So I bought a property in 2018 from the foreclosure auction in Louisville at the courthouse.
The house was still occupied by the original owner. When I went to talk to him he didnt believe I had bought it and thought there was a mistake and didnt know his house was being auctioned etc.
Long story short. We came to a Lease w/Option to Buy (Rent to Own) agreeement in July 2018.
His Rent would be $550 for 2 years and within that 2 years he has the Option to Purchase for $15,000.
He pays his $550 rent on time the entire time, but makes no extra/additional payments. When I've picked up the rent I've asked if he talked to any banks about loans, etc. And it's always no.
Here we are in July 2020. And he tells me he's ready to make his last Payment and he thought the $550 was ALL PAYMENTS towards the $15k and that he owns the house now etc.
What should I do now?
Anyone else experienced any lease/option misunderstandings?
It never ceases to amaze me how reluctant REIs are to engage the services if an attorney. I put a property under contract last week. Being an out of state deal I had my attorney from my home state review it, then I hired an attorney from the state the property is in to review it. And this is just the purchase agreement that came from the real estate broker. I don't understand how people are signing contracts without having them reviewed by their attorneys... I've purchased one property on an installment to purchase. I had the contract written by an attorney. I think that cost me about $400... Would you scrap a deal over an extra $400 in closing costs? If so the deal wasn't very strong. But a few hundred bucks in lieu of thousands of dollars if mistakes. I'll take that any day.
@Jack B. I’m going to be direct. It was good that you qualified that you don’t do lease options before you stated anything because the things you suggested could get people into a lot of trouble if they were to follow your advice in doing lease options.
1. There is NO down payment when it comes to lease options. There is only an option fee. The option fee does not go towards the property and is not a down payment.
2. None of the monthly lease or rent payments should go towards the purchase of the property. If you have a down payment and monthly payments going toward the pay down of a property you have essentially created a mortgage and unless you are a mortgage broker and have qualified the tenant buyer looking at all of their financials as a bank would in order to extend them a loan you may be accused of being a predatory lender which, if found guilty, can come with very high fines or worse.
3. Leon has no grounds to evict the tenant. He can give him a non-renewal letter and then, if his tenant doesn’t leave, he would then go through the eviction process or some sort of cash-for-keys situation.
4. The lease option strategy is not obvious. It is an intricate, advanced strategy (such as taking over a property “subject to,” or doing apartment syndications) that should be done correctly in order to profit the most and stay out of legal trouble.
I hope what I have written was not offensive. I just don’t want people to apply misinformation from what they may have read online and end up getting into costly legal trouble when it could have been avoided.
When you bought the property he pretended not to know that he was in foreclosure. Now, he is pretending that he understood the lease payments to contribute to the purchase price. There is a pattern here. This guy will lie at every turn if he sees some advantage to it. Start eviction proceedings now. if those get tied up based on his defense of "I bought this house," consider at that time whether pursuing the legal process is worth the candle (i.e. a lawsuit can get very expensive very fast and may simply cost too much when a $15,000 house is at stake). In the end, you have record title so he will be unable to sell the property. You may want to reinforce this idea in a letter to him. (Make sure your deed is property recorded everywhere it needs to be recorded under KY law).
It never ceases to amaze me how reluctant REIs are to engage the services if an attorney. I put a property under contract last week. Being an out of state deal I had my attorney from my home state review it, then I hired an attorney from the state the property is in to review it. And this is just the purchase agreement that came from the real estate broker. I don't understand how people are signing contracts without having them reviewed by their attorneys... I've purchased one property on an installment to purchase. I had the contract written by an attorney. I think that cost me about $400... Would you scrap a deal over an extra $400 in closing costs? If so the deal wasn't very strong. But a few hundred bucks in lieu of thousands of dollars if mistakes. I'll take that any day.
@Leon Foree Was any of the rent towards the balance of the option? Show him a copy of the signed agreement and explain that the "rent" was rent and that only a portion went towards the balance of the purchase price. It's a conversation that might not go over well but needs to be done.
Reluctance to retain an attorney to handle a litigation matter is a different matter than hirign someone to look over a contract. Merely filing a complaint in California (can't speak to KY) comes with a $500 charge. A typical "cheap" litigator in my neck of woods costs $300/hour. Assuming five-eight hours to get the facts straight and draft and file a complaint in Superior court - you are out $2,000-$3,000 before you have begun your litigation "journey." You then have written discovery and you are out another $2,500-$3,000 IF everything goes smoothly (it seldom does). If discovery motions are required, you are out at least another $2,500-$3,000 or more if your county does not do telephonic hearings. You are now about 33% through the case and out $7,000-$9,000. Summary judgment motion will cost you at the very least $5,000. Expect $7,500-$10,000 as at least two depositions will be necessary here. The are transcript and court reporter fees as well. Another $1,200-$1,800. State courts hate granting these. Given there is one agreement here, you are likely to lose on the theory that there is a disputed issue of material fact. You are now out more than the full cost of your $15,000 house and still have a trial to prepare for. Court-ordered mediation (required in most of the country pre-trial) will cost you another $2,500-$3,000 in fees to draft the brief and attend in person mediation. in I personally have never seen a case done so cheaply as described here, but it would be theoretically possible.
Play your own version of playing dumb (except you have a contract to back you up ;- ) I would just remind him that the window on the agreement is set to expire and lacking the $15,000 purchase you will need him to sign a new lease, and it will be at market rate.
The hardest part of this whole REI thing is "trying to help" people out. Sadly that is the role of family, and to some extent community, but it is also not fair to you to carry a property at below market rates when I assume you got into this to establish a path to care for yourself and your family. I am not saying you should be a greedy jerk, but I have sadly learned that this is one of those that it does not make you a bad person for holding to people to the agreements they made with you. Actually when you treat others with the same level of respect that you would want, then you will find those good tenants. So flip the tables, how would you want to be treated? We would all want some level of leniency, but if you ask anyone on these forums they also would not want to live in a situation where they were not holding up their level of the agreement (granted they are a biased group, but they aren't wrong either ;- )
This part of the path is not and easy one, but you will actually be able to appreciate that you did the correct thing if you just hold them to the agreement. If you can't, get a GOOD property manager (BEST MONEY EVER SPENT) and let them take care of it for you ;-)
Good luck.
@Darius Ogloza
If this was in response to me you made my point exactly. Get everything done right in the first place so you don't have to go through this. The agreement I saw looked like it was printed offline and may or may not hold much weight legally. Though it shows the agreed upon terms which seems to make it more"evidence of the agreement," than a legally binding contract. It looks more akin to getting them to say it in an email than a contract. Every contract I use has pages of boilerplate legal mumbo jumbo from my attorney.
@Leon Foree
It seems you ate safe. To be 100% sure read all the terms of the contract, to be sure its states what you believe it does. That you are renting for 2 years at 550/mo, and in the end of 2 years tenant has the option to buy it for 15k. If thats the case, the guy is playing smart.
Just a note: a rent with option to buy should have a higher price as it has embedded an optionality. In the rent you face maintenance and taxes. And 24 x550 does not even 15 k.. notwithstanding interest plus taxes plus maintenance...
I would read it again just to have a piece of mind...
Good luck
@Shane H. I agree about hiring an attorney to review your contract. In my mind, that $300 to $700 is like buying insurance. The beauty is you only have to buy it once.
here is my strategy:
1. Know what you want. (Educate yourself and read a few example contracts until you actually understand every clause and why it's there.)
2. Go to an attorney that specializes in what you want to do. If you are talking to the right attorney they will already have this contract mastered and will have already defended it in court a few times and improved it along the way. (That is what your are paying for.)
3. From then on, reuse this contract for deals like this. Make a "fill in the blanks" version of the contract; a template. Now you are good to go and you only had to pay the attorney for the contract the first time you used it.
4. When you have to enforce the contact you call the attorney who wrote it to also defend it. (And immediately turn their enforcement docs into templates. Things like "notices of default" and "eviction notices" are different things. Pay attention to the specific docs that need to be used to enforce the specific contract you exercised.)
ALSO, save a bunch of money by getting a couple investors friends to pitch in on the Attorney's fee.
If 4 of you all do step 1, then you will be able to help eachother understand exactly what you're doing. If 4 of you show up in the Attorney's office and ask 4 times more questions, you will get a better contract. Then 4 of you will walk away with a solid contract that each of you and use as a template for 1/4 of the price.
Talk is usually cheaper so give him a phone call and be very gentle and very nice and nicely explain to him to move out and if he declines your attorney fees will be billed to him for the eviction proceedings. Warning only talk to him once and do not do this yourself, lawyer up and start eviction proceedings. Be sure your lawyer is aggressive and will ask for any damages due.
He is playing you mentally. Contractually it is in writing. So "Oh no you said this and you said that is out the window." He is doing what he wants. Not knowing house was sold at auction. He is not taking anything seriously. He is smart to pay on time and faithfully. He is living in la la land. So handle him accordingly, but be kind and nice as usual.
@Jack B. I’m going to be direct. It was good that you qualified that you don’t do lease options before you stated anything because the things you suggested could get people into a lot of trouble if they were to follow your advice in doing lease options.
1. There is NO down payment when it comes to lease options. There is only an option fee. The option fee does not go towards the property and is not a down payment.
2. None of the monthly lease or rent payments should go towards the purchase of the property. If you have a down payment and monthly payments going toward the pay down of a property you have essentially created a mortgage and unless you are a mortgage broker and have qualified the tenant buyer looking at all of their financials as a bank would in order to extend them a loan you may be accused of being a predatory lender which, if found guilty, can come with very high fines or worse.
3. Leon has no grounds to evict the tenant. He can give him a non-renewal letter and then, if his tenant doesn’t leave, he would then go through the eviction process or some sort of cash-for-keys situation.
4. The lease option strategy is not obvious. It is an intricate, advanced strategy (such as taking over a property “subject to,” or doing apartment syndications) that should be done correctly in order to profit the most and stay out of legal trouble.
I hope what I have written was not offensive. I just don’t want people to apply misinformation from what they may have read online and end up getting into costly legal trouble when it could have been avoided.
No I understand the option "fee" I just said DP because I was in a hurry but it CAN be a DP, you don't understand that YOU CAN credit the fee towards equity in the home. It's similar to earnest money. Yes, he has grounds to evict the tenant, because the tenant is claiming he owns the house. Do you really think he is going to magically give up and leave?
Yes, it is common to charge a higher rent that goes toward credit of the purchase price. YOU are the one that has no clue what you are talking about AT ALL. On top of that you're practicing law without a license claiming that this is illegal when it is a documented fact that it is not in most jurisdictions.
Two of the MANY sources online that talk about this exact type of structure I mentioned. A guy who isn't an attorney yet claims my points are illegal, then chastises me for not doing lease options so I have no experience, yet you are not an attorney but act like you are, you sure seem to miss the irony...you have ZERO clue what you're talking about dude. I know how lease options work, which is why I said you collect money up front or charge higher rent with a credit to the purchase for part of it. I only said I don't DO lease options. I didn't say I don't know the ins and outs of them. I know all about them and how to structure them, even have contracts for them. I just don't DO them because it's a mathematically bad idea. Just like offering seller financing is by becoming the "bank". Returns are far higher when you OWN and HOLD real estate. It's basic economics. The guy made critical mistakes that I validly pointed out. He collected no money up front and he did not charge a higher rent. You CAN use the money as a down payment and you CAN charge a higher rent.
https://themortgagereports.com/37221/simple-mortgage-definitions-rent-to-own-lease-option
https://www.daveramsey.com/blog/how-does-rent-to-own-work
Rent payments. As part of the contract, you’ll agree to pay a certain rent amount each month. These payments are typically higher than rent prices in the area because a percentage of each payment is set aside as a credit for your future purchase of the home.
Option money. You’re required to pay the seller a onetime, nonrefundable fee. This gives you the opportunity to buy the house, and in some cases, the seller will agree to put this amount toward the buyer’s equity in the home. There’s no standard option money amount; it’s typically a percentage of the home’s purchase price.
"What should I do now?"
Show him what you/he signed on the option and point out there's nothing about crediting rent paid to the price.
@Brian Gibbons and @Joe Villeneuve It seems that I may have upset @Jack B. when giving advice on structuring lease options and what not to do. Would either of you like to chime in on the conversation and share your thoughts on ways to structure and not structure lease options.
@Jack B. I’m going to be direct. It was good that you qualified that you don’t do lease options before you stated anything because the things you suggested could get people into a lot of trouble if they were to follow your advice in doing lease options.
1. There is NO down payment when it comes to lease options. There is only an option fee. The option fee does not go towards the property and is not a down payment.
2. None of the monthly lease or rent payments should go towards the purchase of the property. If you have a down payment and monthly payments going toward the pay down of a property you have essentially created a mortgage and unless you are a mortgage broker and have qualified the tenant buyer looking at all of their financials as a bank would in order to extend them a loan you may be accused of being a predatory lender which, if found guilty, can come with very high fines or worse.
3. Leon has no grounds to evict the tenant. He can give him a non-renewal letter and then, if his tenant doesn’t leave, he would then go through the eviction process or some sort of cash-for-keys situation.
4. The lease option strategy is not obvious. It is an intricate, advanced strategy (such as taking over a property “subject to,” or doing apartment syndications) that should be done correctly in order to profit the most and stay out of legal trouble.
I hope what I have written was not offensive. I just don’t want people to apply misinformation from what they may have read online and end up getting into costly legal trouble when it could have been avoided.
No I understand the option "fee" I just said DP because I was in a hurry but it CAN be a DP, you don't understand that YOU CAN credit the fee towards equity in the home. It's similar to earnest money. Yes, he has grounds to evict the tenant, because the tenant is claiming he owns the house. Do you really think he is going to magically give up and leave?
Yes, it is common to charge a higher rent that goes toward credit of the purchase price. YOU are the one that has no clue what you are talking about AT ALL. On top of that you're practicing law without a license claiming that this is illegal when it is a documented fact that it is not in most jurisdictions.
Two of the MANY sources online that talk about this exact type of structure I mentioned. A guy who isn't an attorney yet claims my points are illegal, then chastises me for not doing lease options so I have no experience, yet you are not an attorney but act like you are, you sure seem to miss the irony...you have ZERO clue what you're talking about dude. I know how lease options work, which is why I said you collect money up front or charge higher rent with a credit to the purchase for part of it. I only said I don't DO lease options. I didn't say I don't know the ins and outs of them. I know all about them and how to structure them, even have contracts for them. I just don't DO them because it's a mathematically bad idea. Just like offering seller financing is by becoming the "bank". Returns are far higher when you OWN and HOLD real estate. It's basic economics. The guy made critical mistakes that I validly pointed out. He collected no money up front and he did not charge a higher rent. You CAN use the money as a down payment and you CAN charge a higher rent.
https://themortgagereports.com/37221/simple-mortgage-definitions-rent-to-own-lease-option
https://www.daveramsey.com/blog/how-does-rent-to-own-work
Rent payments. As part of the contract, you’ll agree to pay a certain rent amount each month. These payments are typically higher than rent prices in the area because a percentage of each payment is set aside as a credit for your future purchase of the home.
Option money. You’re required to pay the seller a onetime, nonrefundable fee. This gives you the opportunity to buy the house, and in some cases, the seller will agree to put this amount toward the buyer’s equity in the home. There’s no standard option money amount; it’s typically a percentage of the home’s purchase price.
Jack, Jack, Jack. You are the one that has no clue. The article you mentioned is one of many that must have read about this from an old way of doing SLO and is just repeating it. She wrong on almost every statement she made. Buy the way, I'm glad you don't do leas options...for your sake. You would be in court all the time, and losing your shirt. While we are mentioning court...
Also, would it make you feel better if Shiloh said he wasn't a lawyer before he stated his legal facts? Even though he is correct with what he stated?
Also #2, the way you compared LO to a Land Contract is correct. Trouble is, LO's are NOT a LC...in any way. It's when you start making a LO like a LC that gets you into trouble.
The Option Consideration is NOT part of the DP. It is 100% of the cost of the Option Contract. The OC is a completely separate agreement from the Lease. You should NEVER give rent credits towards the Purchase. That is what will ultimately get you in court because you just turned a lease agreement into a form of structured payment plan, just like a LC, and your tenant will try (and succeed) in converting the entire agreement into a LC...thus ALL of your rent will get credited. (Oh, I forgot to mention I'm not a lawyer).
As far as mathematically not being a good way of investing, you're (wait for it) wrong again. It is one of the greatest ways of getting returns on your money. Very little cash upfront, and that cash is returned almost immediately with profit once you place your tenant/buyer. In other words, the SLO strategy costs the REI nothing to control a property that profits within hours of gaining that control.
Update:
My tenant went to a Rental Assistance program in Jan 2021 and they paid back rent from July2020-Dec2020!!
But TENANT still feels like its house and has no trespass signs posted etc.
So I posted it For Sale online in Jan 2021. I I figure if I can sell it quick I'll eat the couple months of rent and be good!!
A buyer from LasVegas contacted me and wanted to purchase the house.
We do a short 2week closing. I go to title company, sign papers, sign deed, get the check FRiday March 5. Deposit the check!
DONE DEAL!! RIGHT???
WRONG WRONG WRONG
HIS secretary calls me TUESDAY MORNING and says they dont want the house anymore!!!
BUT we Already did the closing!! its sold!
So now they are threatening to go to court over not wanting g the house because of the tenant!!
What to do now??🤷🏾♀️🤷🏾♀️🤷🏾♀️
Agreed with others is that this tenant is either really stupid or trying to take advantage of you. How could a reasonable person possibly believe that at $550/month for 24 months, he/she would have paid everything toward a $15,000 purchase price. Simple math states otherwise ($550*24=$13,200). You should be fine given that you are the owner and have the agreement in writing. Nonetheless, agreed that this is stressful.
Sounds like escrow closed and the new title has been recorded. I'd tell his secretary that if he doesn't want the house he can sell it, but it's not your problem. While it is possible to go to court and have the sale undone, the cost would be more than the house is worth.
Unless you hid the tenant and said the place was unoccupied or lied about the tenant (ex. they're making all payments and on time), they are screwed. They had the ability to do their due diligence and they failed.
if this isn't a state with a 3 day right of redemption or some such thing and you disclosed everything I can't see how they have any recourse.
What a saga. I have a low priced rental house (less than $20K) and just spent the afternoon wading through a flood of poop and toilet paper under the house trying to find the broken sewer pipe and unplug the main line. Fun times, let's all be landlords!
@John Teachout Why in the world would you do that yourself? Why not have a plumber do it? And if you do the lease option correctly, the tenant buyer is the one who is calling the plumber and having the plumber figure out what’s wrong with the plumbing and then fixing it.
@John Teachout Why in the world would you do that yourself? Why not have a plumber do it? And if you do the lease option correctly, the tenant buyer is the one who is calling the plumber and having the plumber figure out what’s wrong with the plumbing and then fixing it.
Why? Because we never call anyone for anything. We're "do it yourself" people. This is a rental, not a lease/purchase. It really wasn't a contribution to the thread, I just felt like whining...
@John Teachout Got it. Sometimes I feel like whining too.
Update:
My tenant went to a Rental Assistance program in Jan 2021 and they paid back rent from July2020-Dec2020!!
But TENANT still feels like its house and has no trespass signs posted etc.
So I posted it For Sale online in Jan 2021. I I figure if I can sell it quick I'll eat the couple months of rent and be good!!
A buyer from LasVegas contacted me and wanted to purchase the house.
We do a short 2week closing. I go to title company, sign papers, sign deed, get the check FRiday March 5. Deposit the check!
DONE DEAL!! RIGHT???
WRONG WRONG WRONG
HIS secretary calls me TUESDAY MORNING and says they dont want the house anymore!!!
BUT we Already did the closing!! its sold!
So now they are threatening to go to court over not wanting g the house because of the tenant!!
What to do now??🤷🏾♀️🤷🏾♀️🤷🏾♀️
Did you disclose the tenant and the issues? I personally ensure I have the right to speak to tenants while under contract, but I guess this could be similar to lying on a disclosure statement? Interesting. Do you have other real estate? If this were my first property I would never want to do real estate again!