A Contract For Option is better than a Lease Option
A Contract For Option is better than giving an Option - avoids equitable interest
5 posts by 3 users
Brian Gibbons
Wholesaler · The Valley, California
Feb 23, 07:09 PM
2 Questions:
Does a Lease and an Option to Purchase create equitable interest?
Does a Lease with an Option trigger the dreaded Due on Sale Clause?
For new folks, lets use these abbreviations...
CFD = Contract for Deed,
AFD = Agrrement for Deed,
LC = Land Contract
LO = Lease with Option to Purchase
CFO = Contract for Option to Purchase
Every state has different rules. See your contract attorney from your local REIA for local laws.
This is an introduction to a concept of a Lease and a CFO (Contract for Option)
CFDs, AFDs, and LC all have a concept in common, they have an agreement if you perform with A you get B.
As an example, you finish the contract, you get a deed or an opportunity to own (might have a balloon to pay - refinance, etc.)
So what is a CFO?
Contract for Option to Purchase.
If you comply and complete the agreement (e.g. make 24 on time payments on a lease, for example you get an option to purchase), if you do not, you don't get the option!
Couple that with a lease, you get a lease plus CFO.
Why is a CFO better than a LO?
No option given until conditions are met. No equitable interest.
Conditions could be:
- condition is to improve the property
- condition is to finish a 24 month lease with on time payments
And there has not been a sale.
Make up your own stipulations! But keep the option in escrow!
Brian Gibbons http://WinWithLeaseOptions.com
Bill Gulley
Real Estate Investor · Springfield, Missouri
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Feb 24, 05:13 AM
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A bit of a bump after nine hours, LOL
Brian, the concept is good, but as with anything creative, there are draw backs.
While a tenant is leasing, they may not be required to make repairs, in most areas this is the duty of the owner. Allowing them to perform work opens yourself to insurance issues, material liens, equity claims and shoddy work. In reality, it's not good practice with the average Joe, if your buyer I a contractor that can be arranged by separate contract.
I am aware this was devised by an attorney, I can see where he was thinking that there is no equitable interest, as to a purchase, but it is a contingent liability and clouds title during the lease.
As a lender, I can still justify pulling the due on sale, it's not just a sale but any contract that facilitates an equitable interest, many consider it a lease beyond one year in residential leases, adding the contingency of selling subject to performance is still allowing a third party an equitable and financial interest in the property, even if it is subject to performance, as a lender may assume performance is intended.
That said, I see this applicable in low income housing arrangements.
Habitat for Humanity is close to the same thing requiring sweat equity hours prior to purchase and at times other N/Ps rent while buyers go through an education period before they become qualified to purchase, so the idea of performance in a lease prior to buying is not new. These arrangements have been taken to bankruptcy and set aside as a purchase arrangement and allowed with the home exemptions applied, in other words, seen as having an interest in the property and the tenant, future buyer allowed to maintain the contract, staying in the property as equity was minimal as well.
Brian and I have talked about this and as I pointed out to him, with good intentions in the right circumstances, a doable arrangement, but it is also ripe for misuse and can easily fall into the predatory sale arrangements. For example, a judge may say default on the lease may need to be over 30 days late as opposed to a lease payment being 5 or 10 days late. If they are late into the agreement, having had made payments ad especially accruing any credit toward the option or having a reduced price. (That could be established if a property appreciated and you had a price set 2 or 3 years ago)
While it's a tool to be aware of in lease options, I don't see this as revolutionary, the basis isn't new. :)
Another good thing is that this might fly in Texas where L/O are limited, @John Chapman might chime in with his opinion.
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John Chapman
Residential Landlord · Dallas, Texas
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Feb 24, 10:36 AM
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Thanks for the mention @Bill Gulley, but I think you might have meant John Jackson, he's the only who really knows about lease options in Texas (for some reason I can't mention him in this forum post). I tend to only do straight rentals.
I will offer my off the cuff observation as a lawyer, and particularly as a plaintiff's lawyer. While something can technically look good from a pure legal standpoint, it is quite another thing for a court to bless or enforce the deal. As Bill points out this looks like something that could be rife with abuse and, as a general matter, I am not sure I would want to stand in a court if the transaction went south arguing that it should be enforced against an unsophisticated party. Judges are still people and if it looks like you're taking advantage of someone, they will find a way not to enforce it.
Wholesaler · The Valley, California
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Feb 24, 11:01 AM
Hi @John Chapman!
@John Jackson has been a friend of mine since 2002.
I have investigated "executory contracts" in Texas with legal advice, back in 2005.
Here is an excerpt from an experienced real estate attorney...
-----Original Message-----
From: xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Sent: Monday, July 25, 2005 2:28 PM
To: xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Cc: xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Subject: Contract for Option in Texas
Sunday, July 24
Brian:
The concept of a "contract for option" is very interesting.
To use this concept under Texas law, we will need to carefully prepare an agreement that contains several legitimate "conditions precedent" to the owner's / seller's granting of an option to purchase the property.
In other words, we need to carefully and clearly describe several legitimate conditions that the tenant / prospective purchaser must comply with in order to earn or obtain an option from the owner / seller. Some or all of these legitimate conditions might be described as circumstances that must occur, or events that must take place, before the owner / seller will grant an option to purchase the property.
I am concerned about Austin's lawmaker(s) ideas on what is legitimate and what is not legitimate conditions.
===================================================
Brian ---It has been my experience since 1986 that most Landlords who want higher cash flow and less hassles will work with the TBer to receive those benefits.
Re: Financing for the TBer to occur, we encourage a 10% down payment. An example would be:
$100K House
Move In Option Consideration $3000
Monthly Option Payment $300 extra above rent
Say in 36 months:
Home appraises for $110,000
Sales Price is $115,000 (needs to be above market, but only slightly)
============================================
Attorney -
Only after all of the conditions, events, and circumstances have happened will the owner / seller grant an option.
Examples of these conditions or events could be the satisfactory completion of performance under a residential lease contract, or payment of consideration for the owner's / seller's granting of an option in installments over a period of time.
Another way to look at it is, several legitimate things must happen before the prospective purchaser will receive an option. Until those things happen, the tenant / prospective purchaser has no legal privilege or right to compel the owner / seller to sell him the property. Of course, this may be disconcerting to some tenants/ prospective purchasers, but I believe if it is explained and presented properly, they will understand.
The contract for option form you attached to your email might be satisfactory for use in Florida, but I would recommend that we develop a different form that would comply with Texas real estate and contract law, especially cases decided in Texas that discuss conditions precedent to enforcement of a real estate contract.
I would be glad to work with you to prepare a form for use in Texas. I can do an initial draft in the next several days, then email it to you for your comments. We can work through a couple of drafts or sets of revisions until we get it into a final form that we are both comfortable with.
I think another aspect of this would be that when the option is finally granted by the owner / seller, the tenant / prospective purchaser must be ready, willing, and able to accept the option by submitting to the owner / seller a standard Texas purchase and sale agreement with a closing date of less than six months. A purchase and sale agreement (not a lease option) that provides for delivery of a deed in less than six months is not classified as an executor contract under existing Texas law or the new law.
Let me know your further thoughts.
Best regards.
(Attorney Name not disclosed)
Brian Gibbons http://WinWithLeaseOptions.com
Bill Gulley
Real Estate Investor · Springfield, Missouri
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Feb 24, 11:32 AM
Pretty much the way I saw it, no mention of the beneficial interests that may be seen in front of the guy wearing a robe. Certainly not saying it won't work, but as John C. mentioned, I doubt I'd defend it or refuse a reasonable request to purchase after some infraction of the lease. I think the other advice is sound as well, that duties need to be clearly understood and that any default be more reasonable than a standard lease agreement (with regards to non-payment for example). I think too that if no money was paid beyond the lease, no credits applied toward the option, you'd have a better chance of defending any default....that might be difficult trying to make money, but if there was no financial loss or equity/benefit established you'll be better off. IMO.
In Texas, a one year renewable lease would be fine, after two years you may have cured credit issues or other matters. If it were me I'd certainly use the TREC and close n six months. :) Might be good in other states to simply more to a sale contract with possession prior to closing under a lease. :)
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