Brokering Lease Option & Seller Finance Deals
Involved In Real Estate · Layton, UT · Member since 2008 · 5 posts · 2 votes
hey guys, new to BP but I'm looking to brainstorm/mastermind with other real estate agents or licensed investors across the country who are successfully brokering lease option & seller finance deals.
Even if you've only done a few...we're a rare breed and I'd like to create a group where we can share ideas & strategies.
Hey William Velazquez I'm actually surprised, and also, not surprised more agents don't offer lease options to their sellers. I think one of the main reasons is lack of education. When you read the required books to get your license, there is (last time I looked) a whopping 2-4 paragraphs on lease options. I think if more agents were given the education of more than "MLS and hope for the best" it would provide a better service to their clients to allow them to see various options.
Welcome William Velazquez. I have not completed any seller finance deals, but have been interested in this strategy. I am trying to accumulate more rentals, and feel this is a good step towards that goal. Hope you find what you're looking for.
Thanks Carolina, good luck to you...let me know if you have any questions getting to your first deal. You probably run into potential tenant-buyers all the time if you have rentals, that's a great place to start...are you also an agent?
Hey William Velazquez I'm actually surprised, and also, not surprised more agents don't offer lease options to their sellers. I think one of the main reasons is lack of education. When you read the required books to get your license, there is (last time I looked) a whopping 2-4 paragraphs on lease options. I think if more agents were given the education of more than "MLS and hope for the best" it would provide a better service to their clients to allow them to see various options.
yeah John Jackson, I couldn't agree more. And you nailed it on the head with education.
Our industry is a bit broken in that the real estate licensing schools only teach what you need to know about the laws and ethics, but nothing with regards to helping clients solve their real estate problems.
Most agents will look at a situation and think one of two things...do they qualify to buy? ...or, do they have enough equity to sell? not realizing there are more than 1 or 2 ways to help clients especially when they don't fit the traditional mold.
And what's more, is the income potential available to agents who offer these alternative solutions to their clients.
Thanks for your feedback!
I can tell you're excited William, but here's a few reasons agents don't get involved in SF and L/Os.
The agents want to get paid, they are paid on sales, not leases, but either party can pay a fee, usually the L/O is kinda thin so the Realtor may go hungry.
Many RE Brokers don't allow it due to the liability. It's not a state contract and usually a broker won't allow agents to use guru contracts, the E&O coverage may not apply if the broker fails to use approved contracts. A broker may go along if an attorney is involved in each deal.
Another reason brokers shy away is that the agent isn't qualified to do loan underwriting, and the broker takes the responsibility if a deal blows up.
If a property is listed, you have two brokers involved, double trouble. If just one, you're a transactional broker, not a leasing agent, and you can't advise on either side, you simply facilitate the deal, brokers have ethical issues with this in putting someone in an installment contract and not being able to advise and additional liability.
If someone puts a chunck down for an option and they can't get financing, say at the end of 2 years due to problems that should have been avoided, the broker becomes an easy target as well as the agent.
I like options, the key to doing them successfully is knowing how to get the buyer financed at the end, not just putting them in a house, the deal is not done until title changes hands. Most agents look to qualifications at that time, that's not the issue, it's where the buyer is down the road. Getting some there takes a lot of hand holding and dollar for dollar in time and effort, not really worth it to an agent.
Totally agree education is key, but I've never heard of a guru note or LO type teaching underwriting.
You can also bump into SAFE Act issues with residential, screw that up you're likely loose your license. Agents know about the unauthorized practice of law, that's drilled into them, they are less aware of the unauthorized practice of mortgage origination and associated liabilities if they are permitted to originate a mortgage
A good RE Broker will keep an agent from getting hung, not only for his/her protection but also to protect the agent and agency.
Everyone usually thinks I'm being negative, raining on a parade, saying don't do this and don't do that, maybe so, it's because most really think these aspects have real liability and they haven't done enough deals to have problems end up with an attorney or a judge.
Actually, I'm surprised that there is so much fear by landlords of getting sued and never a thought of getting sued by a buyer for predatory lending or due diligence. It's on the rise.
I know pretty much what John does and in Texas I believe he has it nailed when his "system" is appropriate. Brian G. also does a lot of L/Os. Not sure about others. Nothing wrong with a creative deal if it works, but for an agent that takes on a whole other flavor.
So, William Velazquez, how do you address these issues?
I always think of the education needed to get your Series 7. When I was considering getting mine, I made most of my income of options, yet, in the Series 7 book there was less than 2 pages (out of about 500 pages of the book!) about options. Edward jones won't even OFFER options to their clients!!! What a disservice. They view options as "gambling"...really?? Yet buy and hold our crappy "annuity product of the month" is a solid plan? No thank you.
Bill Gulley is correct about the agents (many of them) not knowing how to get the client prepared for finance etc. I used to be shocked how so many agents I talked do over the years didn't know the basics of finance. They didn't know about their "buyer" that just had a short sale couldn't just go buy another house.
IMHO, I think it should be required for agents to learn about financing.
Truth is though, the education for those that want to become loan officers, is about on par with that of the real estate schools that just pump out diplomas.
It's like drivers ed. The attendees are just wanting to get it done, adn are on the cell phones, texting, checking e-mail, doodling, doing nails...and the instructors are just giving the answers that will be on the test.
Obviously this is painting it all with a broad stroke, but I think you get my point.
Agreed John, in the beginning, there was light, just enough to see the big picture for new agents. While agents/brokers have continuing education requirements, I don't recall any offered drilling down in finance. Usually as William mentioned, laws, regulation changes and liability issues. A pretty sorry education system, until you get to the various certification levels. I never took the advanced courses, like commercial, but it was unergrad level finance, all well and good. I already had that and beyond so it looked like pay a fee and get the certificate to me.
John, I have always thought the RE Brokerage structure was very close to the securities business and insurance world, captured agency relationships, product development and a sales force. The Series 6/7 and 71/72.
I'd say that if it weren't for freedom of speech, anyone teaching RE would be required to meet much higher standards and few gurus would clear the bar, IMO. :)
Welcome William Velazquez! I am so glad you are an agent doing lease options!
Bill Gulley John Jackson Bill Walston, all chime in here.
What @Bill Gulley knows is alot about many things, especially liability issues with the US Government. I would love you to address his post questions. I am not talented in his areas of expertise.
William, I have found that many but not not ALL RE agents hate investors operating on the premise that the investor is signing documents as a principal and assigning or selling their interests.
Bill Gulley states why RE Brokers are concerned, especially for Errors and Omissions issues. IMHO "MOST" RE brokers want their agents to LIST and to BRING MORTGAGE QUALIFIED HOME BUYERS to listed properties. They love the 6% solution!
I go after listed houses, expired listings, and wholesalers that have leads with no equity to wholesale. Many sellers have little equity and can't afford the costs to sell, notably but not limited to listing commission, closing costs, seller's concessions, price reductions, etc. I've seen enough HUD1s to know that sellers give up 8 to 12% of their houses value to sell today.
I have been doing creative financing since 1986, and lease options are different in many states, notably Texas and North Carolina.
What I do for a Lease Option Assignment:
I use an attorney to draft a Lease and an Option and a Memorandum of Option to cloud the title, then I use a Release of Option to be paid from the option fee.
Tell us how you do it!
And welcome to BiggerPockets!
Brian Gibbons
LOL, US Government....
Some but mostly from lending and doing installment transaction clean ups and experience in just doing deals, servicing different contracts.
Yes, RE Brokerages are about sales, closed transactions. Around here, the brokers perked up when I suggested they take a fee on the creative deals. Otherwise you're taking a property out of their inventory to be paid on.
Brian, you certainly know enough to ask me a question, LOL, ask away. Most of my opinions from the brokerage side are from the curse of having had a broker's license.
BTW, an option memo should include the date the option expires for title purposes, many sharper recorder's will require it, some have not and without the date, it causes title search problems when options were not taken and there was no release. A thought. :)
Bill Gulley, thanks for your insight...very thorough post
Lots of points to respond to, I'll address each one individually...
-----You're right, agents want to get paid. And they can...on sales, on leases, on options...even just consulting. And if they're "going hungry" it's because they're not charging enough or they get involved in deals that IMO are unqualified to be put together.
-----I agree that most brokers don't allow it and blame it on liability...but isn't every transaction a risk? It's why we carry E & O insurance. The problem is that most brokers are unwilling to go the extra steps to ensure that they have lease option documentation that satisfies state requirements for their agents...thus mitigating the risks and making sure that these deals will still be covered by their insurance carriers.
-----Yes, agents should not be doing loan underwriting. Lenders should. And owners should be advised to conduct their own due diligence on the prospective tenant-buyers ability to pay. It's fully disclosed that I am a real estate agent and in no way represent myself as a mortgage lender, credit expert or full service property manager.
(even though I have minimum requirements that a potential tenant-buyer must meet in order to enter into a tenant-broker agency relationship.)
-----With regards to dual/limited agency, laws may vary from state to state...however, in Utah...with proper documentation and adequate disclosure it's perfectly legal. We work within our limits, educate the parties as to what that means, advise to the fact that it's a choice to continue and if they wish can seek legal advice from a third party.
-----Agreed, buyers can lose down payment option funds if they can't get financed within the allotted time...and if tenant-buyers wish to place blame outside of themselves and pursue legal action against the other parties involved in the transaction...it wouldn't be the first time. It happens everyday, even with traditional bank-financed homes. Sometimes others parties are at fault, sometimes they're not. Another reason why it's important that every deal have evidence of full disclosure, proper paper trails and clean files.
-----Agents should always have their clients best interests at heart. For me this means not putting someone in a property that evidently doesn't have a good chance of being able to complete the purchase (I of course am not making this judgement alone, that's where pre-screening from a qualified mortgage lender comes into play...in my process anyway). Additionally, if an agent is going to be brokering lease options, they should have a support system available for the tenant-buyer to enroll in so they can get from point-A to Point-B.
-----And with regards to the SAFE Act, there are certain provisions outlined that specifically identify a real estate agent/broker's role in the transaction being exempt or not. Here, we're obviously not referring to lease option but rather the brokering of a seller financed transaction.
-----Again, thanks for your input here...really enjoyed the interaction from you and the others on this thread.
John Jackson Brian Gibbons
This is old but I want to add my 2 cents… You can get around the Lease Option contract hoopla by doing a lease purchase instead. Use the Realtor Lease agreement and Purchase Contract with an addendum written by attorney. This way you can date the contract for a future date and you are covered with your E&O.
a delayed sale and purchase plus a short lease will cover at most circumstances.