Updated over 7 years ago on . Most recent reply
Lease option exception
After reading a lot about the lease option strategies, one thing I have not seen much about is an exception for home owners looking to do one or two of these a year. I understand if your are going to go into the mortgage business and begin financing people regularly, then you need to become a broker and get a license. However, reading over DF, the way I interpret it is that there is not any violation if I was to create a standard lease, then a separate option form that they can apply money to the purchase price, as well as an option fee of say 5% as long as the property is appraised and the sales price is within reason of the appraisal and they are qualified to make the payments. This would be written up by an attorney of course, but not sure what I am missing with this.
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- Qualified Intermediary for 1031 Exchanges
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@Pete Schmidt, Rent credit to sales price acts like a mortgage. A sales agreement implies contractual agreement, and a lease option with the option payment applied to sales price - all three of these can create an equitable defendable interest in the underlying property. The minute you sign them the tenant has an interest to defend. Not that it will go south, but if it does you're dealing with something far more serious than a simple eviction.
There is also a second fly in that ointment - If the IRS smells a rent to own or land contract arrangement they will interpret that "risk of loss" (the sale) happened at signing of the documents not the passing of deed (and the cash). That eliminates the 1031 exchange as an option.
I've used lease options in the past personally (pre-Dodd Frank) and was always careful to
1. Make the option stand alone and have no contingencies or credits the option payment was applied to.
2. Make the lease a stand alone lease with no reference to any mortgage, sale or option at market rate.
3. Pre adjust the option price to anticipate that if they exercised the option they got credit and if they rented for x period of time they got a discount. And at the same time wire in a strike price that anticipates whatever you want for appreciation. If they exercise they get the benefit but there is no obligation incurred, and you can 1031. And if they don't exercise then you are protected and all financial loss is on their side.
I love lease options. Just be careful
- Dave Foster
