How to take three bites from a property sandwich

Back in the ‘good old days’ (or ‘bad-old-days’, depending on your point of view) of the property boom, it was possible to finance buy-to-let property on a ‘no money down’ basis.

This enabled people who believed that property prices would rise exponentially ad infinitum to purchase properties for very little capital investment.

Since the property sector got its long overdue dose of reality, the lenders have belatedly sobered up and a twenty five percent deposit is nowadays the minimum that a buy-to-let investor would need to obtain financing.

However, there are always some wiley souls who will figure out a way to circumnavigate any obstacles to their making a fast buck.

So, enter the ‘Sandwich Lease’. This is a wheeze that enables investors to profit not once but three times from the rental market, not despite but because of the dire state of the property market without the inconvenience of using any of their own money.

Various ‘consultants’ are running seminars costing thousands to teach investors how to pull off this sleight of hand.

So, how does it work?

First the investor finds a homeowner who is struggling to sell their property, not too difficult in these times. The investor then enters into an option agreement with the owner to purchase the property at an agreed fixed price for a fixed term with the investor agreeing to pay the owner’s mortgage repayments until such time as they exercise their purchase option.

The investor then finds a tenant who pays an upfront premium for a further option to purchase the property at a higher agreed fixed price.

The investor takes three profits by taking a premium from the tenant, pocketing the difference between the mortgage payments and the rental payments and finally from the difference between the two option prices.

Sound too good to be true?

Well, that’s because it is. Here are just a few of the fiscal time bombs waiting to explode with these schemes:

1) If the investor doesn’t pay the mortgage it will be the original owner that will be repossessed with the resulting financial loss and damage to their credit rating.

2) The tenant has only the investor to rely on for the security of their premium. This could be dubious to say the least.

3) There will be no credit checks on the investor who may not be able to pay the mortgage if the tenant defaults or the interest rate inevitably rises.

The ‘money for nothing’ nature of these schemes will, no doubt, have investors piling into them’ Let’s hope we don’t have another property disaster waiting in the wings.