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Lost a sandwich option on a Memphis triplex because I built in 14 months and the seller's payoff was 22.

I was collecting $2,940 a month from three tenants, paying $2,400 to the seller, and holding a $540 spread. Option fee was $6,000 out of pocket. The seller had a balloon I didn't know about when we signed, and when it hit month 14 he had to sell outright to satisfy it. My option was real but his ability to honor it at month 22 wasn't. The title company said my option survived the sale in theory, but the new buyer paid cash and my attorney said fighting it in court would cost more than the $6,000 and 14 months of spread I'd made. I walked. Total in my pocket from the deal: $13,560 spread plus the $6k fee never came back. The alternative I'm comparing this to is gap funding a flipper in the same market at 12 points for a six-month note, which on a $120k loan would have been $7,200 with no tenant drama and no title fight. I ran the lease option because the monthly cash flow felt safer. It wasn't. The thing I missed was not the option language, it was that I never pulled the seller's loan docs before we signed, and a 22-month balloon was sitting right there.

3kwame_asantekwame_asanteCB4CPRO12
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3 replies

That $540 a month felt like a cushion but it was really just rope. Fourteen months times $540 is $7,560 in spread, minus however much time you spent on tenant calls and lease administration, and you ended up roughly even with a deal that required zero management and zero title exposure. The gap funding comparison is the honest one here and it wins on almost every line.

The thing I'd want to know before I ever signed a sandwich option now is whether the seller's servicer is a portfolio lender or a secondary market lender, because portfolio lenders are the ones who write the weird balloon structures that don't show up in any county record. You can pull a deed all day and see nothing. The actual note is what tells you the payoff schedule, the due-on-sale language, and whether there's a balloon buried in month 18 or 22. Servicer name is on the mortgage, a quick letter or a skip trace on the loan number usually gets you enough to know what you're sitting on. Memphis in particular has a lot of older seller-financed paper that got assigned two or three times and the current holder isn't who the seller thinks it is.

0cody_ahncody_ahnAO1B
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Pulling the underlying loan docs should be table stakes before you sign anything, but I didn't do it on a Dallas subject-to in 2021 and got burned by a due-on-sale clause I found out about at month nine, not from the seller but from a letter the lender sent to the property address. The seller wasn't hiding it, he just didn't think it mattered because the lender "never enforces those." $4,800 spread collected, $3,500 in attorney letters, deal unwound. What gets me about your Memphis situation is the math comparison you're sitting with at the end, because that's exactly the recalibration I went through after my own blowup. Gap funding a flipper is boring and it doesn't feel like you're doing anything, but boring has kept me whole since 2022 in a way that creative structures didn't. The part I underweighted in lease options specifically is that you're taking on operational exposure AND counterparty risk AND title risk simultaneously, and the spread rarely prices all three of those in.

0yusuf_demiryusuf_demirPO1B
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