Taking Over a Lease Option?

9 Replies

We have a proposal on the table to buy a property with a lease option in place. We would be buying the property for $30,000 and the lease option is $700 per month rent until Jan 2016 when the tenant is buying the property for $40,000.

My question is, does this language make sense, and what should I be looking for when going to sign the paperwork (aside from looking at the property, etc)? Just want to make sure we are not throwing 30K down the toilet and that the paperwork is in order, etc. We have never dealt with this kind of transaction.

Here is what he wrote, along with sending over the 4 point inspection:

"Lease with option document as executed by said tenant will be presented in person for privacy rights of tenant.

Be advised, any and all executed notarized recorded wet signature documents will be submitted in event of junction to performance.

Tenant/Buyer is under contract as Lease with option that could expire January 2016 "36 months" effective Jan 2014 for $40k or to be renewed for 24 additional months at $700.00 in the event of nonperformance of said option.

Direct deposit on the 3rd of every month."

Thanks,

John

Simple....have your RE att'y looks over docs to protect your interest........CYA.....Matt

@John Barnes

The VERY best thing you could do is get an attorney in Orlando to review your offer.

I have worked with lease options for over 30 years, and since 10 Jan 2014 many things have changed.

You could have an illegal lease w option via the IRS (disguised installment sale) or via Dodd Frank (not underwriting the tenant buyer as per the Ability to Repay Rule)

Please do not as for legal advice on a forum, and spend a few 100 bucks with an attorney.

@Bill G.  @John Jackson @Douglas Dowell  

I agree with @Brian Gibbons   and @Matt Reed    have a GOOD RE attorney review the documents that are in place currently between the TB and the seller. 

I would verify that the docs don't state the seller can not sell the rights or property to another person during the LO terms.  Also know who's paying what closing costs.  The cash flow should be good though.  Make sure the TB knows what's transpiring. 

John, you can buy a property that has an outstanding option held by another party, so long as there is no deed restriction. That's clever investing as most think an option locks up the property (guru stuff).

When you buy a property under contract, you need to accept a Special Warranty Deed, that "excepts out" the outstanding lien interests, when that option expires you'll have the same coverage afforded by a General Warranty Deed. See your attorney to draft the deed language.

I didn't understand what the heck those first three points were.

An option may not have any performance required by the optionee (buyer) in connection with the buying or condition of the subject property.

You have the issues Brian mentioned as well.

An option that provides for any renewal is simply considered as if the renewal will be provided as to a disguised sale and the same with any lease under the due-on-sale mortgage matter. A one year option with an option to renew 4 times is a 5 year option in reality.

Options must have an expiration date, it's not that your option "could expire" it will expire, there is not really a default in performance as no performance can be required.

I'm not picking, but 1. I don't know how the option was constructed, but 2. how you describe the arrangement in written materials can haunt you.

You should obtain an estoppel letter from that tenant, they must be notified as to the tenancy changing, they will also have serious questions as to how you can buy the place when they have an option, so make it clear that their option will remain in full force and effect as agreed. But, you need them to acknowledge their understanding of their lease and the option arrangement. You attorney can best do this without having them hit the roof I would think.

If you were writing those "points" in a sale contract, I'd suggest you clean up the jargon, "wet signature" being "original documents"....

Original Agreements executed in connection with the subject property shall be provided as recorded.

It is understood that the tenant holds a valid option that may expire on Jan 1, 2016 unless renewed with additional consideration of $700.00 as agreed which will extend the option term to Jan 1, 2018, at which time the option will expire.

That might be a little longer than you have, but it's clearer.

Just saying using terms like "nonperformance" implies performance is required, you don't want to go there as it implies a contract to purchase.

You option appears to have been originated prior to the effective date of Dodd-Frank, have your attorney verify that, if so, I don't see your involvement with that origination, this isn't a note unless there is some credit allowed toward the purchase price from any payment made. Then you could have a financing agreement.

The $700 can be an issue as a payment over the entire term contemplated, intended, so again, have your attorney to review that matter with an opinion.

Hopefully, your option and the lease are under two separate documents, unrelated. Performance under the lease can not be tied to the option, otherwise you may have an installment sale.

Terminology and phraseology are important in RE, words used can imply something not intended, Sounds like a good deal, good luck!  :)    

Thanks everyone. 

@Bill Gulley  - I'm from Springfield MO originally, cool to see you are as well!

@John Brown  

Great, I was born here, LOL, so was my father! So, we are "from" here I'd say. I use to hunt where Battlefield Mall sits! Most likely we have bumped into each other, at least family probably has. Good luck down there, it's too humid for me! :)

Interesting. The seller told me I will be purchasing a Warranty Deed from him, and will be transferring the deed and options contract to me. Basically he said it's just that simple. Does this seem accurate to anyone? 

That will be up to the title company, if the option has been filed it would cloud title, if the TI company wants to insure over it, that's fine. Good luck :)