Rental Property Investor · Knoxville, TN · Member since 2013 · 111 posts · 28 votes
hiya BP.
So I've been scouring the forums for lease option information. I have two properties currently and am n the process of finding new tenants as they are both vacant. I had someone email me about doing a lease with the option to buy a few days ago and it hasn't been something I've ever considered.
Little background on the property in question - it was my first primary residence and was purchased with VA financing. I have occupied the house for at least two of the last four years (it was built new in '11) and it also has rental history. It's in a great location, but my biggest problem is that the margins are so tight that it doesn't make me very much of a profit ( maybe $250/mo when occupied) I feel like of I could break even from a sale then I wouldn't be in a bad situation and it would clear up some financing abilities to but another property with better numbers since I've learned a lot more than I knew when I first bought.
So my question is, am I crazy for considering a lease option to get out from under a low performing property? If not, what do I need to start researching and doing to prepare for this situation? Any counsel would be much appreciated!
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
11y
Anthony, I doubt, in your case, that Dodd-Frank applies on your first deal but you need to see an attorney outside of JAG as mentioned.
You need to qualify that buyer to ensure they can buy, besides Dodd-Frank there can be predatory sales issues if they can't qualify which is different than if they elect not to buy. Predatory would be putting someone in an L/O that can't qualify over the term, you can avoid that if you can show that they could if they can cure the matter that keeps them from qualifying and that they know what they must do to cure such matters.
You can not require a residential tenant to perform maintenance or be responsible under the lease or any option. You'll be in violation of tax codes. Courts also allow an equitable interest to be gained by a tenant for costs of maintenance.
Do use two separate contracts, charge market rents and don't give credits of payments to the sale price, that constitutes a financing agreement.
An option may not require ANY performance to be required by the optionee (buyer), if you do, like requiring maintenance or paying on a lease as agreed, then you don't have an option and money paid on that contract may defined differently, you may end up returning the option price.
If you lease it, you'll later receive 75% of the rents as an offset to your mortgage debt to qualify on future loans.
There is no issue with a VA loan after one year of occupancy, you can rent it. An option for any term can violate the due on sale clause, you take your chances, the tenant is obligated to pay off the mortgage, you are if it is called. If you fail to pay it off then the optionee has a cause of action against you for failing to keep the property available to sell under the option, they can get their money back. Terms of assumption are described in the note you made, they will need to qualify and that outstanding balance will count against your VA entitlements for another VA loan.
Seems the assumption is to do the L/O, you'd probably be better off selling conventionally and regrouping your investing approach from buying a new home and now that you are more aware of RE.
Tenants do take care of a property they think they are buying, problem is that if they become aware that they can't or won't buy, animosity sets in, they can get more ticked off (at themselves if nothing else) and they can take it out on the property, especially if they feel they were messed over. So, the care given initially can backfire, it can work both ways.
Your property is in its best condition now to be sold than down the road, so if you're inclined to sell, I've always found hanging on doesn't pay off unless you hold for a longer term, 7 to 10 years as your depreciation will play on the future sale.
Can't say what you should do as I don't know enough about your personal position. :)
Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
11y
Can they assume your loan? Using that as a primary and you carrying a 2nd mortgage for the equity is likely to be a better deal for them, due to the tax advantages and any appreciation potential.
Rental Property Investor · Knoxville, TN · Member since 2013 · 111 posts · 28 votes
11y
@Jesse T. Is that along the lines of seller financing until they can get to the point of refinancing out to a more commercial institution and if that's the case and something goes wrong, do I have to take foreclosure proceedings vs an eviction? Sorry if these are basic questions, again, never really considered selling so I have much to learn!
Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
11y
We have VA loans too. I due NOT recommend you do lease option with a VA loan. Take my advice with a grain of salt, as I am not a fan. I don't know that much about them but what I do makes me very nervous. If you decide to do this, go talk to a REAL attorney (not jag). Someone who would be abel to defend you if his advise is wrong. You need to look at the VA loan very carefully because they are very "rule govern". I would be concern that you be violating the mortgage.
Investor · Fort Wayne, IN · Member since 2009 · 391 posts · 257 votes
11y
Anthony,
You will definitely want to have the proper documentation for the state that the property is located. This may require an attorney or a real estate agent that has the proper forms for your state.
You want to think of this as two separate transactions.
First: They are leasing the house. Straight forward.
Second: They have an option to buy the house at a specified price within a defined time period.
I like lease options because I know the person renting the home is going to treat it like they are going to buy the home. We require the renter/prospective buyer to be responsible for all but major maintenance items.
We find that this can usually be structured to be a mutual benefit to both parties.
I have never used my VA loan benefits and I am not an expert in this field so you may want to pay for legal advice. If you can rent a home with a VA loan, I do not understand where it would change the rules if you were also planning to sell the home at some time in the future.
I think the key is to have the right paperwork for the state where the property is located.
We have VA loans too. I due NOT recommend you do lease option with a VA loan. Take my advice with a grain of salt, as I am not a fan. I don't know that much about them but what I do makes me very nervous. If you decide to do this, go talk to a REAL attorney (not jag). Someone who would be abel to defend you if his advise is wrong. You need to look at the VA loan very carefully because they are very "rule govern". I would be concern that you be violating the mortgage.
That's very good advice, VA loans can be very difficult. I did a rent to own with a VA loan where I was the renter and then sublet it on a rent to own. It all worked out but I was worried throughout the entire ordeal. Again, great advice, Barbie
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
11y
Anthony, I doubt, in your case, that Dodd-Frank applies on your first deal but you need to see an attorney outside of JAG as mentioned.
You need to qualify that buyer to ensure they can buy, besides Dodd-Frank there can be predatory sales issues if they can't qualify which is different than if they elect not to buy. Predatory would be putting someone in an L/O that can't qualify over the term, you can avoid that if you can show that they could if they can cure the matter that keeps them from qualifying and that they know what they must do to cure such matters.
You can not require a residential tenant to perform maintenance or be responsible under the lease or any option. You'll be in violation of tax codes. Courts also allow an equitable interest to be gained by a tenant for costs of maintenance.
Do use two separate contracts, charge market rents and don't give credits of payments to the sale price, that constitutes a financing agreement.
An option may not require ANY performance to be required by the optionee (buyer), if you do, like requiring maintenance or paying on a lease as agreed, then you don't have an option and money paid on that contract may defined differently, you may end up returning the option price.
If you lease it, you'll later receive 75% of the rents as an offset to your mortgage debt to qualify on future loans.
There is no issue with a VA loan after one year of occupancy, you can rent it. An option for any term can violate the due on sale clause, you take your chances, the tenant is obligated to pay off the mortgage, you are if it is called. If you fail to pay it off then the optionee has a cause of action against you for failing to keep the property available to sell under the option, they can get their money back. Terms of assumption are described in the note you made, they will need to qualify and that outstanding balance will count against your VA entitlements for another VA loan.
Seems the assumption is to do the L/O, you'd probably be better off selling conventionally and regrouping your investing approach from buying a new home and now that you are more aware of RE.
Tenants do take care of a property they think they are buying, problem is that if they become aware that they can't or won't buy, animosity sets in, they can get more ticked off (at themselves if nothing else) and they can take it out on the property, especially if they feel they were messed over. So, the care given initially can backfire, it can work both ways.
Your property is in its best condition now to be sold than down the road, so if you're inclined to sell, I've always found hanging on doesn't pay off unless you hold for a longer term, 7 to 10 years as your depreciation will play on the future sale.
Can't say what you should do as I don't know enough about your personal position. :)
Rental Property Investor · Knoxville, TN · Member since 2013 · 111 posts · 28 votes
11y
Great information, everyone! Thank you so much! I had a good long talk with my Realtor and she gave me some of the same information and a great way to weed out people who just want an easy way to occupy a property versus those who are truly interested in a lease option.
Real Estate Broker · Louisville, KY · Member since 2014 · 121 posts · 91 votes
11y
@Anthony Martin I have never seen a lease option with a tenant and the tenant actually end up purchasing the property. Typically this was because they could not qualify at the time of rental and were not able to qualify later when the option was to be executed or expire. I think you are talking about 2 separate contracts, one is for the lease and one is for the option. So, what happens if part of the way through the lease you have to evict the tenant or they move out? They still have until the option expires that they can execute (though that is unlikely) it is something to consider. You would likely need to talk to an attorney and ask about how that would work since you might be in a bind waiting for the tenants option to expire and be prevented from doing anything until that time.
Investor · new york, NJ · Member since 2014 · 137 posts · 13 votes
10y
Jesse - dont you want to avoid 2nd mortgages - if the person - no fault of their own - medical emergency, layoff from 12 years of steady employment etc happen - defaults you probably get nothing.?