Lease w/ Option 2 Buy gone WRONG!!
Most Popular Reply
Member since 2018 · 433 posts · 208 votes
6yIt 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.
57 Replies
- Member since 2018 · 433 posts · 208 votes5y
Originally posted by @Jack B.:
Originally posted by @Shiloh Lundahl:
@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- Option fee: an upfront payment that becomes part of your down payment if you complete the purchase (typically 1 percent of the purchase price)
- Rent credit: additional above-market rent paid to the seller, which becomes part of your down payment if you close on your purchase (typically a 10 – 15 percent increase over market rent)
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.I have nothing to contribute to the argument you fellows are having, but I will say I would be hesitant to quote Dave Ramsey. I love to listen to his show. I've used some of his philosophies in life and money. I work a Davish plan. But he is either dishonest or dumb when it comes to legal matters, and math. A great example is when he says never to buy with an unmarried partner. If he left it at that, okay great, his opinion. Largely based on his religious beliefs. Fine. Great. Everyone is entitled to their opinion. But when he tells people its a bad idea because if their partner dies they now own a home with their partners mom.... Dumb or dishonest. That is a simple matter of a deed with right of survivorship. Has he never bought a property with a partner? His super simple plan is great for a certain group of people. But I would never take his legal advice. \__o__/
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Shane H.:
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.
Agreed if you had not clue about real estate and real estate contracts. And when it comes to purchase and sale contracts they are pretty simple when your talking a SFR type property. When U start to get into things that would trigger Dodd Frank and many probably dont know what that is or what triggers there are then yes you need some legal advice.. Although two different lawyers looking at one sales contract seems a little over board but hey if its only a few hundred bucks cant hurt right.
- Member since 2018 · 433 posts · 208 votes5y
Originally posted by @Jay Hinrichs:
Originally posted by @Shane H.:
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.
Agreed if you had not clue about real estate and real estate contracts. And when it comes to purchase and sale contracts they are pretty simple when your talking a SFR type property. When U start to get into things that would trigger Dodd Frank and many probably dont know what that is or what triggers there are then yes you need some legal advice.. Although two different lawyers looking at one sales contract seems a little over board but hey if its only a few hundred bucks cant hurt right.
I didn't really mean to advocate hiring 2 attorneys to review every contract. Out of state contracts with a dual agent worry me. That was the scenario. The attorney in my state reviews things for "free." Quotation marks because we know nothing is free. He's my business attorney. I have multiple businesses. A quick look at something for strange language or answering a question doesn't generally get charged. And I also do work for them and provide the same courtesies. Since he's not licensed in the other state he can't represent me so I hired an attorney from the state to handle closing, then have them look over the contract. Normally a review of a sale contract takes less than an hour. Something in the vicinity of $100. I couldn't imagine being in a mess like this to avoid paying $100! A boilerplate contract usually runs me less than 500. Still! A mess like this over $500!!! Its not always pleasant though. Ever have an attorney charge you fees when the seller didn't meet the contingencies and the deal fell through? Now every contract is sent with the statement "Please do not begin any title work or any other action that will result in expense to the buyer until contingencies have been met!"
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Shane H.:
Originally posted by @Jay Hinrichs:
Originally posted by @Shane H.:
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.
Agreed if you had not clue about real estate and real estate contracts. And when it comes to purchase and sale contracts they are pretty simple when your talking a SFR type property. When U start to get into things that would trigger Dodd Frank and many probably dont know what that is or what triggers there are then yes you need some legal advice.. Although two different lawyers looking at one sales contract seems a little over board but hey if its only a few hundred bucks cant hurt right.
I didn't really mean to advocate hiring 2 attorneys to review every contract. Out of state contracts with a dual agent worry me. That was the scenario. The attorney in my state reviews things for "free." Quotation marks because we know nothing is free. He's my business attorney. I have multiple businesses. A quick look at something for strange language or answering a question doesn't generally get charged. And I also do work for them and provide the same courtesies. Since he's not licensed in the other state he can't represent me so I hired an attorney from the state to handle closing, then have them look over the contract. Normally a review of a sale contract takes less than an hour. Something in the vicinity of $100. I couldn't imagine being in a mess like this to avoid paying $100! A boilerplate contract usually runs me less than 500. Still! A mess like this over $500!!! Its not always pleasant though. Ever have an attorney charge you fees when the seller didn't meet the contingencies and the deal fell through? Now every contract is sent with the statement "Please do not begin any title work or any other action that will result in expense to the buyer until contingencies have been met!"
I am the opposite I want the title report First thing.. and well for me I never get charged for them .. or if its attorney closing state they are doing enough deals a year with me that a few sale fails because of bad title is accpetable. But you do have to close deals.. cant expect these guys to do it for one off buyers thats for sure.
But let me tell yo why .. I learned this I guess the hard way.. in some of the deep south states I worked these were older areas that are prone to bad titles because of no probates being done no real divorce other family maladies.. So on one deal in Charleston I do all my due diligence which include architect soil and other items. only to have the title come back buggered up and we cant close I am out all that money. So from that day on I want TITLE first .. the reason they don't order title kind of to the end is for the one offs they don't want to get stuck with the Abstractor fee.. On the west coast its all digital so not a big deal but back east were they are 100 years behind in title plants its very old school.. IE takes two weeks to get a title report/commitment.. once I know title is clean then I am good to spend money
However for sure if your unclear what your signing getting legal or second opinion is the proper thing to do.. I know I send my insurance policies to my attorney and have him tell me if I am actually going to be insured you know how hard they are to decipher. Not title insurance i can read those just fine .. I am talking hazard and liability.
- Member since 2018 · 433 posts · 208 votes5y
Originally posted by @Jay Hinrichs:
Originally posted by @Shane H.:
Originally posted by @Jay Hinrichs:
Originally posted by @Shane H.:
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.
Agreed if you had not clue about real estate and real estate contracts. And when it comes to purchase and sale contracts they are pretty simple when your talking a SFR type property. When U start to get into things that would trigger Dodd Frank and many probably dont know what that is or what triggers there are then yes you need some legal advice.. Although two different lawyers looking at one sales contract seems a little over board but hey if its only a few hundred bucks cant hurt right.
I didn't really mean to advocate hiring 2 attorneys to review every contract. Out of state contracts with a dual agent worry me. That was the scenario. The attorney in my state reviews things for "free." Quotation marks because we know nothing is free. He's my business attorney. I have multiple businesses. A quick look at something for strange language or answering a question doesn't generally get charged. And I also do work for them and provide the same courtesies. Since he's not licensed in the other state he can't represent me so I hired an attorney from the state to handle closing, then have them look over the contract. Normally a review of a sale contract takes less than an hour. Something in the vicinity of $100. I couldn't imagine being in a mess like this to avoid paying $100! A boilerplate contract usually runs me less than 500. Still! A mess like this over $500!!! Its not always pleasant though. Ever have an attorney charge you fees when the seller didn't meet the contingencies and the deal fell through? Now every contract is sent with the statement "Please do not begin any title work or any other action that will result in expense to the buyer until contingencies have been met!"
I am the opposite I want the title report First thing.. and well for me I never get charged for them .. or if its attorney closing state they are doing enough deals a year with me that a few sale fails because of bad title is accpetable. But you do have to close deals.. cant expect these guys to do it for one off buyers thats for sure.
But let me tell yo why .. I learned this I guess the hard way.. in some of the deep south states I worked these were older areas that are prone to bad titles because of no probates being done no real divorce other family maladies.. So on one deal in Charleston I do all my due diligence which include architect soil and other items. only to have the title come back buggered up and we cant close I am out all that money. So from that day on I want TITLE first .. the reason they don't order title kind of to the end is for the one offs they don't want to get stuck with the Abstractor fee.. On the west coast its all digital so not a big deal but back east were they are 100 years behind in title plants its very old school.. IE takes two weeks to get a title report/commitment.. once I know title is clean then I am good to spend money
However for sure if your unclear what your signing getting legal or second opinion is the proper thing to do.. I know I send my insurance policies to my attorney and have him tell me if I am actually going to be insured you know how hard they are to decipher. Not title insurance i can read those just fine .. I am talking hazard and liability.
Its funny how we both learned what we believe to have been hard lessons and came out with opposite perspectives. I've never actually had a title come back unable to be closed on, but I'm confident I have done less deals than you. ha. In the case where I was upset I incurred fees, the seller couldn't provide me with the leases for the current tenants. They lied about the income. The property manager told the tenant they had to move because they were selling the property. Turns out he was mad because he didn't get the listing. There was no lease signed and after being told they had to move they were unwilling to sign one. Mistakes were made lessons were learned. Ever since that deal all of my timelines have been extended. Agents don't always like working with me for that reason. But hey, I'll wait for a deal I'm comfortable with. I want 30 days due diligence 60 to close. No fees until the seller provides anything that was on their side of contingencies. Providing leases. Things of that nature. I'm not spending money until I have everything I requested from the seller. I make this clear upfront...
Join the conversationCreate a free account to reply, vote on answers and follow this thread.