MY ATTORNEY WASN'T TO POSITIVE ABOUT LEASE OPTION ASSIGNMENTS

19 Replies

I had a meeting with my attorney today I wanted to have some contracts draw up for lease option assignments. He told me without being a realtor it could be risky. Is anyone in Massachusetts using lease option assignments as a strategy? have you had any problems with the attorney general? My attorney is going to look into it but I figured I'd ask.. My phone is ringing from motivated sellers with little equity and cant sell without bringing cash to the table, so I need to know how to do this without getting into legal trouble

Thanks 

@Christopher Moran  - I'm not an attorney, and this is not legal advice.  But I know that there are a lot of people using this strategy around the nation.  And several coaches who are coaching it and providing forms (they're not attorneys either though).

Here's my biggest concern about this strategy.  Say for example that you get a lease option under contract with a seller.  Then you sell (or assign) your lease option (or you do a sandwich lease-option).  Then, lets say that 6 months later, your buyer quits paying and does $10,000 worth of damage to the house.  Who gets stuck with the repair bill?  Original sellers are probably going to be giving you a phone call.  I don't know, but that's my question.

The attorney likely doesn't want to be involved in drafting contracts on types of investing that can suck them into liability claims and future litigation.

It's just like closing attorneys handling vanilla purchases of houses. The paperwork is almost the same each time and you crank them out for the most money with the least risk.    

I agree with @Joel Owens  .   Attorneys are deal killers...with all due respect to my former colleagues. 

It's aggressive but you have an equitable interest.  

@Christopher Moran  

@Bryan L.  

I bailed out a small group of investors in PDX who used this strategy oh ten years or so ago.  The issue was that some of the people that they did leases with on advice of their council recorded them.. now these were standwich deals.. as the original lease was paid to them  IE they made some positive cash flow of the B transaction and then they paid the A.

Well these types of deals have a way of going south at the rate of 50% or better.. so as they started to crumble one after another they were soon in negative cash flow situation and could not make payments. So the original seller was screaming at them... They usually had moved on and thought things were rosy they just dumped their house for more than they could have sold it for.. Only to find themselves with a tenant living in there that THEY NOW HAD to do a JUDICIAL foreclosure to get them out because of the recorded lease.. And some were wrap land contracts but both in ORegon have the same remedy to get the people. out... I came in a negotiated with the sellers on these guys behalf as they were going down quick.. Some sellers turned them into the AG and they issue C&D and fined them.

So like all things about RE its great when it works but its tough when it does not.

Why make a business out of playing with property with no equity?  I see that all the time I guess I have not seen that class that touts this as a big money maker

@Bryan L.   I've read the posts, watched video's learned A lot from the people using this strategy,, but haven't met someone in MA using it. Attorney wasn't to fond of any owner financing, especially sub2.

@Jay Hinrichs   Thanks for the post,, bad situation to be in!!

@Joel Owens  @Douglas Dowell  thanks for the posts guys.

well the good news is my  partner and I close August 15 on our first property !! 4 acre lot were going to subdivide, there's a single there already that we'll rent out while we put the the other lots together.

thanks again

That's what the IRS will say. You will lose the depreciation expense deduction and othe key investor benefits. But the money can be good...

Christopher, the reason your attorney wasn't crazy about lease options and sub2 is that many of these transaction are in violation of Dodd Frank.  Dodd Frank is a national law that was passed several years ago, but the conditions that affect these types of transactions just went into effect in January.  

These techniques have been taught for years, but I don't know of any guru who has updated their material to incorporate the new restrictions imposed by the new law.  So while people may in fact be doing it, it doesn't mean they are in compliance with the law.  While attorneys may be deal killers, ignoring them in this case could land you in a world of hurt.  You could go along for years without a problem, but the minute there is a complaint by a tenant, all your transactions will be subject to scrutiny.  

You also talked in another thread about rent credits.  These are specifically prohibited under Dodd Frank.  

Since I'm not an attorney, I am not providing legal advice, but if you want referrals to attorneys in MA that many savvy investors use to keep them out of trouble, send me a pm.

I also suggest you do some searches both here on BP and on Google for Dodd Frank and lease options.  There was another thread within the last few days her on BP about lease options, so you can search that topic too.  

Perhaps when you find a deal with no equity, you can do a short sale.  I can send you to a good short sale negotiator also, if you don't want to hang on the phone all day on hold waiting for banks.

It could be interpreted, and there has been case law, the an option constitutes equitable interest assignment and therefore violates Due on Sale Clause it the lien holder discovers.  There shouldn't be any issue on free and clear property, but I would highly advise to clear with the lien holder in case there's underlying on the property, unless you have the cash sitting in the bank to be able to cash out the lien if the bank calls.

Good Luck!

@Ann Bellamy  , Thanks for the post. I spent some time researching lease options, Dodd Frank, rent credits etc. that's what lead me to my attorney seeking advice.. After reading up on the new laws Lease options assignments didn't look to promising. He's looking into the process and will let me know. Creative financing is a great tool but I'm not going to put myself in legal trouble..

@Ben Leybovich   Thanks for the post

Ok I am going to be a contrarian.

I like lease option assignments, sub2 and wraps as acquition strategies for low equity pretty houses, and I am from Mass.

re: lease option assignments here is my Letter of Intent for Lease

https://drive.google.com/file/d/0B410Qg6zTH1EWERSb...

You may want to be licensed to flip lease option contracts.

I also like sub 2 and a note for equity w a mortgage for mid equity pretty houses.

And I like installment sales for free and clear pretty houses, creating a good win win note with the seller.

@Peter Fortunato (from Hingham MA) and @Jackie Lange and the late Jack Miller will tell you all about these strategies.

Lastly there is no "due on sale jail", the acceleration clause in mortgages give the right for the note maker to call the loan due. If the payment is made, chances are slim they call the loan due. I have never had a seller financed deal had the loan called since 1986.

If you want a real estate lawyer's discussion on DOS, see http://eckleylaw.com/article_fullstory.asp?ID=85

I find it illuminating.

@Brian Gibbons  

  Where the guys here in PDX got in trouble was they bought sub too or on lease options or land contracts. then REsold on on contract or lease option to owner occ's.. with the low down no credit we finance strategy... WEll they did about thirty of them. and more than half the B buyer defaulted within 20 months.. and they got in a jam.. Plus the land contracts and lease options got recorded which clouded title. So depending on which side of the transaction you are.. But I can tell you for the original sellers it was a nightmare trying to clean this all up.

@Christopher Moran    reading your post, what your attorney is referring to is not Dodd Frank or Due on Sale etc., he's referring to Occupational Code. 

You would want to read up on your states Occupational Code.  Done properly, there shouldn't be a problem. Our states real estate commision spent 1 year on 2 separate occasions reviewing everything we do, and both times said we were operating within the law.  

In the aftermath of the great recession, many states have recently changed laws regarding real estate. For sure, foreclosure laws have changed. But legislative impact includes "creative" methods like lease options and installment sales (contract for deed). Make sure you know if what you are doing is regulated. Examples (in NC... don't know about your state):

http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/ByChapter/Chapter_47G.html
http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/ByChapter/Chapter_47H.html

@Chris Martin  

@Brian Gibbons  

Chris very good post and the statue's in NC are very clear.  And I love reading them at 5 am PST>

Its clear in your state that these MUST be recorded and if they go TU then to get the defaulting party out of the house if they will not mutually terminate requires court action.

And from my experience lease options ( at least on entry level housing as I have done a few on my personal residence in the past but those were 500k plus homes with 50k plus up front payment) the default rate is sky high, and its really no more than a glorified rental.

The end buyer has NO equity to speak of little to no down.. I know there are those out there that make this a business model and try real hard to take the lessee and make them owners.. It would be great to see what the success rate of converting those buyers to owners is. My personal experience here in Oregon was I did at least 50 of them before the laws changed and  two ended up buying the rest all defaulted over time and moved on.

To be fair though I did not do anything proactive to help these folks refi it was up to them to figure it out.. I just bought sub too and used these as my rental portfolio which was eventually sold off. However I would not buy anything that did not have at least 20% equity day one.. I would not touch anything underwater or no equity as I had no desire to get into the short sale bizz ( back then it was much more difficult than I think it is today).

@Christopher Moran  

Or someone in MA.  I am in Cape Cod, Sandwich, MA and would be interested in more info about your lease option transaction experience, due to your experience in MA.   My property has a small buildable lot  (that cannot be subdivided) to help build equity for the prospective tenant buyer. It is mortgaged and I don't want to do a deal with someone who is not wanting to take possession of it himself i.e.an assignment flipper.  I could possibly do a partnership with someone who has construction skill and funds to do the development without purchasing it outright.    I am not finding any luck finding an attorney to facilitate this.

@Susan Dellea  

"I am not finding any luck finding an attorney to facilitate this."

I'm not clear what "this" is.  Can you specify?  Maybe I'm dense, but I've read it twice.  Do you mean you want to sell the property using a lease option? And you can't find an attorney to help you draw up a lease and an option contract?  

You will need two separate contracts, and none of the rent money can apply to the purchase of the house, since Dodd Frank went into effect, assuming you are selling to an owner occupant and not a company.  If you want an attorney referral, I can help you, send me a colleague request with a private message.  

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