Lease Option "protection" for the Tenant

14 Replies

I have a great opportunity to get a property with great terms with a 24 month Lease Option but I am new at lease options so have a question or two. We have a contract written up and we have all the details in the contract. But..

1. What prevents the "Landlord" say on the 23rd month to decide he doesn't want to move forward with the sale? What recourse do I have?

2. If the Landlord were to bail can I put a Lien against the property. Our lease option agreement states 1/2 of the monthly rent goes to principle. so $6k over the course of 24 months will be applied to principle.

3. Can I file something with the registry of deeds in my county stating that the property at X location owned by Mr Smith has agreed to sell on this date to me (Tenant).

Thats it for now thank you all for your input, I live in Maine and dont know how the laws differ from state to state, but if you can lead me to water i will drink.

David

Local laws vary quite a bit with lease options, so make sure you check with someone who specializes in the LO that's in your state.

That said, your answer is yes. A seller/landlord is bound by the contract to sell you the property if you exercise your option according to the contract. Just make sure the contract you sign doesn't have any exit clauses written in for the landlord. Worst case scenario, you would have to file this contract in deed records and the landlord would be forced to pay you before he could sell the property in the future.

IMO it's pretty unlikely that you would go into the LO contract and have the landlord back out. Just make sure you always pay your rents on time or else they may have something written in that gets them out of the contract.

Unfortunately there are some "investors" who use very predatory lease option agreements that are very easy for the tenant to violate. Sometimes something as simple as being a day late with the rent is enough to void the option.

I'd recommend paying an attorney a couple of hundred to review the documents and make sure they're balanced and that you understand your rights and obligations under the lease and option.

An option can be recorded. It does represent an encumberance because its binding a legal obligation on the grantor (landlord) that binds them to selling you the property at the agreed upon terms.

Jon Holdman, Flying Phoenix LLC

anyone heard of or use the following to protect yourself as a "tenant"?

Memorandum of Agreement or

Performance Mortgage

David

Originally posted by @Jon Holdman :

An option can be recorded. It does represent an encumberance because its binding a legal obligation on the grantor (landlord) that binds them to selling you the property at the agreed upon terms.

So the original Lease Option can be filed with the county registry of deeds? I learn something new daily, love it!! :)

@David Kidwell,

1. First of all see an Attorney. Adn second of all see a RMLO.

You can cloud the title with a

- memorandum of option

- performance mortgage - see link below.

https://www.dropbox.com/s/pni60h5dhdt0xs5/performance%20mortgage.rtf

2. this item makes your lease option invalid - " Our lease option agreement states 1/2 of the monthly rent goes to principle. so $6k over the course of 24 months will be applied to principle."

This is a financing arrangement under Dodd Frank and the SAFE Act. @Bill Walston ston ston Gulley has said this "ad nauseum."

And there is nothing to prevent the seller from selling the property "subject to" the option.

3. See a RMLO (Registered Mortg Loan Orgin) and perhaps look at a Lease Purchase - delayed sale, and open an escrow with escrow instructions along with a Sale and Purchase Agreement.

4. I would buy it sub2, and promise to refi and pay off the the seller in 3 years.

5. Below is a taxation issue your seller is facing, not Dodd Frank.

-------------------------------------------------------------------------------------------------

Your sellers are exposing themselves to a "Disguised Installment Sale" to the IRS.

Here are parameters of how a lease option can avoid being re charterized as an Installment Sale.

Where the parties want to avoid having the lease/option recharacterized as a sale, the overall planning strategy is to avoid or minimize the above indicators of a deemed sale as follows:

1. The rent should be at or near fair rental value. Breece Veneer & Panel Co., 232 F .2d 319.
Get a written opinion of the rental value from a qualified real estate professional.

2. Keep rent credits toward the option price to a minimum.
Generally, 20% or less is considered reasonable.

3. The option price should be at or near fair market value.
Get a written opinion of the market value from a qualified real estate professional.
Breece Veneer & Panel Co., Ibid.

4. Try not to tie-in substantial lessee improvements with the option exercise.

5. Do not pass legal (or equitable) title to the optionee\lessee\buyer.

6. Demonstrate that you intend to do a lease-option and that you believe the rent and option price to be reasonable. See Benton, 197 F.2d, 745; Lester, 32 TC, 711.

Use arm's length lease-option documents along with the counsel of qualified professionals.

@Steven Hamilton II

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com

@David K. good input from all above, and make certain the numbers are set so the lender will accept them at the time of finance.

I did a post on BP on "how to set the numbers on a lease option" that will help you. You can just search for it.

I just lost a long post about all the things that are a mess here.

DO NOT USE THAT PERFORMANCE MORTGAGE! That is not a mortgage, it's a false lien if used and filed, it's total BS. The obligation of a seller is not a mortgage nor can you have them convey a security interest as if they made a loan or mortgage, these are two totally different worlds.

I believe Brian meant to say 10% not 20% as credits.

Do not use the words "Rent Credit" search BP for the financing issues. You'll have problems later in financing if you even whisper those words, use the option price. Since you are financing anyway, finance the option price, it's commercial!

A lease agreement is irrelevant to future financing if it has no credits. So don't even go there.

You would probably be better off paying less than market rents and paying more on a financed option. If the rent appears reasonable and has no credit involved a lender will simply go by the option/purchase contract.

And, you're trying to force a lease-option in a situation where it isn't even applicable if you're doing work on the place! Get to an attorney. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by @John Jackson :
@David K. good input from all above, and make certain the numbers are set so the lender will accept them at the time of finance.

I did a post on BP on "how to set the numbers on a lease option" that will help you. You can just search for it.

For the "stumped" folks here looking thru 1 billion posts, here is John's post.

http://www.biggerpockets.com/forums/83/topics/79732-how-to-set-the-numbers-on-a-lease-option

And see my "Business Plan for Low Equity Deals."

http://www.biggerpockets.com/forums/87/topics/128458

look down the 1st page, my second post.

Medium banner reiskills 997   copyBrian Gibbons, REISkills | [email protected] | 818‑400‑3046 | http://MyREISkills.com

Originally posted by @Brian Gibbons :
@Bill Gulley that info came from my CPA of 20% or less rent credits, based on US federal tax court law.

Dodd Frank and SAFE Act are different issues. They are not even cousins.

The IRS isn't in charge of assessing financed transactions except as to tax matters, your CPA probably isn't versed in originating financing agreements, that's a bit out of the domain for a CPA and the Federal Tax Court isn't the proper jurisdiction for RE transactions except as they pertain to taxation.

They were also speaking to what not to exceed, not what the customary or average credit was being allowed under options, 10% of "firm" equity places a buyer/borrower over the hump for the financing required, most contracts shoot for 10% equity to be acquired.

Dodd Frank incorporates the SAFE Act by specific reference. Not sure if that is a cousin relationship, a step child, an adoption or a sibling, but they sure play together. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Thank you all who have answered. I have been recommended a great RE attorney in my area I think it will be money well spent for my first LO deal.

Also thank you for the links Brian, I will review them after this post.

David

Well, I will have to disagree.  A Performance Mortgage is not financing and doesn't pretend to be.  A mortgage secures the Note.  The Note is the financing.  A mortgage can secure the performance of many things like an option too. It is a wise instrument to record for the investor with a seller in a sandwich lease option.  A Performance Mortgage, if anything, can make the seller deliver a clean General Warranty Deed at close.