Question About Subject To Deal

[Amir Saeed]

I am looking at the "Subject to Deals" I have educated myself and aware of different risks specially the "due on sale clause". My question is that once the house is deeded over to you, you can do a lease to buy option with a new tenant. The lease option fee the prospective tenant pays is non refundable if the tenant does not buys the house. What if he does buy the house as agreed. What happens to the lease option fee. Do you still keep it or you have to pay the option fee back to tenant for him to pay the down payment...etc. Please explain how does it works (usually) in both cases....Thanks.

[Jon Holdman]

Buyer's with good credit and enough cash for a down payment don't do these subject to deals. They just buy in the normal fashion. They have lots more choices of properties and don't have any complexity on the transactions.

The buyers who do engage in these transactions are the ones that won't quality for a conventional mortgage. So, somewhat by definition, lease/option buyers aren't in the strongest financial position. If they do manage to scrape up a 3% fee for the option money and then something happens and they cannot exercise their option and buy, you most certainly have left them in a worse position than if they had just been paying rent for that time.

Say what you wish about everyone being adults. Dodd-Frank was put in place specifically to address bad actors in this space. There is an assumption about the financial sophistication of the seller on a lease/option deal vs. the buyer. "I assumed they were an adult" won't fly for a defense in court.

I do fully agree that lease/option sellers aren't all bad actors, nor is this the only place where bad deals are done. Lots of predatory loans have been made, especially during the boom. And even the basic "buy as much house as you can afford" and selling home ownership as "the American dream" are doing a disservice to people who would be better off renting or buying the least house that fits their needs.