How can I hold a note for balance of lease option fee?

14 Replies

Hey everyone,

Can I hold a note for the balance of a lease option fee? And how would I go about doing it? 

For example: I have a seller that is willing to lease option their property, I find the lease option buyer and assign the lease option for a fee. Let's say I'm aiming to get $4000. I like a particular buyer but they can only give me $2000. Can I (and how do I) write/hold a note for the balance? Structure it so there is a minimal monthly payment of $50 for example over x amount of time.... I'd like to be able to do a few of those for a couple hundred a month in cash flow..... Is it possible? What are some thoughts? Thanks!

You could not do it from the perspective of a real-estate secured note because you don't own the property.  I am winging it here, but I am thinking you might look at this in terms of a sublet, i.e., the seller leases to you (with language specifying the you have the right to sublet) and you turn around and lease to your client.  You build the fee into your agreement with your client.

Why could this not be handled thru a UCC filing?

Real Estate is asset based. UCC is liability based.

That's pretty much the way I was hoping to do it @Mike Hartzog , I just don't want to necessarily pass on someone who could give me a portion of a fee right away as opposed to waiting, if all other factors were in place.... after all time is money. I was hoping I could get some sort of enforceable I.O.U.  but since, as you said, I don't own the property it won't be real estate backed.  @Boyd McClean if I were to setup something like that what would it look like? Would I just have my attorney draw up some sort of "personal loan" contract? I've heard of a UCC filing, but I'm not too familiar with it....

You can't do a UCC filing, the debtor doesn't own the home (and neither do you).

You would indicate in your UCC filing the reason for it. You do not need a lawyer to do it. I use a UCC when I hold paper on a mobile home not attched to land. I sold my farm tractor and held the note and used a UCC filing.

After you do the lease option file a Memoradum of Option with your county recorder of deeds so the owner of the property can not sell it from under you. Or he could  sell it and  not give clear title. I had a fellow do that to me and found out he could not give clear title so he had to come to me (via his lawyer) and get a release. The release cost him $12,000. He could have tried to sue me, have the legal expense, and have his sale fall thru so he paid the popper. Had he come to me in the first place, I would have been reasonable and worked something out that would have been mutually beneficial to all parties invovled.

In order to protect yourself properly you could take one more step. On an option I have the title and a  signed sales contract put into escrow for the duration of the option. What happens if you  or your buyer goes to exercise the option and the owner of the property refuses to sign a purchase and sales agreement for whatever reason. Now you are on the hook for the $4,000, because you have an unenforceable option, the Memorandum prevents clear title from being given, yet the owner does not need to sell without a sign purchase and sale agreement.

So your only solution is legal. In some states the option holds no water without a signed purchase and sale agreement. Check you states regulations.

Am not a lawyer or giving legal advice. Just telling you what I have done.

My first option was done out of ignorance on my part. I had the owner of the real estate that gave me the option sell from under me. I learned the hard way to use a Memorantum of Option (which i composed myself) and put title and a signed sales contract into escrow. If the optionor will not agree to these steps you are standing in quick sand.

Cover all basis to protect yourself.

@Boyd McClean  

The Memorandum of Option filing makes a lot of sense in terms of protecting your position with regard to the current owner.  I am no expert on UCC filings but as I understand them you can name collateral other than real estate.  To secure the agreement with the  buyer with a UCC, one would need to name some collateral that the buyer actually owns, like a car or something like that.   Agree? 

@Mike Hartzog    since your form the great northwest   UCC filing are common in the Timber industry.. when the Trees are standing they are real property.. When they are cut down and on the log truck then the lender of record on the Timber deed files a UCC filing to secure their interest for the time the logs go to the scaling yard get scaled up and then accepted by the mill and payment is made to the owner of the logs and subsequently to the lender who financed the Timber deed.. this is exactly how I ran my timber business for 10 years in ORegon and Washington... We either had lines of credit with our bank or the Mills would put up the money so we could buy timber from the land owner

@Wayne Brooks    I think the bigger issue with what @Fausto Carosella   wants to do is he probably needs a RE license to be leasing property he does not own.. Unless he is sub leasing the property IE he has a lease and the lease calls for a sub lease.

@Boyd McClean   Boyd brings up many good points.. I always recommended my clients that were buying on a lease option to record it and cloud the title so the owner could not sell it out from underneath them... And your write what happens if the seller won't sign.. A proper purchase and sale agreement should be in place so in the event a seller goes pear shaped one could sue for performance ...

Seems like a pretty complicated way to make a mere 4k and take payments on the 4K.. obvioulsy regardless of the laws and doing it right.. fausto could just get a unsecured promissory note from the owner ( seller) and call it a day.

Back in the 80s when I sold land in N. CA.. to make deals work I routinely took my commission in the form of a promissory note. However I was and am a CA RE broker so I was entitle to my commission in any manner I choose to take it.  

agreed with having an executed purchase agreement, to go with the option.  To me it's standard procedure, and an option without an agreed purchase agreement is somewhat useless.


Stoke the fire boys, let me get my chew, my pocket knife and join this spit a whittle club!

@Fausto Carosella    you have a good piece of wood I can whittle you a gavel as a gift to the court, may be they'll go lighter on you  for filing wrongful liens and financing the sale of real estate outside of settlement, you know, like undisclosed costs of acquisition in connection with the sale that cause the settlement of accounting to be incorrect, an unreported basis for federal taxes and, oh, let me see, financing an option out of compliance with the SAFE Act (now incorporated in Dodd Frank)........hey, mind moving that spittoon away from your leg, I'm not a very good shot spit'n'!   

Jay, can I borrow you're chain saw to whittle out one of those logs for ole Boyd there? He needs a good stool to sit on when I buy the property out from under him he has his option on with all the memorandums he can write being filed. All I do is buy the property subject to his option rights, at a lower cash price to the owner. If ole Boyd exercises the option, I sell it to him at that option price, if he fails to take the option, it expires and it is no longer an encumbrance and I have clear title. Now, if you want to gamble a bit 'cause it's really a nice place, I'll buy the place subject to at a higher price, if ole Boyd gets to closing on time as agreed under the option, well, I lose the premium I paid and I'll need to sell it to him at that price....but, if he fails to the second (be'n the good ole boy he is) then I just keep the place and he'll need that stool.

Fausto, not so close to Wayne, he'll get splattered, little more back towards you....that's good, right there, KA DING thanks.

Speak'n of ole Wayne, he's on to someth'n there, a good Option Contract IS a purchase contract, in fact, you can go by a purchase contract and just take out all that default malarkey that nails the buyer if'n they don't buy the place. If you're just do'n an option say'n somebody has the right to buy.....well, heck, how are they to buy, under what terms, do the get a quit claim deed or a warranty deed, are they pay'n cash or finance'n the place, do they even get clear title and do ya get the crops on the place or do the hogs go with it if they are still there, what about that ole broken combined in the field, who hast to haul that off? And, it's already signed off on by everybody just in case somebody drops dead 'tween now or then!

Now fur' ole Boyd. B'now you figured out your option and all them fancy papers didn't lock that place up like all them gurus said it would, nope, you got nothi'n cept the right to buy during that period of time. I'd say you're lucky that guy you stuck it to wasn't me, cause you'd be whistle'n another tune.  Guess who ever told that fella he couldn't give a clean title subject to that option needs to be fired, then hung down there in Texas.

Oooops, sorry Mike, didn't mean to stain that tie ole buddy, but you're miss'n someth'n, need to check in your state for the minimum loan amount that can be secured by real estate, can't just be go'n out there filing liens for any little ole bit ya want to, not only would it not hold that bucket of spit, you'd have your'self an other false lien matter to go see the judge 'bout!. But, let's spose that was a $5,000 note and you could file it, now you gattcha a real mortgage and you're sure financing that option price so ya get to meet Dodd and Frank and if ya filed after settlement, well, ya got other troubles if'n that weren't disclosed in settlement, ya got the RESPA cops, the IRS, probably used the bank so ya get to meet one of J. Edgar's finest too.


Now you'al know, UCC filings are for personal property, not real property and them are federal filings, screw one of them up as a false lien you might get to go to the big courthouse. Ya gotta itemize personal property on that little bitty form too, or attach more paper. They call it the "nomenclature" say'n it's a Ford D-10 Tractor and the like, need the numbers off it, best to say it's red "n gray, and the reason ya did it, like "to better secure that promissory not made on the first day of October, 2014 (dur'n hoot'n holar days shin dig). Then ya cotch'r self a perfected note! Boy, lemme tell ya, you mess up and don't release that thing on time, you'll be wish'n your big brother had feed ya to the hogs!

KA DING, Aggghaw...C

KACHEEWEEE, whey, that was a good one, dang near lost my chew!

Yep Jay, soon as them logs were duly cut and they hit ole mother earth they is then personal property and don't come under no land and crops rulings as real property, ya did good do'n that. Bet that banker knew what he was do'n too!     

Now, if I was you'al, I'd just take me some cash, report it to the closing agent and not have them headaches in the first place. But if that buyer was real short and had hima good old truck free and clear, I'd just swap him some of that option fur a small note and put me down on that title as a lien holder and send it to them license crooks in that capitol building. I'd take me some spare keys too! 

KA DING, I gotta run boys, meet'n a little philly fir sum jug and BBQ, you boys stay otta trouble now, ya hear.....No more creative stuff while I'm gone either!  KA DING, later fellas. :)


@Bill Gulley    You bet timber buyin and selling is the old west.. if the folks on BP understood it no one would even fool with buying crappy little houses.... they would all be running around the woods looking to buy timber..

in the day we got the mill to loan us 100% of the money we needed to buy them thar logs from the farmer.. We hired on contract the logger.. ( we never owned anything but pick up truck and cell phone) the logger delivered said log to mill... Mill did split payments they paid the logger direct and sent us the rest... We did not even need major accounting ...

all said and done no money out of pocket in and out of a timber stand in 30 days or less start to finish and 6 figure profits.... Nice days work! still my most favorite endevour.

@Fausto Carosella  

I had this brought up several times while setting up a lease option for a property in Texas. Several things came to mine, but what I decided was best for the deal was to offer the property for a straight lease while the buyer could arrange to get the rest of the funds. 

In this particular case, heres what the numbers looked like. 

140k purchase price 

5k option 

Buyer had $2000.00

I offered to straight lease her the property for 1250 a month while she had time to secure the funds (6 months) and told her at the 5th month mark, she needed to submit a letter of intent that she had the intent on the 6th month to enter a lease option deal. I explained that if she did not have proof of funds by the time the LOI was submitted that I would have to place the property back on the market.

I came to this after searching about holding a note with really no security, and I am not a big fan of IOU's, regardless of how "promising" a tenant buyer is. 

Hope this helped 

Jay, let's not let the cat out of the bag, we have newbies here who have been sucked in by the RE gurus wanting the best in life out of RE, you know, like wholesaling and lease options, that stuff, you start talking about real estate, getting into what grows on it and what comes out of it and how to transfer rights.......well, you'll just be messing up their little heads and confusing these kids. 75% don't have a clue, cause they want to chase the guru fast money. Give them step by step instructions, they want the secrets of how to do it, dream chasers man, let's not spoil it for them!

Down side to the timber gig is that you need haulers or a good log truck, they will make more than half the RE "investors" here, but, ya know, I've never heard of a logging guru, so they will never know.  Most don't even know what real estate is, much less how to profit it from it. But, I love them all, someday it will sink in......I'd hope....for most not....poor kids and the wheeler dealers !Let's not let out all the secrets, (that they look for) keep em guessing and looking for quick answers, after all, everything is on the internet, it they can learn that, they'll be rich!        LMAO!!! 

Really knowing RE basics doesn't make money in a week it just makes it easier to make money for the rest of your life, but they don't have time for that !!!! 

Just as pathetic are the old guys who never learned anything but wheeler dealer stuff, the old guru junk that is totally history, bad ideas, poor knowledge, suff that is illegal now and shame scam artists. The hill billies of RE. It's been a sorry industry for decades, maybe it will get better.  : :>)) 

Thanks everyone for the input! @Eric Giovannucci that sounds like something I'd consider in the future. @Bill G. I can definitely see how I could over-complicate something. I'd probably just move on to the next buyer that DOES have the immediate funds... although making myself a lien holder on a car on a vehicle isn't the worst idea... especially since my daughter should be getting her license pretty soon :P

I suggest those thinking of taking a note and collateral search state law, collateral is to be sold to pay the debt created, any overage goes to the borrower, you don't just drive off and keep it.....unless you have a voluntary repossession where the collateral is given for the payment of the debt. :)

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