Sandwich Option or Lease to Sell
(you can watch this video at https://youtu.be/qj0vg-Xkv-Y )
This is something that’s called a sandwich option. So you are taking a lease option on a property to buy it, but then giving someone else the option, someone to buy that property. So how does this work? So let’s say I’ve gone to somebody and they’ve given me the option to buy their property in seven years time. Until then I pay them a certain amount, whatever that is. It might be that I’m paying their mortgage or I might be paying them a rental and I’ve turned it into an HMO or I’ve turned it to an Airbnb or something like that. But then at the same time, you don’t have to do that. You could then say, well, I’ve taken it from this person and I can then rent it to somebody else who wants to buy it at the end.
So let’s say just easy figures. I’ve agreed to buy this property from somebody for £100,000, sometime in the next seven years, and I’m going to pay them an agreed amount every month. And I’m going to maintain it, I’m going to look after it, I’m going to take care of it. I will then go and find somebody else who can’t right now, buy a property. Maybe they’ve not got a great credit score, maybe they’re new to the country, maybe they’ve had problems with their business or something like that. And I will then rent it to them for six years. So I’ve got it for seven. I will rent it to them for six. I’ve got a year in the middle, and I’ll give them an option to buy it higher.
So I say, look, you know what? In six years time, this property’s going to go up, however many percent it is. I’ll look at the area and say, properties in this area are going up by this much every year, so I’m going to sell it to you for £125,000. So I’ve now got the option to buy it for a £100,000. This person’s got the option to buy it for £125,000. They’re then going to rent it from me as well at whatever the going rent is, so I can make some money in between there as well. So I can make some money on the rent and I can make some money on the uplift.
The best thing about that though is on a rent to buy, the person who’s renting it from you, the way you market it is it’s going to be their home. It’s just that right now they can’t afford to buy it for whatever reason. They haven’t got a deposit saved up. They haven’t got a good credit score. They can’t get the lending. Whatever it is. So you’re saying this is going to be your home, therefore I’m not going to do any work to it. You are going to do all the work. You are going to do all the maintenance. You’re going to look after it. You’re going to do it up the way you want to. If you need a new kitchen, you’re going to put a new kitchen in. Needs a new carpet, you are going to do it because it’s going to be your house. It’s going to be your place to live in. I’m not going to come and say, you can’t put those nails up on that wall. You’ve got to take those pictures down, or you can’t paint it that colour.
And then that way you’ve got no cost for yourself in the middle other than the stuff you have to do, which is the gas safety and the electrical. So I’ll give you an example. So I did this with an auction property. I went to look at this auction property not far from where I am now. And I looked at it, this was probably about three years ago, maybe four years ago now, and it was in the auction and I looked at it and thought, it was the end of terrace three bedroom house. How can I make this work? And I looked at the figures and it was a £142,500 is what I could have got it from because it didn’t sell at auction. I knew the auctioneer said, “Well, if you pay this, you can have it.” It needed £30,000 worth of work and the property was only going to be worth £175,000 at the end of it.
So I did my figures and I thought, okay, well if it’s only worth £175,000, I refinance, I can only get £130,000. I’m going to leave in about £40,000 in this property, and I’m probably only going to get, I looked at the rent, so I’m probably get about £750 per month for it. So my return investment was rubbish. I’m not doing it. I’ve decided I’m not doing that property because it’s not going to work.
Now, I had a cleaner at that time who was cleaning my HMOs, and I just happened to mention to her that I’d seen this property and she told me she was in a property and it was rented, and the landlord was, in her words, awful, terrible. She said, I’ve done all this work to this property. She even put in new windows at the back. She wanted bi folding windows at the back to her garden and the landlord wouldn’t do it, so she paid for it herself. And I was listening and she’s done all this work. And she said, and suddenly there was some rats underneath the floorboards, and she had two little Jack Russells, dogs, that were just going crazy trying to get to these rats because they could smell them and hear them.
So she told the landlord, the landlord came around. All he did was he sealed up the hole. The rats were still in there going round, and the dogs were still going crazy. And she’s like, “I can’t sleep. The dogs are going crazy…” I said to her, “Okay, well, how much are you paying?” I asked her what her rent was, and she said her rent was £750 per month. And I said, “Well, how about this? Would you be interested?” Because I knew that her credit score wasn’t great. “Would you be interested in buying a property from me sometime in the future, renting it and then buying it in the future?”
And she said, “Well, how does that work?” So I explained to her that if she had it, she would have to do all the work to it, she’d have all the maintenance to it, she’d have to look after it. She would get the option to buy it, and we’ll fix that price. And I put five years with her, in between now and then you’ve got to pay rent, and if you want to, you can pay a little bit over the rent into another account towards your deposit when you buy it. So because she was a cleaner, she had kind of money coming in at all different times. So one week she might get £1,000, one week she might get £1,500, and her money was kind of all over the place. So she would bring in and she said, “I’ve a little bit extra, so I’ll put it into an account.”
So the way I worked it, I bought the property for £142,500. I then agreed to her that I’d sell it to her for £175,000 in five years time. But at the time I said, okay. Now the property needed work doing, so it wasn’t wrecked, it just, the guy who had it before was a bit of a carpenter and he just put wood everywhere. The whole walls were covered in wood, and it wasn’t particularly nice. And so that would’ve all had to come off and do the work. So I said, “Your home. You can do with it what you want. Look after the way you want to.” I committed to doing the electric because I wanted the electrics done to be safe. So I spent £3000 to get the electrics tested and put right, and that’s all my commitment was to it. I bought the house.
So again, I had a deposit of £38,000. I rented it for £750. The mortgage was about £500, so I’ll making £250 pounds a month, and I’d agreed to sell it to her for £175,000. I’ll make another £30,000 pounds there. Over the period of five years, I was going to make a good money and she got the house she wanted.
There’s also an option, which you can put in there in the option agreement, you can have something called an option consideration where they pay a chunk down, which is less than a normal deposit. It might be 5% of the property purchase price. She was over the moon. She’s in it now. She’s over the moon now. She has got a house that she’s going to call her home. She phoned me up when she went in there, she’d been to Magnet kitchens and she’s got these samples and she says, “Neil, come and look at the kitchens. I’m looking at this colour. It’s going to be eggshell,” whatever it is. And I’m like, “I don’t care what colour the kitchen is. This is your kitchen.” She said, “No, no, come.” And she wanted me to come and have a look at the kitchen and the samples.
She’s completely done the property inside. She’s just done all the outside and she’s created herself a nice little patio area with… she’s put a jacuzzi outside, like a hot tub and a kind of cover over. And every time she does something, she phones me up and says, “You’ve got to come and see this.” She’s painted the outside of the house. I saw her yesterday. She’s painting the outside of the house a different colour. It’s her home ,I’ve had nothing to do with it. But every time she wants to do something, she asks me, she say to me, “Is it all right if I do this?” And I’m saying, “That’s fine.” And all I do is make sure the safety requirements are covered.
So that’s very hands off. It’s helping somebody, again, but it’s also very hands and you can make money. And we had a little incident, so the mortgage rate changed. So I had a two-year fixed on it to start with. Last year it went up a little bit, only a little bit. Went up £50 a month more. And I said, “Lizzie, I’m sorry. I’m going to have to put the rent up a little bit because the mortgage has gone up.” Now, it went up £50. I thought, no, I’m not going to put up £50 on her. I’ll put up £25, we’ll cover half each. And she said, “How much has it gone up by?” I said, “It’s gone up a little bit. Don’t worry. You just got to pay £25 more.” She goes, “No, no. How much has it gone up?” I said, “It’s gone up £50.” She goes, “I’ll pay the extra £50.” Goes, “I’ll pay an extra £50 a month for my rent so that your mortgage is okay, and you’re covered.”
And we’ve got that kind of relationship. So she’s very pleased to have a house of her own, somewhere she called her own, something she did what she likes to, and I’m very pleased to have somebody that’s looking after the property as if it was their own property. There could be a chance that in five, I think next year will be five years or might be year after, there could be a chance that she can’t afford it or she can’t buy it in five years time. So what can you do? I wouldn’t take it off her. What we do just sit down and renegotiate and say, “Look, okay, you want to do another five years? Let’s work out the figures. What’s it going to be? Are you happy to do it on this basis?” And I won’t never, never push it hard. I just say, “Look, this is the stats. It’s going up every year 5% here, so it would be worth this in five.”
This house is already worth £200,000 and she can buy it for £175,000 now, and I’ll sell it to her because that’s what I agreed, if she can get that money.
So there’s another strategy you might want to consider
Sandwich Option or Lease to Sell Video link https://youtu.be/qj0vg-Xkv-Y