrite the law from the bench (meaning give a decision that was totally contrary to how the statute read) and it cost another investor more than ten thousand dollars (he had followed all the rules). His choice was to either spend another 10 grand (or more) to appeal or eat the cost and move on. He moved on.

Same with contract law. It doesn’t matter what the contract says, many judges are very sympathetic to sellers. You could even wind up being required to pay their legal costs!

The only sandwich L/O I did seemed to be going well until I found a buyer and informed the seller that I wanted to exercise my option. She wasn’t ready to sell as she wanted to have the loan balance paid down more. Luckily I was finally able to convince her to close but it was scary for a while. I didn’t expect it (it was all spelled out in the contract) and was wondering what the he11 I was going to tell my buyer all the while imagining my profit flying out the window into the attorney’s pocket. That experience brought into sharp focus how little “control” I really had of the deal.
Never again.
Lyal

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Re: why the neg on sandwich L/O’s??? - Posted by DP (ON)

Posted by DP (ON) on June 05, 2006 at 23:34:00:

The simple truth is tha 99% of the people posting on this site have no idea what they’re talking about because they’ve never done a deal. Listening to them regurgitate the latest fad opinions is like asking your dentist to operate on your brain tumor.

A few years ago L/Os were all the rage, now they’re the devil incarnate. Next year sub2’s will be the new great satan because somebody will write a course on some new technique and sell it by picking them apart.

Let me save you a lot of time: There is NO foolproof technique, and no technique is better than any other. They all have their pros and cons. Get to know one strategy and do deals, and stop worrying about what people say.

For the record, I’ve been doing deals for nearly 6 years and I’ve never seen a major problem yet. So, you can either believe that death lies around every corner… or you can get off your butt and make some money.

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Re: why the neg on sandwich L/O’s??? - Posted by Mike (Seattle WA)

Posted by Mike (Seattle WA) on June 05, 2006 at 20:29:21:

After reading this, I think I’ll do my deal via sub2 and a nice note instead. I’ve already done 1 that way :slight_smile:

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Re: why the neg on sandwich L/O’s??? - Posted by Luke Hoppel

Posted by Luke Hoppel on June 05, 2006 at 17:12:58:

I agree that all of these are potential problems. The thing you must ask yourself is “Is it worth the risk?”
I’ve read Conti & Finkles book and I personally like the strategy but I don’t like the fact that they advocate 7-10 year leases. The longer the lease the higher the odds of one of these problems occuring.
I personally like a 2 year lease from the seller. A one year option for the T/B. If they don’t excercise I can L/O it again or just find a end buyer and cash out. It’s not going to be as much but you’re out of the deal.
Remember there are inherint pit falls in every strategy. Of course it’s best if you minimize them but me personally, I like the L/O.
Also remember you don’t have to always use sandwiches. How about buying sub2 then lease optioning. You know have the problem of the Due On Sale clause but once again, it comes back to the risk/reward ratio.
Good Luck,
Luke

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Re: why the neg on sandwich L/O’s??? - Posted by James Carver

Posted by James Carver on June 05, 2006 at 16:11:24:

Sam,

No offense intended but if you’ll reread the ‘For Joe Kaiser’ thread you started you’ll find at least a half dozen ways to eat a sandwich L/O and none of them are nice.

To add to Gerald’s 2nd point in his post, consider this scenario: You’re in the middle of a Sandwich L/O and the OWNER of the house has an IRS lien filed against him (or judgment, mech. lien, etc.)

Imagine the dialog between you and the IRS agent. You say,“Yes, I have an agreement with the owner and my docs all lean in my favor so you need to remove your tax lien because my tenant buyer is ready to cash out.”

To which he says,“Interesting. So, you wanna talk with our legal dept or would you like to work out a payment plan? Or maybe we’ll release the lien for a discount?”

Do you see the problem here? Same thing if the owner loses in The People’s Court and has a big, fat judgment against him. You think the judgment holder will subordinate to your silly L/O agreement?

It doesn’t matter whether you’re dealing with investors or plain ol’ homewners, your bulletproof agreement simply doesn’t have a contingency clause that will cover unexpected liens like this.

How about this one: the owners get divorced (marital or corporate) and the property is ordered to be sold but your strike price is no longer the sale price.

What if the owner dies? You think you get the property? Hmmm, maybe the heirs or creditors are thinking something different that doesn’t necessarily involve you.

Each of these scenarios COULD happen. They don’t always, for sure. But, knowing that they could happen, you need to be prepared for the worst if you’re considering going forward and actally doing something like this.

Oh, and if you want success stories, there are plenty of them. Just ask Conti & Finkel.

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Re: why the neg on sandwich L/O’s??? - Posted by B.L. Renfrow

Posted by B.L. Renfrow on June 05, 2006 at 16:03:17:

In addition to what Gerald said, here’s one I was personally a party to, early in my REI career before I knew better:

Owner gets into financial trouble, unbeknownst to sandwiched investor. Owner files Chapter 7 BK, contacts the lender and is advised to immediately deed over the property…and does so. By the time investor finds out, it’s a big mess.

Brian (NY)

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Re: why the neg on sandwich L/O’s??? - Posted by gerald(tx)

Posted by gerald(tx) on June 05, 2006 at 15:04:51:

This is a no-brainer, Sam. Here’s two I have personally seen, but was not a party to:

1- Owner wants the house back. Gets an attorney who finds some technicality to void the lease. The judge almost always sides with the person whose name is on the deed and mortgage. That’s lawsuit #1 for you. Number #2 comes when your tenant/buyer who has been paying to own his own home, now is being evicted.

2- The owner has a lien placed on his property. Your T/B wants to exercise his option, but you can’t deliver because neither you nor the owner can come up with money to pay off the huge lien. Guess who gets sued?

There’s and old saying, “friends don’t let friend do sandwich lease options.”

gerald

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Assignment of the Lease back to the owner - Posted by Gerald-NC

Posted by Gerald-NC on June 07, 2006 at 11:54:40:

Cooperative Assignment in other words. You contract the home, then find you a qualifed T/B and assign your contract from the homeowner to him…with the hoeowner’s consent and signature, and then if something “bad” happens it’s between the homeowner and the T/B and you’re no longer in the middle :smiley:

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Re: why the neg on sandwich L/O’s??? - Posted by Sam

Posted by Sam on June 06, 2006 at 10:29:22:

Many great points here, Sean. Thank you.
I completely agree with your statement, “However, I NEVER EVER EVER L/O a property that I know I could not not actually buy myself if I had to… I also don’t L/O or SUB2 properties with ungodly payments attached that my finances won’t afford.”- I believe each deal should be looked at on a case by case basis- NO deal is perfect and yes, there are always pitfalls.

Do the numbers work? Yes or no- deal or no deal.

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What do you suggest for No $ / No Cred Investors… - Posted by MB(Ga)

Posted by MB(Ga) on June 06, 2006 at 09:08:52:

If buy/hold, L/O’s and sub2 are out of the question, what is a viable way to get started into REI with little equity and minimal cash.

I post the MH section and plan to start there. However, I still have an interest in SFH and want to do my first deal on myself by end of the year. I want to go about it in the smartest, safest strategy.

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Re: No fan of the sandwich (L/O that is…) - Posted by Sam

Posted by Sam on June 06, 2006 at 10:16:36:

Thanks, Lyal, for posting with some real life experience. You are so right- anyone can sue for any reason.
Take care,
Samantha

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Re: why the neg on sandwich L/O’s??? - Posted by Sam

Posted by Sam on June 06, 2006 at 10:41:29:

Hi DP-
I must be the devil herself, huh! :slight_smile:
Fortunately, I am not one to make decisions based soley on what other people say or think. I do believe we can all learn from other peoples experiences and mistakes- I also strongly believe in creating my OWN experiences and making my OWN mistakes to get the REAL learning goin on!
Thanks for your input and Congrats on 6 years of investing success!
Samantha

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Re: why the neg on sandwich L/O’s??? - Posted by DP (ON)

Posted by DP (ON) on June 06, 2006 at 24:30:22:

P.S. - I don’t do sandwich lease options, either.

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Re: why the neg on sandwich L/O’s??? - Posted by Sam

Posted by Sam on June 05, 2006 at 22:58:13:

I think that’s a good idea, Mike. If given the option between a sub2 or a sandwich L/O, I’d do the sub2 too!!! Take care and good luck with it!
-Samantha

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Re: why the neg on sandwich L/O’s??? - Posted by sam

Posted by sam on June 05, 2006 at 16:31:45:

Thanks James… and Gerald…and B…L.
I completely understand how all of these circumstances could put a damper on (or devour!) any sandwich L/O deal.
Thanks for all your input.
Samantha

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Re: why the neg on sandwich L/O’s??? - Posted by James Carver

Posted by James Carver on June 05, 2006 at 16:20:27:

Another excellent point, Brian.

The final chapter in the Sandwich L/O saga is Chapter 7.

Add to everything that’s been mentioned before and pile a nice BK on top of it. Exactly where does a Memorandum of Option stack into a CH7? I’m thinking that it’s not exactly on top.

Lots of untold ugliness could easily happen at that point.