A Contract For Option is better than giving an Option - avoids equitable interest

[Brian Gibbons]

I am re-starting a discussion.

Does a Lease Option create a due on sale clause issue?
Can equitable interest be avoided?
Is there an alternative to a Lease with Option?

I have communicated with Bill Gulley with this.

I suggest the idea to BP forums that a Contract for Option to Purchase (CFO) avoids equitable interest and does not trigger the due on sale clause when coupled with a residential lease.

My complete BP blog post is here...http://www.biggerpockets.com/blogs/3/blog_posts/26565-a-contract-for-option-is-better-than-a-lease-option

But to pose the question to the thoughtful and experienced on seller financing, which include wraps - aitds, cfds, seller carrys and such, what is your opinion? Does it avoid equitable interest and the due on sale?

Please post on this thread.

I look forward to all responses!

Brian

[Bill Gulley]

First, as I understand the contract, it is a lease that must be successfully completed prior to the option being effective. So, tehncially at the time it's made it's not a real option at that time.

As to the first question, I'd say it will be in the eye of the beholder. I can see a good defense in that no equitable interest has been conveyed until the conditions are met. However, I can also see that a lender would say the intent is there and that the conditional aspect is easily met. Bottom line, if the lender does call the note, it will be on you (the borrower) to file suit and stop the action and then defend it or refinance the deal or complete the sale.

To stay away from the due on sale, assuming you use a lease and a conditional option agreement, a Notice of Option might be filed with the effective dates, say a year off for a period of 60 or 90 days. From the information made public it seems it would be difficult to say any equitable interest was conveyed prior to that effective date. If I were the lender I probably wouldn't call the note under those circumstances, but may when the option was effective. At that point it seems like it would be sold or terminated and if terminated my problem as a lender has been cured.

The Option Price paid is also a consideration as to any interest established and the terms of returning any funds in the event the conditions were not kept.

I'll yield to thers for the forum discussion.

Good post and hopefully discussion. :)