Is Real Estate Options a Good Tool?
Colorado Springs, CO · Member since 2013 · 6 posts · 1 vote
As a new investor I am trying to fill my "Toolbox" to close as many deals that come to me. I have come across many ways to invest. I have learned wholesale so far, but would like to have another option for those that this will not work for. I would like to hear some opinions and statistics about using Real Estate Options. I appreciate any and all information about Real Estate Options from those that know best.
Okay, I was mentioned and I'll drill down a little deeper.
What Brian has outlined are arrangements that could be made they are not really types of options, but he has elected to give names to various ideas. In residential RE, an option contract may be made as a stand alone agreement or made in connection with other agreements. In NO situation, should an option be included in one document with a lease, any lease-option arrangement should be under seperate agreements. We have covered this issue on BP before and the problems that ultimately arise with financing when a lease and an option are under one cover.
If an Option Price is more than sufficient for a down payment for a financed purchase, the concerns of having two seperate agreements deminishes. But using two seperate contracts always works and using a contract that incorporates a lease and an option only in limited situations simply is nothing more than a seperate product to be marketed, it serves no unique function that would not be accomplished with two agreements.
You need to begin at the beginning to understand concepts used to buy, use or control a property.
An "Option" is nothing more than a contract, an agreement, given by an Optionor (owner) to an Optionee (a buyer or tenant or other entity) that restricts the rights of ownership held by the Optionor and grants the Optionee rights to some future benefit to buy, lease or use a property.
You may have an option to purchase a property, you can have the option to renew a lease or the option to mineral rights, plant trees and retain the fruits grown or to obtain any other lawful use of a property.
An Option on real estate must comply with the Statute of Frauds, be a written agreement, it must be signed by the grantor/optionor and it must contain all of the requirements of a contract to be enforceable.
The parties to the contract must be named, the legal description of the subject property must be given and the contract must meet the legal requirements fo a valid contract.
Sufficient consideration must be paid for a valid contract. An Option Price must be paid to have a valide Option. While "sufficient consideration" may be rather creative, the consideration must be able to be valued in dollars. I could say "For and in consideration of Ten Dollars and the love and affection of my children" which is acceptable in our society and courts, consideration between unrelated parties must be valuable enough for the transaction contemplated. Ten per cent of the purchase price for the property is accepted as sufficient consideration for an Option.
An Option must be for a stated term in time, an Option can not be forever there must be a termination date. The longer the Option term, the more valuable it is. So, a term of 6 months may have sufficient consideration paid with a few hundred dollars, a three year agreement is much more valuable and a 5, 10 or 20 year agreement can require amounts needed to be paid that the transaction becomes a financing arrangement. Again, a ten per cent Option Price is generally accepted in small real estate transactions for a term of less than five years. Option contracts are valued under the concept of the time value of money as the purcahse price agreed to is being paid in the future. The value is also impacted by other related agrrements, if the Optionor is granting other uses of the property over the Option term.
An Option must contain a stated sale price to be paid if the Optionee elects to exercise the rights to purchase. The sale price must be determinable at the time the Option is given. Saying the price is $120,000 with six per cent per anum at a per diem rate to the date the option is taken is determinable. From that we can determine the price to be paid in 6 months or 3 years in the future. I mention this as an example as a determinable sale price, it might be applicable for a short term agreement but such an arrangement will likely be seen as a financing arrangement over a longer term as well. That is a caution to the creative minds out there.
As opposed to a sale contract where both parties are obligated to perform, an Option is, at the election of the Optionee, they are not obligated to perfom any function or act.
A contract that is contingent on performance of the optionee is not a true Option Contract. While placing any contingency or requirement on an optionee, such as successfully completing a lease, is not an Option but a contract arrangement to sell under agreed terms. Some use a contract that requires the Optionee to perform over a term but it does not become an option until requirements have been met by the buyer or optionee. As such agreements may be lawful, giving the buyer or optionee the percetion that they have the option to purchase as a true Option may present problems as it is possible for a buyer to acquire cash to purchase prior to the requirements being met. While an Optionor may not object to the sale, depending on how the agreement was constructed they may not have a valid agreement. At that point, a new purchase contract might be required.
Financing an Option Price may be accomplished by the Optionee making a note for the consideration and the Option Price is considered to be paid under the terms of the note. So long as the note is not in default, consideration has been exchanged, the note for the Option, in the event the note is in default then consideration is not being paid as required. However, just as mentioned, such an agreement is more of an installment option, a financing arrangement and if done with and agreement giving possession, it may carry the same force and effect as a contract for deed being a financed purchase agreement.
Another issue is that many talk about using an Option to lock up a property thinking it can't be sold. Actually, an Option is a deed restriction, a contingency that the title holder may be obligated to sell. A property with an outstanding open option can be sold to another party at any time over the option term, but is sold with the option in force. Those wondering about title insurance requirements, the property is sold with the cloud on title and is excepted from coverage, similar to a Sub-to transaction with existing liens.
Such an arrangement or transaction can be accomplished where you take an Option to buy a property from a seller within one year for $100,000. The seller needs to sell and agrees to take $90,000 if it can be sold within 45 days and the seller gives the Optionee the first right of refusal to exercise the option, but the Optionee can't perform. I come along anf agree to purchase the property subject to the open option. The seller sells to me at $90,000 and I take title. If the Optionee elects to exercise the option, I'm then obligated to sell at $100,000. Yes, I make $10,000 less my expenses.
Since investors dealing in options have seemed to be under this umbrella of protection I know they have missed this alternative to apply in certain circumstances. When a "Notice of Option" is filed for record, it clouds title, it does not prevent title from passing. It will generally prevent any lender from getting involved and it certainly limits most buyers from considering a purchase knowing they might be required to sell over the term. So, while we say "tie-up" it's a lose noose. An example of why I always suggest that investors begin with the basics rather than guru strategies and relying on "Forum Colleges of RE". :)
I know all of this is boring, it lacks the bullet points of schemes and methods to employ various option situations that many perfer to see.
Before getting creative in doing Options you really need to be familiar with RE law, contracting requirements as well as local custom. There are certain strategies promoted by mentors, coaches, gurus and even attorneys that may spin or modify basic transactions. Giving names to variations of a basic transaction may make them identifiable and therefore marketable, often the zebra loses his stripes and loses the basic concept and becomes another animal that can be subject to unintended consequences. :)
Nathan, welome to BP!
I'm sure the Option Coaches will be on this shortly. Stats on Options? Probably more than 80% fail, recent laws may apply to financing residential sales and Options can be seen as a financing method.
You need a good RE financing understanding to make sure your Options will work when buyers are required to (even at thier option) to belly up, not doing so can put you in a position as a predatory lender or dealer.
There is a place for Options, do some searching here and there are at least a thousand posts about how to. IMO, it is not a strategy to specialize in, but some do, as you'll be better off by having a good basic RE knowledge and then recongnize which method best applies to any transaction, that gives you all the tools you need. Going the other way is almost like buying a car because you have some of the tools to fix it, better to have all the tools and you can buy any car! :)
Beautifully said Bill Gulley. I have been floating master options and have very little success with them. In this California market, cash is king.
YMMV,
Tevis
Bill Gulley - your post above sounds like you were discussing "lease options"; but maybe the OP wasn't looking at using "lease options" but just an "option to purchase". I don't believe the latter can be considered predatory ...
Now that I got your attention with that, I'm sure you can give the OP a dissertation on both the "lease option" and "option to purchase" strategies :)
Nathan Ryder If you are familiar with wholesaling, then a simple option is essentially the same idea.
Lock it up and flip it.
Are you referring to lease options?
LOL, any contract could have predatory aspects by the party drafting it.
Yes, my comment was geared toward the Lease Option type using the arrangement to sell a property in the future. Investors/Operators can use an Option to buy a property at a later date or to simply control circumstances to keep a property from being sold and to facilitate further transactions. When notices of such options are filed they cloud title over the term of the option. These probably have a better success rate, maybe 50% are accomplished, some investors may take all the options the enter into, many others can't get things moving toward a deal, 50% is my guess.
Steve, I'd think you would have provided some links for more in depth analysis.... :)
I would actually like to see what most think of option to purchase at the later date and the lease option. From what I understand the lease option is the more risky of the two and might not be a great option. Thank you all for the discussions on this one!
Nathan Ryder The option vs. the lease option are 2 different tools for 2 different end users.
The option, would normally be used to tie up a property to then sell to another investor, such as wholesaling.
Or, you could tie up a property for a certain period of time that you felt would appreciate over time and then you could exercise your option, just as a call option on the stock market.
A lease option is normally used to lock up a property with terms and assign it to the end buyer that can't qualify for traditional financing.
Hi Nathan Ryder
Options Overview
Rolling Option
Optioning a large tract of land piecemeal, buyer buys 1 section w an option to purchase more. Builders use this.
Sale Option Back
Owner sells today at discount to get capital, receives option to purchase later, price is fixed.
Earnest money Option
This is generally called a Straight Option, you create an option to purchase for some time period at some price with an "and or assigns" as optionee. You then sell your option.
Buying on Lease with Option
Low option consideration, low rent to landlord optionor, low exercise price, long lease and long exercise - expiration date. You want a document that includes both lease and option.
Selling on Lease with Option
High option consideration, high rent to tenant buyer optionee, high exercise price, short lease and short exercise - expiration date. You want 2 documents - a lease and a seperate option to purchase.
Sandwich lease option
You buy on lease option and sublease and sub option. See above. You profit with option payments at move in, differences in rent, and back end profits. You usually do a back to back closing on the same day.
Lease Option Assignment
You lease option from seller and assign the deal to a tenant buyer for a fee. There is less risk to the LOA than the Sandwich, as you are out of the deal, as opposed to being obligated in the Sandwich to pay the Owner if the Tenant buyer does not pay.
Contract for Option to Purchase and a Lease
In some states giving an option now is dangerous (e.g. equitable interest), so you lease with a Contract for Option to Purchase, place the Option in escrow, and when tenants finish the lease they get the option to buy for a period of time, like a Contract for Deed.
There are other ways too.
And, a tax benefit to options, according to IR Section 1234 option consideration payments received are tax deferred until option has either expired or has been exercised.
http://www.law.cornell.edu/uscode/text/26/1234
Hope this gives you some ideas!
Bill Gulley you must have other ideas!
Brian
Options are a GREAT thing!
@Bill Gulley and John Jackson Thank you for the insight so far!
@Brian Gibbons Wow what an amazing amount of information I can say I didn’t know that many Options existed. It is apparent that the 2 that I brought up were just a mere scratch of the surface!
Okay, I was mentioned and I'll drill down a little deeper.
What Brian has outlined are arrangements that could be made they are not really types of options, but he has elected to give names to various ideas. In residential RE, an option contract may be made as a stand alone agreement or made in connection with other agreements. In NO situation, should an option be included in one document with a lease, any lease-option arrangement should be under seperate agreements. We have covered this issue on BP before and the problems that ultimately arise with financing when a lease and an option are under one cover.
If an Option Price is more than sufficient for a down payment for a financed purchase, the concerns of having two seperate agreements deminishes. But using two seperate contracts always works and using a contract that incorporates a lease and an option only in limited situations simply is nothing more than a seperate product to be marketed, it serves no unique function that would not be accomplished with two agreements.
You need to begin at the beginning to understand concepts used to buy, use or control a property.
An "Option" is nothing more than a contract, an agreement, given by an Optionor (owner) to an Optionee (a buyer or tenant or other entity) that restricts the rights of ownership held by the Optionor and grants the Optionee rights to some future benefit to buy, lease or use a property.
You may have an option to purchase a property, you can have the option to renew a lease or the option to mineral rights, plant trees and retain the fruits grown or to obtain any other lawful use of a property.
An Option on real estate must comply with the Statute of Frauds, be a written agreement, it must be signed by the grantor/optionor and it must contain all of the requirements of a contract to be enforceable.
The parties to the contract must be named, the legal description of the subject property must be given and the contract must meet the legal requirements fo a valid contract.
Sufficient consideration must be paid for a valid contract. An Option Price must be paid to have a valide Option. While "sufficient consideration" may be rather creative, the consideration must be able to be valued in dollars. I could say "For and in consideration of Ten Dollars and the love and affection of my children" which is acceptable in our society and courts, consideration between unrelated parties must be valuable enough for the transaction contemplated. Ten per cent of the purchase price for the property is accepted as sufficient consideration for an Option.
An Option must be for a stated term in time, an Option can not be forever there must be a termination date. The longer the Option term, the more valuable it is. So, a term of 6 months may have sufficient consideration paid with a few hundred dollars, a three year agreement is much more valuable and a 5, 10 or 20 year agreement can require amounts needed to be paid that the transaction becomes a financing arrangement. Again, a ten per cent Option Price is generally accepted in small real estate transactions for a term of less than five years. Option contracts are valued under the concept of the time value of money as the purcahse price agreed to is being paid in the future. The value is also impacted by other related agrrements, if the Optionor is granting other uses of the property over the Option term.
An Option must contain a stated sale price to be paid if the Optionee elects to exercise the rights to purchase. The sale price must be determinable at the time the Option is given. Saying the price is $120,000 with six per cent per anum at a per diem rate to the date the option is taken is determinable. From that we can determine the price to be paid in 6 months or 3 years in the future. I mention this as an example as a determinable sale price, it might be applicable for a short term agreement but such an arrangement will likely be seen as a financing arrangement over a longer term as well. That is a caution to the creative minds out there.
As opposed to a sale contract where both parties are obligated to perform, an Option is, at the election of the Optionee, they are not obligated to perfom any function or act.
A contract that is contingent on performance of the optionee is not a true Option Contract. While placing any contingency or requirement on an optionee, such as successfully completing a lease, is not an Option but a contract arrangement to sell under agreed terms. Some use a contract that requires the Optionee to perform over a term but it does not become an option until requirements have been met by the buyer or optionee. As such agreements may be lawful, giving the buyer or optionee the percetion that they have the option to purchase as a true Option may present problems as it is possible for a buyer to acquire cash to purchase prior to the requirements being met. While an Optionor may not object to the sale, depending on how the agreement was constructed they may not have a valid agreement. At that point, a new purchase contract might be required.
Financing an Option Price may be accomplished by the Optionee making a note for the consideration and the Option Price is considered to be paid under the terms of the note. So long as the note is not in default, consideration has been exchanged, the note for the Option, in the event the note is in default then consideration is not being paid as required. However, just as mentioned, such an agreement is more of an installment option, a financing arrangement and if done with and agreement giving possession, it may carry the same force and effect as a contract for deed being a financed purchase agreement.
Another issue is that many talk about using an Option to lock up a property thinking it can't be sold. Actually, an Option is a deed restriction, a contingency that the title holder may be obligated to sell. A property with an outstanding open option can be sold to another party at any time over the option term, but is sold with the option in force. Those wondering about title insurance requirements, the property is sold with the cloud on title and is excepted from coverage, similar to a Sub-to transaction with existing liens.
Such an arrangement or transaction can be accomplished where you take an Option to buy a property from a seller within one year for $100,000. The seller needs to sell and agrees to take $90,000 if it can be sold within 45 days and the seller gives the Optionee the first right of refusal to exercise the option, but the Optionee can't perform. I come along anf agree to purchase the property subject to the open option. The seller sells to me at $90,000 and I take title. If the Optionee elects to exercise the option, I'm then obligated to sell at $100,000. Yes, I make $10,000 less my expenses.
Since investors dealing in options have seemed to be under this umbrella of protection I know they have missed this alternative to apply in certain circumstances. When a "Notice of Option" is filed for record, it clouds title, it does not prevent title from passing. It will generally prevent any lender from getting involved and it certainly limits most buyers from considering a purchase knowing they might be required to sell over the term. So, while we say "tie-up" it's a lose noose. An example of why I always suggest that investors begin with the basics rather than guru strategies and relying on "Forum Colleges of RE". :)
I know all of this is boring, it lacks the bullet points of schemes and methods to employ various option situations that many perfer to see.
Before getting creative in doing Options you really need to be familiar with RE law, contracting requirements as well as local custom. There are certain strategies promoted by mentors, coaches, gurus and even attorneys that may spin or modify basic transactions. Giving names to variations of a basic transaction may make them identifiable and therefore marketable, often the zebra loses his stripes and loses the basic concept and becomes another animal that can be subject to unintended consequences. :)
@Bill Gulley Thank you so much for the time you spent typing this out it is truly what I was looking for! What an amazing amount of information! This will definitely help me and others who are just starting out!
I love this post!
Thx Bill Gulley!
Brian Gibbons
Can you elaborate on your
"Contract for Option to Purchase and a Lease"? I'm not seeing how this arrangement does not transfer an equitable interest in a property, but maybe I don't understand enoungh of the details of this deal.
Bill Gulley
Just a minor clarification:
"Another issue is that many talk about using an Option to lock up a property thinking it can't be sold. Actually, an Option is a deed restriction, a contingency that the title holder may be obligated to sell. A property with an outstanding open option can be sold to another party at any time over the option term, but is sold with the option in force. Those wondering about title insurance requirements, the property is sold with the cloud on title and is excepted from coverage, similar to a Sub-to transaction with existing liens. "
The Option needs to be recorded (either the actual option or a notice of option) before the option serves as restriction on the deed. You did mention filing the notice of option 2 paragraphs after the paragraph I quoted, but I just wanted to clarify that the option must be recorded to restrict the deed. If the option is never recorded, you can sue the person who granted you the option, but you would not be able to purchase the property from a new owner (unless you could prove the new owner had actual knowledge of the option).
All things having to do with real estate have to be recorded as a matter of public record before unrelated 3rd parties can be legally bound by the obligation. Anything not publicly recorded can only be enforced with the original parties to the contract (or their assigns, heirs, etc....)
Thanks Kieth for the mention and clarification as I should have discussed the filing in more detail together with the ability to convey title. For those doing such a transaction I'd stress that you file a Notice of Option and never the Option, not making public your option price. Ensure the NoO filed includes the expiration date of the option to provide clear title for any future search. :)
Hi Keith Barton
Here is my blog post on BP on the Lease and CFO subject.
http://www.biggerpockets.com/blogs/3/blog_posts/26565-a-contract-for-option-is-better-than-a-lease-option
Feel free to PM me, and calling is easier to explain things. My ph # is on my profile.
Best wishes,
Brian
Here is my blog post on BP on the Lease and CFO subject.
http://www.biggerpockets.com/blogs/3/blog_posts/26565-a-contract-for-option-is-better-than-a-lease-option
Feel free to PM me, and calling is easier to explain things. My ph # is on my profile.
Best wishes,
Brian
LOL :) Or, discuss it here.
It's basically what I was speaking to about options having conditions on the Optionee.
Not picking on Brian, having some buyers jump through hoops before getting locked in with them is basically what many non-profits do with low income housing sales. Habitat For Humanity requires labor hours to be accomplished, many require completion of home onwership classes, others require satisfactory rental periods along with other requirements. But such arrangements are not entered into up front as an option to purchase. :)
Brian Gibbons
Equitable Conversion - some jurisdictions consider a lease option agreement to be an equitable conversion and some jurisdictions do not. An equitable conversion means the optionee/tenant owns an equitable interest in the property. This is enough to trigger the due on sale clause of a mortgage, and it is enough to potentially really screw up insurance payouts if the parties don't understand how the courts will determine who gets insurance proceeds if anything happens to the property.
I do not know (one way or the other, as I've not taken the time to research) whether the process you label "Contract for Option to Purchase and a Lease" avoids transfering an equitable interest in jurisdictions that consider lease option agreements to be an equitable conversion.
Bill Gulley
Jurisdictions vary of course... But...
1) Option agreement and Lease agreement together or not?
Your statements:
"In NO situation, should an option be included in one document with a lease, any lease-option arrangement should be under seperate agreements....
[Combining option and lease together in same document] serves no unique function that would not be accomplished with two agreements."
I disagree. In Ohio at least, I think it works to the advantage of the seller if the lease and the option are in the same document. There can be a difference in how a lease and option in separate documents are interpreted as compared to how a lease and option in the same document is interpreted (more details below).
2) Consideration
Your statement enumerating consideration:
"For and in consideration of Ten Dollars and the love and affection of my children...." This is sufficient consideration when a parent is transfering property to more than one child, but this would not work for anything other than that. I just wanted to clarify that so nobody used that phrase inappropriately :)
3) Option Terminated for Tenant's Default
This is another matter that varies by jurisdiction, but there are jurisdictions in which the seller can prevent the tenant from exercising the option if the tenant is in default on the lease. Ohio is one such jurisdiction, and this is why I draft single document lease-option contracts for my landlord clients. Combining the lease agreement and the option agreement (together with the proper language) strengthens the seller's right to prevent the option from going through. The ability to do this does not mean this is not an option contract. There are conditions precedent that must be satisfied for the option to be exercised. These conditions precedent constitute consideration that is in addition to the option price (the non-refundable payment for the purchase of the option).
4) Locking-up the property
I think this is just a matter of semantics - the end result is the same - the optionee can purchase the property from the owner. However, it IS a good idea to mention what you mentioned. You are right that many probably do not realize that the property can be transfered and the new owner will be obligated to sell if the optionee exercises the option.
Keith Barton, Yes, my comment as to consideration was only clarified by my saying unrelated parties need valuable consideration shown, by implication saying the example pertained to related parties. While it seems obvious to some of us, your clarification is appropriate and appreciated. I sometimes write touching on something breifly. My writing style might be improved, lol.
As I did in this thread concerning my opinion with a lease-option being contained in one agreement. The problem has nothing to do with any jurisdiction or the legality of such an agreement, while there are limitations in Texas, I'm under the impression no other state makes any requirement concerning seperate agreements.
As I mentioned above, I did say that when there was a sufficient down payment a one document L/O could be used but that if it was less than 10% of the purchase price they should be avoided if credits are given.
In most all lease-options drafted as one agreement that I have seen they tend to provide credits from rents toward the purchase. The Rent-To-Own contracts usually do the same.
Many options are not taken, but I'd say too that that most that are attempted fail due to financing requirements. Prudent lending practices, not just secondary market guidelines, require lease-options with rent credits allowed to be viewed in light of fair market rents being assessed and only amounts paid in excess of fair market rents be credited for financing purposes.
While you can agree to rents of $500 per month and credit say $200 toward the purchase, lenders won't accept the credit unless the fair market rents is assessed at $300 a month or less.
So, what you have with agreements drafted in such a manner are two parties who agree to a credit thinking that $200 is being credited, say for 24 months allowing $4,800 toward the purchase price of say a $50,000 house. However, two years later the fair markets rents are found to be say $425 a month. From this a lender will then only allow $75 a month accrue toward the purcahse or $1,800, far short of the borrowers down payment requirement.
Here is the kicker, fair market rents are assessed by the appraiser assigned by the lender and are the fair market rents at the time of the appraisal, not when the agreement was made. So, it is impossible for anyone selling or buying under a lease-option allowing rent credits to be accurate in applying amounts for lending purposes.
Besides credit issues with buyers, in a lease-option this is the number one reason such consolidated lease-option agreements fall through, insufficient down payment. Now consider those who generally enter into lease-options, they generally lack funds to buy in the first place and IMO most will not save along the way in contemplation of the purchase for unforseen expenses anyway. Buyers don't learn of these issues until they apply for financing so no contingency is allowed.
IMO, the fact that some investors selling with lease options are aware of this issue and have drafted contracts knowing they will fail, they use a consolidated lease and option setting higher credits to intice the buyer and fail to disclose the financing requirements. I'd also say this practice is why lease options are mentioned in the recent SAFE Act. There are those investors too that simply are unaware of what they are doing and the agreement simply fails out of thier negligence or understandings.
One lease agreement and a seperate option solves the problem. The option can still be contingent upon meeting terms of the lease and/or successfully completing the lease, but no part of the rent is applied toward the option. As I mentioned above, the option can be financed. Lenders can then avoid the lease arrangement as it contains no financial relationship to the option agreement. Still, caution should be taken in setting rents at a very low amount as it may become a concession in the overall transaction and a lender could draw the lease back into the underwriting picture. But, if rents are reasonable there is no need to have the fair market rents assessed.
There is no advantage of using a consolidated lease option agreement providing rent credits, it may not even save paper! Again, you can use a consolidated agreement if sufficient funds are paid for the option price. But why? It does provide two different products for gurus.
Keith, as you know, if financing is secured then at settlement the buyer will receive the credits agreed under any agreement. IMO, usually that is a big IF.
It's difficult at times for me to discuss a topic and include when I change hats as I tend to simply blend my experience into an overall assessment of my opinion, I've been told here it's hard for some to peg me in just one area of RE investing, I know, I'm all over the place at times. :)
The whole reason behind separate agreements comes down to one thing....OK...2... CONTROL and EVICTION.
On an assignment, they are 2 docs.
The lease and the option..(actually we have 7 separate docs..but..we are highly anal at my place of employment..me..wheeee!!)
So, when you evict, you provide the JP with the lease and assignment.
On a SLO, you as the buyer want one doc, to strengthen your CONTROL.
Now, unlike Bill Gulley , I won't spend 5 hours going into detail on all of this, as I have an interview on Fox News and the Wendy Williams show...so I have to run.....but, he can elaborate on this.
Keith Barton I run title searches on hundreds of properties and a lease option is mentioned in every one that I've ever read regarding the due on sale.
The due on sale really doesn't matter until Obama finishes his complete radicalization of the US and the interest rates jump dramatically.
@john jackson omg ur a celebrity! Watch out for the paparazzi !!!
John Jackson
Interesting - re: your title searches and the note being called due.
I always tell my clients that the lease-option is enough to trigger the due on sale clause; I tell them I have no way to guage the liklihood of the bank calling the note due (but, that whatever the liklihood is now, it will be more likely as the interest rates climb); and, I always put a clause in the agreement that the optionee is put on notice that the bank may call the note due even if all payments on the mortgage are current, and the optionee's only remedy at that point is to exercise the option and close before the bank takes it in a foreclosure action.
Bill Gulley
I recommend to my seller clients that they charge extra for rent under a lease-option. One nice thing about using an attorney for lease-option deals is that the attorney can use their trust account to escrow the amount of the rent being credited toward the downpayment on the property. At the time the option is exercised (if it is) it can be used as cash on hand by the optionee. If the option is not exercised, it gets paid out to the seller (as the rent credited is not refundable to optionee)....
Keith Barton Obviously you have read a number of DT's as I have and realize that the "note being due" or "triggering the due on sale" is nothing to really be concerned with unless this regime puts the final nail in the coffin...or until Jimmy Carter is re-elected!
Our docs do discuss the due on sale, so we explain that to the seller.
Just to clarify, I hope we aren't missing the point about rent credits. You could have a 500 rental and charge 1000 for rents, if there is any amount credited from rents, the fair market rent must be included in the appraisal. If the FMR comes back a 400, you can credit 600 to the option. If the FMR comes in at 700, you can only credit 300.
If there are two agreements, charging seperate amounts there is no reason to assess fair market rents or even go there for the computation of what gets credited to the purchase.
By credit, I mean for financing qualification purposes, it has nothing to do with cash retained in any escrow account as I did in the loan servicing business, where we serviced options and other installment contracts along with notes in several states.
So, if you mention rent credited to the purchase, you have an issue, if you say rent is xx dollars and in another contract xx dollars paid to the option/purchase price, you don't have those issues. :)