There are different ways to structure real estate transactions that involve seller financing to benefit all parties.  Of course the seller has concerns of protecting their property and the need for regular repayment.  The following scenario explores this option in detail.

You know that your local market has many rental properties in the inventory and you have found one that meets your needs.  You will be purchasing from a seller who is greatly motivated because the property has been on the market longer than a year.  The property has an existing long-term fixed rate first mortgage with a balance of just $100,000.  Your plan is to buy the property, rent it out and hold onto it as a long-term return on investment property.  You know that the home is worth about $150,000 and the seller has it priced at a discount of $120,000.

The offer is as follows.  You want to put $5,000 in cash as a down payment but also allow the seller to keep the title in their name with their first mortgage with only a balance of $100,000.  The seller must also consent to taking a second lien loan for the remaining $15,000.  This transaction may seem like it only benefits the buyer and the seller is left with all the risk.  However due to the current lack of home sales in your area, the seller is motivated to continue the arrangement of the sales price, your down payment amount, and also is okay with you taking over the monthly payment for the first lien mortgage because they want to see the property sold in the long run.  What bothers most sellers about this type of transaction and what makes it risky for them is that you are not assuming the existing loan.  It still remains in their name but the title work protects them for your default.  Still there is the concern of the loan remaining in their name and the $15,000 second lien is also risky for them should you fall into hard times but the goal of the sold property remains a common interest for all parties.

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Let's play make-believe, shall we?  It's a fairy tale with a happy ending, no wicked step-mothers, and no poisoned apples.  Picture if you will...

A confident and eager real estate mogul-in-training- one that looks a lot like you!- with a $5000 check burning a hole in a briefcase.  Also in that briefcase is a signed contract that will generate $250 monthly Positive Cash Flow.  It gets even better!  Now imagine that the contract is on a property you don't even own, and you don't have any back-breaking work or maintenance to worry about in the near-future.  After hearing the good news, your partner is ecstatic and can't wait to share in celebrating this triumph.  You're on your way to vast riches, and it all started with this first Lease Purchase deal, and you plan on doing it again soon

How did you get to this point in your real estate career?  Through hard work, studying the market, and setting your crosshairs on a beautiful property with everything that a tenant would want.  You keenly employed the art of negotiation you've been honing in so many other deals, and you came out on top.  Your deal is good for two years, during which you have the rights to the property and the revenue generated by tenants, and all it will cost you is one month's rent.  The Sandwich Lease, the one that binds the occupant, is placing a $5000 non-refundable Option-to-Buy in your hand.  This type of lease can work really well with a well-written contract, giving you control of the property.  You can also include a Specialized Assignment clause that allows you to rent it out, and you keep the money!  Once you consider the $5000 Option-To-Buy check and the rental lease, you're practically making money hand over fist.  All while not having to encounter any deed transfers or costs associated with titles.  If this sounds too good to be true, you may be on to something...

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Scenario #1. Ok, you find a home you like for $250,000 and a good interest rate requires 20% down to eliminate the escrows and insurance. Take that $50,000 and when you add a 1% origination fee, probably 2% interest points, survey, appraisal and closing costs, your payment on that now, $200,000 8% mortgage is going to cost you $1,467/mo. Once you add home insurance and taxes, you are upwards to 1800/mo putting your out of pocket around $55,000 and only $50,000 equity. Now it looks to me like you're already in the hole 5,000.

Now, lets take this mortgage a bit further, pay it out 3 years and you now have a pay down of the original loan to about $194,500. That puts your cash investment at about $55,500 and it doesn't take a rocket scientist to deduce that this is not a healthy return on your investment and therefore, not a good reason to purchase the home.

Now let's look at a lease/purchase situation with Scenario #2:
A familiar story might be the seller who has been transferred to another state and must sell or find a fast option to getting rid of their home that is worth, say, $250,000. There you are with a $250,000 offer to lease/purchase paying them $1,600.00/mo which will cover their mortgage and you ask for a going rent credit back of 25% to go towards your purchase price. You could even, depending on your liquid cash at the time; offer two more months rent up front that would also be applied to your purchase when you take the option later on. No more money or fees exchanges hands and you literally move in the next day. Say you have a three year option and with all costs considered ($3,200), plus rent credit ($400 x36=$14,400), your ROI jumps to 500% with a total of $17,600 in equity earned.

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With a Lease Option, you as a buyer can control a property without actually owning it yet. The "Lease" part of the agreement gives you the right to occupy the property and the "Option" part of the agreement gives you the right to buy. As part of the lease, a percentage of the rent payment is credited towards the purchase price. This means that you are occupying the property, the seller cannot resell it to someone else, and a portion of your monthly payment is going towards what is owed on your option to buy.

Sellers will do a lease option for a couple of reasons. Sellers will do a lease option, mainly, for debt relief. When you "Lease Option" the property for the amount owed on the mortgage, you are giving the seller the debt relief they need. You are going take over the monthly payments, living in the house and maintaining it until you actually close the purchase of the house. Mean while, the seller now gets enough money from you to pay for their mortgage, taxes and insurance, and they no longer have to worry about maintaining the property.

Also, some sellers may need to improve their "debt to income" ratio when buying a new home... A debt-burdened home-owner looking to buy new property has a slim chance of doing so. The reason being that mortgagees always examine your debt-to-income-ratio to determine how much you can pay towards the mortgage you take out for the new property. Now, you as a buyer, "Lease Option" the house from the seller. The lease payment the seller receives is considered to be income (for tax and credit score purposes) and this income offsets the debt of the monthly payment on the old home. Therefore, you are helping to correct the seller's debt ratio problem.

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If you know how to make money on properties which have no equity, you'll be able to do deals most other investors can't. You will have the competitive edge over your colleagues.

In this climate of the real estate market, there are an abundance of sellers who want to sell their home, but they don't have enough equity to cover a real estate agent's commission. Some may barely have enough equity to even cover their closing costs. Most of these sellers are just waiting for someone to come along and provide them with a solution, and that maybe you, if you know what solutions to offer them.

You might be pondering "If the property doesn't have any equity, how am I supposed to make any money?" There are several ways in which you can make money on a property even if you are paying full market value. They are... buying "Subject To", doing an Agreement For Deed or Lease Option, and doing a short sale.

One way to make money on a property which is 100% financed, is to take over the property "subject to" the existing loan. Then, you can Lease Option the property to a tenant/buyer. You could not only make money by getting an upfront deposit, but you can also make money every month by charging a higher monthly payment. You can even tie the sales price to a future appraisal. This way, you are building up equity in the property until your tenant/buyer exercises their option to buy. That equity would be your third payday down the road.  There's more you can do with "subject to". Say take over the property on "subject to" and find a buyer who's going to live in the property. Many people who wish to own a home are ready to pay five to ten thousand dollars above market rate, if they didn't qualify for the loan.

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