The Importance of Seasoned Funds and Paper Trails – Lease Option Investing with Wendy Patton (2024)

If you’re paying all cash for your real estate investments, you’ll have no troubles because no banks or other financial institutions will be involved with the transaction. But if a bank is involved with the financing, they are going to require well-documented seasoned funds and paper trails. I’m going to explain this to you but the good news is that when you invest using sandwich lease options, there is so little of your own money involved that banks and financial institutions are not an issue for you.

Let’s begin with an explanation of seasoned funds and paper trails and why banks require these. A big concern that lenders have is that you might have borrowed the funds for the down payment to qualify for the loan that they are about to make to you. It means that you will be obligated to repay another loan and it could make it difficult for you to afford the loan they are making. For that reason, banks want to see that the funds you are using are seasoned (have been in your account for 60 to 90 days). They will also look at your detailed bank records to see if you have been making payments on a loan that you have not told them about. That could be an indication that the money is borrowed.

Banks are also concerned when unexplained money suddenly appears in your account a short time before it will be needed to close the real estate deal. These are funds that they want to see a paper trail for. They want to see copies of the checks and/or wire transfers. Again, they are looking for borrowed money that can make it difficult to repay the mortgage loan the bank is about to make to you.

Something that is even more important for you to know is that sandwich lease options don’t involve banks or other lending institutions. That means there is no need for you to have seasoned funds and paper trails.

Why Sandwich Lease Options Don’t Require Seasoned Funds and Paper Trails

Sandwich lease options are a private arrangement between you (the investor) and the seller of the house. Most important is that you are taking out an option to purchase the house but you do not have an obligation to buy the house. That means you don’t have to apply for a loan from a bank. Seasoned funds and paper trails are not an issue for you. This is one of several big reasons that sandwich lease options are a highly preferred method of investing in real estate. Sandwich lease options are about “controlling the property” without the hassles of ownership.

You complete the entire transaction without needing any seasoned funds and paper trails. But that doesn’t mean you don’t need to understand these. With the sandwich lease option, your biggest of three paydays comes when the end buyer completes the purchase of the home. The end buyer is going to need to obtain a mortgage to complete the deal. The end buyer (but not you) will have to show documented seasoned funds and paper trails. Because you are the expert in the sandwich lease option process, it’s wise for you to understand seasoned funds and paper trails so that you can help your end buyer.

Instead of seasoned funds and paper trails, you only need to come up with a relatively small “option fee” to take control of the property. You’ll even be repaid that small cost very quickly. As soon as you take control of the property, you put an end buyer (tenant/buyer) in place that pays you an option fee. This is the first of your three paydays because the option fee paid to you is significantly larger than the option fee you pay to the seller. For you, there are no banks involved, no need for seasoned funds, and no need for paper trails.

How to Help Your End Buyer with Seasoned Funds and Paper Trails

For your end buyer, this involves funding the down payment and closing costs. They will need a bank account so the lender can request copies of bank statements. The lender strongly wants this account to have signature authority limited to the names that will be listed on the property title or deed. This account is where the bank looks for seasoned funds that have been there for 60 or 90 days. Banks also ask for other financial information like pay stubs but they want to see normal and expected transactions happening in the bank account.

The bank’s concern with paper trails involves unexplained large cash deposits (or a stream of small deposits). Some lenders do allow down payment funds to be a gift from close family and friends. These can be explained in a letter to the bank from the person making the gift. The letter needs to be clear that the money is a gift that will not have to be repaid. Not a big deal but it does require a documented paper trail.