Subject To Property & Lease Option

15 Replies

Just out of curiosity, is it legal to lease option a house that has been acquired subject to?

Also, I've heard that lease options are still legal in Texas if and only if the lease option period is 6 months or less. Is this true?

@Brandon G.  Not sure I understand your question but I would assume you acquired the property subject to and have found a buyer that is doing a lease option on the backside???

First things first subject to deals are risky..... As I stated many times before lets say this deal actually is ready to close your tenant came through with the money..... Well the property still belongs to your seller ....is the title still clean or was it ever??? In that six month period what if he got sued and judgment was rendered or a tax lien was placed on the property or he went bankrupt,  what if he defaults on the mortgage?? There are a lot of things that could on in that period. I suggest stay away.

Also every good investor has a good attorney..... I am not familiar with Texas law so I would consult the attorney on that exact state law.  Hope that helps.

@Joshua Houchins  Thanks for the reply. There's no actual deal. I'm still in learning mode so everything is just hypothetical. I am working with an attorney but with the amount of hypothetical questions I have, I'm sure he would stop taking my calls if I directed every one of them to him personally. 

With that said, the attorney I'm working with is very comfortable with sub2s. I am a bit confused by what you mean when you say that the property still belongs to the seller after a sub2 acquisition. As a complete newbie, I'm very hesitant to disagree because I've not even closed a deal yet, but everything I've read here and the two attorneys I've talked to have confirmed that in a subject to transaction, the title transfers to the new owner and is not in the seller/borrower's name any longer. How then could a tax lien be placed against an asset that is no longer in his possession? As for foreclosure, in a sub2, the seller is no longer the one making payments. It is the new owner who acquired the property subject to who is making payments. If I've misunderstood you, please let me know because I'm very curious.

@Brian Gibbons  Thanks for chiming in. I've done a lot of reading on the lonestarlandlaw website - truly a wealth of info there. That's where I read that it can only be done on option periods of 6 month or less. Even still, I've learned I need to confirm from more than one source. So thanks for confirming for me. 

@Brandon G. I am not saying it can't be done but I deal with one of the top real estate attorneys in the state and again you don't own the property you are simply taking over the payments and not all mortgage companies will allow you to pay on the actual owners behalf. Since you dId not actual buy the property how are you going to get title insurance? If you doc the existing policy the owner is still on the DOT. His actions can still be docked to the subject property. I just pre warn anyone who is beginner of handling any sort of creative way to obtain "control" not "ownership" of the property. I personally have attempted a few deals earlier on in my career like this and my attorney strongly advised against them everytime. There is a lot that can wrong. Now Texas might have some sort of miricale law that I am not aware of I am just simply stating the risk you are taking.

Originally posted by @Joshua Houchins :

@Brandon G. I am not saying it can't be done but I deal with one of the top real estate attorneys in the state and again you don't own the property you are simply taking over the payments and not all mortgage companies will allow you to pay on the actual owners behalf. Since you dId not actual buy the property how are you going to get title insurance? If you doc the existing policy the owner is still on the DOT. His actions can still be docked to the subject property. I just pre warn anyone who is beginner of handling any sort of creative way to obtain "control" not "ownership" of the property. I personally have attempted a few deals earlier on in my career like this and my attorney strongly advised against them everytime. There is a lot that can wrong. Now Texas might have some sort of miricale law that I am not aware of I am just simply stating the risk you are taking.

 Sub 2 purchase and lease w right of first refusal as an exit strategy is the way to go North Carolina

Originally posted by @Brandon G.:

I am a bit confused by what you mean when you say that the property still belongs to the seller after a sub2 acquisition.    .     .     .   but everything I've read here and the two attorneys I've talked to have confirmed that in a subject to transaction, the title transfers to the new owner and is not in the seller/borrower's name any longer.

Yes in a subject 2 deal you are the new owner and have title. Other wise it is not a subject 2 deal, it would be called something else. 

Originally posted by @Brandon G. :

Just out of curiosity, is it legal to lease option a house that has been acquired subject to?

Also, I've heard that lease options are still legal in Texas if and only if the lease option period is 6 months or less. Is this true?

If by 'Lease Option' you mean a Contract for Deed (make payments now for a deed to be delivered at some time in the future) these are 'legal' in Texas. However, if they are for more than 6 months, they are so highly regulated and the penalties for non-compliance are so harsh, a seller would have to be less than informed to write one for any property that the purchaser intends to occupy. For example, missing a single report the seller is required to deliver to the purchaser potentially makes the seller liable for penalties to the purchaser equaling the price of the property.

Good deal if you are 'buying', not so good if you are the seller.

Texas limits options on residential to 6 months per my DFW attorney, he also avoids CFDs, a Sub-2 conveys title subject to the underlying lien in all states.

You can lease a property and after a successful period of time leasing give the option, an option can not require performance by the optionee (buyer).

Do not give credits toward the purchase price, that is financing, unless you comply and I seriously doubt you'll find a RMLO who can underwrite options, I'm sure there are some that claim they can, but.....no. Don't finance the option price either.

John gives credits toward closing costs, up to 3% can be paid by the seller, that is not financing the price of the property.

Texas also has predatory dealing laws, giving short options to an unqualified buyer can get you hammered. That's true in all states, but even municipalities have predatory ordinances/laws concerning predatory RE activities.

People learn RE through a structured process beginning with the basics of RE, not by random approaches to strategies that are presented as some structured step by step process, that is marketing, not RE. TREC has a heavy hand in Texas, regulations and laws are part of learning the basics, you won't be banging into strategies that won't work or require greater knowledge starting off. :) 

@Brandon G. As a newbie operating in the Houston area just learning about Subject 2 this thread was of particular interest. Would you mind sharing how you proceeded with this information? From the research here and outside of BP are there any point you feel should be highlighted?

I would do a lease option with the right of first refusal without offering any part of the payment to go toward the purchase to avoid financing the property and then also market the property for sale letting everyone know the property would not be available until the lease was up then if the leasee failed to purchase I would have a back up buyer if they qualified with a some kind of acceptable down payment. Remember the original owner still has the property as collateral for the existing loan so the best of all worlds would be to find a buyer who would qualify to do an out right purchase which provided for the original loan to be financed but the end buyer that way the original owner seller would be off the hook. 

Two transactions are taking place.

1. Subject 2 purchase from a seller. They sign a warranty deed to you. The fact that an existing lien is attached to the property created the subject to ownership. You can get title insurance even though the loan is in the previous sellers name unless it's FHA or VA. If it is, due diligence in emparitive. There are other risks acceleration clause...

2.  Leasing after you have taken ownership or owner finance, lease option, or whatever you call it, is the next step.  Remember you must pay the previous owners liens or they can foreclose on you. I like the right to refusal option as that keeps you from having to comply with the Dod Frank BS.  I have never done that so great post whoever it was. I get 2 contracts a purchase agreement and a lease agreement which if is defaulted terminates the purchase agreement. I haven't been to court on this so I'm not sure how solid this is. If you ask an attorney they will say all the reasons why not to do either one. That is why we are the investors.  

The http://www.lonestarlandlaw.com/Lease-Options.html link on TX lease options was very informative. 

I do have a question for the forum before I consult a TX attorney. Let's say I move forward with it's advice and I draft a contract with several 'stacked' 179 day option terms, essentially letting the option expire and renewing it several times, when necessary. Let's say the tenant/buyer is aware of this and is ok with it, and the attorney drafts and approves the whole contract and I'm aware that the tenant/buyer could totally change their mind and challenge with a lawsuit. 

But assuming they DO NOT challenge..

My question is - could the State of TX or other jurisdiction act independently of this harmonious arrangement and file their own lawsuit against me (the investor/seller), if they found something deficient in the contract?

Or is this even possible? I'm not sure if this contract would need to be recorded publicly. If it's private, then I guess it goes back to that one sole foreseeable problem (i.e. tenant/buyer changes mind and files lawsuit)? Please advise.

Just trying to be super conservative. Thanks!

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