Lease Options SAFE Act and Dodd Frank

25 Replies

LO's and Dodd-Frank have NOTHING to do with each other.

A pure lease and a pure option that is not intertwined or dependent on each other is not involved with Dodd Frank or the Safe Act.

Once you make performance of the lease subject to the lease or or use rent credits as a financing arrangement, now you have issues Dodd Frank or the Safe Act.

@Bill Gulley  may want to comment.

An option alternative is a ROFR, see http://www.biggerpockets.com/blogs/3/blog_posts/38...

Geeez, no, I don't really want to comment......again.

If performance of any kind is required of the optionee (buyer) then you do not have an option, you may have an installment contract, if you do and payments are being made that are ultimately credited to the sale price you have financing.

If the optionee is living in the property, it's a consumer financing arrangement and Dodd Frank applies.

Peter posted a more recent post that proposed credits to a buyer, that is financing and it's covered, there are still exceptions, but not so much for investors dealing in RE. He also posted predatory issues with that post that are not acceptable. Predatory dealing and lending have to do with Dodd-Frank but are stand alone issues as well.

If you have an option without any financing arrangements, then the DF Act will not apply, except if it is a predatory issue, DF is overseen by the CFPB as well as aspects by HUD, but generally, paying a lump sum for an option is not an issue. Peter changed his tune in the other thread and so without providing credits he would then be in compliance......but there may be other issues.

Now, I sure hope this tiff can be over between you guys and let this stuff die a natural death in the archives. :)

@Brian Gibbons    @Bill G. 

Hi, so if I'm understanding what is being said here. I take it that:

1. If I have a regular lease and an option to buy addendum attached, I cannot give my tenant buyer any incentives at all?

2. I cannot give the tenant buyer a rental credit or deduct any portion of the monthly payments from the sales price if they decide on their own to exercise their option to purchase?

3. My only option is to do a first right of refusal which is totally different than a lease option and not in the favor of the tenant buyer being that the Owner is not actually guaranteeing they will want to sell at the end of the term. It just says they might feel like selling and if they do the tenant has the first right to buy it.

4. There is no way at all for the tenant buyer to win and have any incentives without violating the Dodd-Frank.

I'm confused because I was always under the impression that lease options had nothing to do with Dodd-Frank. Now I'm reading a thin line between what is acceptable and what isn't. I'm not seeing this being fair to the tenant buyer and I'd like to know how I can offer them value without violating any rules. 

I'm dealing with lease option assignments daily and anything said here can help.

Thanks BP Community!!

Originally posted by @Bruce Carter:

@Brian Gibbons    @Bill G. 

Hi, so if I'm understanding what is being said here. I take it that:

1. If I have a regular lease and an option to buy addendum attached, I cannot give my tenant buyer any incentives at all?

2. I cannot give the tenant buyer a rental credit or deduct any portion of the monthly payments from the sales price if they decide on their own to exercise their option to purchase?

3. My only option is to do a first right of refusal which is totally different than a lease option and not in the favor of the tenant buyer being that the Owner is not actually guaranteeing they will want to sell at the end of the term. It just says they might feel like selling and if they do the tenant has the first right to buy it.

4. There is no way at all for the tenant buyer to win and have any incentives without violating the Dodd-Frank.

I'm confused because I was always under the impression that lease options had nothing to do with Dodd-Frank. Now I'm reading a thin line between what is acceptable and what isn't. I'm not seeing this being fair to the tenant buyer and I'd like to know how I can offer them value without violating any rules. 

I'm dealing with lease option assignments daily and anything said here can help.

Thanks BP Community!!

 Your #1 & #2, that isn't what was said, you can apply payments to settlement costs, up to 3% of a sale price, but that is not reducing the sale price. Incentives to act can be applied in many ways, you can not accept any payment that is applied to the agreed sale price reducing that price, that is financing the sale price.

FRORs are not magic bullets, they are often spun to achieve a purpose they don't, only an owner can give a FROR and it is limited, it needs to have a time requirement to perform. They don't really have teeth. A FROR doesn't state a price, if a price is stated that can be seen as an option being agreeable to a seller, if you finance a FROR, let's look at consideration for that right, the value.

It's really worthless, the value can't be established other than from an intrinsic value which can not be measured in a market, simply being notified that someone can have a future opportunity at some unknown price has no standing for valuation. If you talk someone into giving $5,000 for a ROFR, you'll likely be viewed under a predatory microscope. If you apply that to a stated sale price, you have a non-binding sale agreement that is dependent on a seller to act, agree to sell, if he never makes that decision, the seller just took $5,000 without anything as a valued consideration, how would you justify the intent of not just taking money under some false pretense?

If you take payments for granting a FROR, you're financing that right, that is not a RE financing issue at that time (it is as to financing something that has little value) but if later on, the seller agrees to sell, then reduces a stated sale price based on payments received, then when that credit is applied, you have a RE financed transaction. Payments made prior to contracting for any sale that reduce a sale price of an asset is financing that sale.

#4. An Optionee (your tenant buyer) can pay any amount for an option price, that option price may be applied to the sale price, but that payment is paid as a lump sum, it is not a series of payments at anytime, paying an option fee is not financing it. Dodd Frank does not effect transactions that are not financed.

You mentioned making an option as an addendum to a lease, not the best way, make the option a separate agreement entirely. Keeping the agreements as separate as possible will avoid future financing requirements that can keep a buyer from qualifying with the expected equity they may have acquired by agreement.

If ther is a stated option price, say $5,000, and it is made as a sales contract that may be exercised in the future, that sale contract may have a down payment requirement when the option is taken, that would be additional money paid under the sale contract, it could be earnest money, it too can be a lump sum required, but you can not accept payments as that would be financing toward the sale price.

Now, can an optionee reduce the sale price over time? YES! They can pay toward a down payment that is not a structured requirement to pay, if it is voluntary without any obligation to pay it is not financing.

Can a seller reduce a sale price at settlement? YES, that is done everyday somewhere, things arise that in order to keep a transaction alive, the seller reduces the price, this can be done to the price or as credits toward settlement expenses. So long as such reduction is not related to making periodic payments of any kind, that is not financing.

An option may not make any requirement for an Optionee to perform anything other than paying an option price. You can not require they lease for any period of time, you can't require them to perform any maintenance or repair, you can't require them to send their kids to a certain school or take a specific class.

If there is any required performance, you don't have an option, if you don't have a true option you can't have an option price, if you took money it becomes consideration toward a sale arrangement, as we recently saw in another thread, where an option messed up and all the money paid was ordered to be refunded!

So, you shouldn't do an option where leasing for a certain period allows the sale price to be reduced, that is performance required with the benefit of a lower future price, it's financing from lease payments.

Last point, you need to understand RE basics, what rights in title are held and understanding that you can only convey what rights you are in title to. You can't agree to sell a property you don't own, you can agree to sell your rights to purchase a property but you aren't selling the property. There are advertising laws concerning RE and you need to be in title to the property to advertise the sale of that property.

Need to do some searching on these topics, they have been covered before, careful what advise you take and see your local attorney before you leap. :) 

    

@Bill G.  Thanks Bill you have been very helpful. I will double check everything with my attorney before moving forward.

Can someone tell me if this is a violation of Dodd - Frank? This was my first deal and I put it together in Sep 2014. It is a sandwich lease. If so, would it simply be a matter of writing a new L/O between me and tenant buyer, and just adjust the sales price to what it would have been as if it had the credit?

Details:

Between seller and me:

I agreed to purchase the property for $120,455, with $10,000 down due when I found a tenant buyer. The remaining balance of $110,455 will be paid at the time the Option is exercised by the tenant buyer. I structured the lease for 1 year term, and auto renew 2 more times unless either side decided to cancel in writing with 30 day notice. The lease and option are separate on both side of the deal.

Between tenant buyer and me:

I agreed to sell the property for $160,000 with a $15,000 non-refundable down payment. The monthly lease amount is $1,000. The original agreement was that the tenant buyer put $20,000 down and pay $950 a month, but they indicated they needed money to do a few things in the house. I agreed to adjust the down payment (-$5,000) and the lease payment (+$50) to accommodate this request. I also agreed that if they pay on or before the 25th of the month, I will credit them $100 towards the purchase price. If it is received later then the 25th, no credit will be applied. This is in contrast to the 5% late fee I would charge if they paid on the 5th or thereafter. 

Here are the figures:

Between owner and me:

$120,455 - Purchase Price

-   10,000 - Down

$110,455 - Remaining

Between tenants and me:

$160,000 - Purchase Price

    15,000 - Down

-     3,600 - $100 credit for 36-month

$141,400

Expected Proceeds:

$141,400

- 110,455

$ 30,945

+ 13,950 - $387.50 x 36 month

$ 44,895 - Net profit if option executed at end of 3 years

@Andrew Hartzel   @Brian Gibbons would be the best person to ask. I have never attempted to do a sandwich lease. You should always involve your Attorney to oversee these deals and sign them at he or she's office. Not only for matters of clear title, but just to be sure you are doing things the right way. So either Brian Gibbons or @Bill G. can answer this question I'm sure when they have the time. 

In my understanding is that you have some issues...

A few things I notice. You have to be very careful and not use the word down anywhere. People view this as down payment in which a down payment means ownership interest. Use Option Consideration

As far as the credit goes I have never given credits , but my understanding is that its a no no if you want to stay away from issues with Dodd Frank Act. The way I feel is they have some sort of credit issue and therefore pay a premium in rent. However, I don't inflate the purchase price. I put it at current market value.

Is there any 3rd party information showing the value of the property to support the value? You may get into trouble if you value the property at an unrealistic purchase price. In most cases the courts are going to be on the tenants side.

In my contract it's referred to as non-refundable lease option fee. I took it to a lawyer and even though he was really smart, he had very little understanding of the type of deal I was trying to put together. He wanted to re-write all my contracts, and was preaching traditional purchase. He almost took me out the game before I got in. But he looked everything over and didn't really have any issue with it. In his words he said it looked like I had a pretty sweet little deal worked out.

So my question in regards to Dodd-Frank is, if I am giving rent credits and it puts me in the realm of Dodd-Frank, what are the consequences? Does it mean I would have a hard time getting rid of them? The total amount of credit is $3,600 which I would have no issue giving back if it became an issue. 

As far as purchase price and fair market rent, they are both under. The value (comps from realtor, and other sources such a realquest.com, homesnap, etc.) all put the value around $175 - $180K. I sold it for $160K. Fair market rent is $1,200, I'm only charging $1,000. I know some may say, what were you thinking, but it was my first deal, and I didn't want to set the tenant buyers up for failure nor get myself in trouble by taking advantage of their situation.  

I also ran a title check which came back clean.

I personally feel you done well and weren't trying to scr*w anyone over which should help if anything arises. But how knows how the courts see it, if it ever would get to that point. I feel if a person is doing things in good faith and can prove it , it will hold some value but doesn't mean you can't get slapped on the hand. 

The way it sounds is this was a great learning experience and the next one you will have down to a T. :)

@Andrew Hartzel

Andrew just commenting towards the Attorney issue. This means that you have to find a new Attorney. The best way to find an Investor-Friendly Attorney is through referrals. You should go to your local REIA and join a local meetup group on meetup.com. This way you can blasts blog posts and email requests to people who are local for resources. You could also search for topics regarding Investor Friendly Title Companies or Attorney's in Denver Metro Area here on Bigger Pockets or start a new thread yourself.

I last spoke to my Attorney about Dodd-Frank when it first started and he had some answers for me and as far as I knew lease options were exempt from Dodd-Frank. Now that it's been a year I'm seeing that there is a bit more to it and have a scheduled conference with him tomorrow based on my new findings on the subject. I'm sure he has some new information for me because he is very good at working for unconventional investors. I found him as a referral on a local wholesalers FB page. I have also seen him mentioned in high regards here on Bigger Pockets by other Investors who do very savvy and crafty investor real estate transactions. So you have to do the work to find a new attorney. You should also try and at least have 3 of them. My attorney went on vacation for a couple of weeks one time and I tried to find a quick fix fill-in and I ran into the problem you are having now. Someone who isn't familiar with working with Investors who use unconventional methods to purchase their real estate. They tell you what you are doing isn't right but that is because they are used to dealing with conventional investors who just pay all cash in full for their investment properties. 

I only just revisited wholesaling lease options recently again and had been working on other projects. So I will have to get updated by him. I was able to get him to agree to a discount price for signing these deals with the tenant buyer and landlord at his office. I find that the seller and landlord don't mind splitting the costs half and half for a safe closing so that it doesn't come out of your pocket. Worse case scenario is you would have to pay the landlords portion. To give an idea of how much of a discount I got here in the DC Metro Area so that you can try for the same. I was charged $1,400 for a Installment Sale deal, but able to get a flat rate of $700 for my lease option assignments. That is only $350 for my tenant buyer and landlord when split in half for a piece of mind. It's worth it for you to handle all deals with your attorney. First, you have to find the right ones. 

Good Luck and I hope you can get the info from the gentleman I suggested previously.

Lots of chatter here I see.

@Andrew Hartzel  

IMO:

Sept '14 Dodd-Frank was in effect, prior the SAFE Act was effective (DF included the SAFE Act).

Yes, you are financing by allowing credits, regardless of what you call an amount, it reduces the sale price. If the buyer did not go through a licensed mortgage originator, you contract would be in violation unless there is a state exemption as to the number of transactions, such exemption may not apply to a dealer, someone doing RE as a business.

Besides DF violations, there are predatory dealing and financing issues, your sale price is 33% of your purchase price. Now, that looks like a sweat deal as your attorney said, I doubt he is current on the new predatory issues of consumer financing with owner (buyer) occupied homes.

If you can show that your purchase was in fact a distressed sale, that the seller was dumping it under some distressed situation, then you may have purchased at a distressed sale price (what investors here call buying under market value). Then selling at market value is fine, you're entitled to buy low and sell at a reasonable market value.

However, if your seller met the definition of market value in their transaction, they advertised it, there was exposure to the market, etc., then you bought it at market value, regardless of perceptions of value, what it sells for is the market value.

Next issue, regardless of what you pay, if it is at or near market value, the next question is  how is the higher sale price justified to the end buyer? If you didn't touch the property, didn't cure some title issue, didn't effect marketability or use, then what made the property more valuable? 

General Business:

In any business, price is driven by economic factors of value, RE is no different. Predatory dealing is taking undue advantage of another, charging more than the value provided in consideration of the money exchanged.

When a service is performed by anyone, your doctor, attorney, CPA, trash man, painter, lawn guy, fees for services must be in line with similar services in that industry, if fees are excessive as to acceptable practice they may be seen as predatory or gouging the consumer. Fees for services vary for any practitioner, a heart surgeon demands a higher price than a generalist or your chiropractor, it is based on education, costs of acquiring higher degrees of expertise, a successful criminal defense attorney may charge more due to his success of providing greater odds against going to jail. But, everyone who deals in business is held to standards of fairness, providing consideration that is justifiable for the value received.

Real Estate:

In real estate, the facilitating of a transaction, flipping a contract, doing some paper work that puts a buyer in a property or leases that property is well established, historically that service is measurable in the market, it is pretty much the fees paid to a Realtor or RE Broker. That is what RE Brokers do, facilitate the transfer of property rights, if anyone does anything to effect the same exchange, then the value can be seen as being close to what is fair and equitable for that function. Joe can't charge 3 times what is reasonable simply because he was able to get a buyer to agree or because he is Joe. To go beyond that fee level, Joe needs to add additional value.

I have seen here on BP where investors claim to bring value to the deal because they located the property, the negotiated a better price, they devised the transaction.....well, that is exactly what Realtors do! None of these will be a justification for higher profits.

There are intrinsic values that can apply, I might sell Elvis' Caddy for $200K more than the blue book value, it's a collector's item, you might have that in RE if a property can be shown to have been owned by a famous person, but intrinsic values can not be measured in the market and therefore are not used in valuation of real property. You aren't Frank Lloyd Wright, your property has no intrinsic value to even be considered as to its uniqueness.

Now, remember what I said about buying a distressed property, if the deal isn't taken at a market value then there can be room for profit to another buyer.

On the buy side, you can also be dealing in a predatory manner, mislead a seller into thinking a property is worth significantly less than it is.....is simply cheating the owner out of equity. That isn't to say you must offer a market value price, you can offer anything you like, just make the offer, but use prudence in how you might justify that offer if you justify it at all. If a seller accepts that offer, then you might get a heck of a deal, but know that a transaction meets legal requirements to an exchange when a buyer and seller have equal or similar knowledge, where one party doesn't have apply undue influence or have knowledge that is significant to that exchange that is kept from the other party.

So, in real estate exchanges there are acceptable value ranges for services and improvements. You can find trouble from dealing on either side, buying or selling, you can be seen as messing over a seller or a buyer. The key is to justify prices within that range.

Gurus base their information on predatory dealings, trying to show buying "under market" and selling high. They skip basic business aspects of value exchanged as it contradicts what they are trying to sell.

So, back to Aaron's 33% gain, that is way above the 10% (6%) a Realtor would normally charge for effecting a similar transaction, in the best deal, a Realtor might take a buy side and a sale side on one property, at 12%, so 33% is exploding with predatory aspects.

Now, good for you, you got a valuation from an independent party. That helps you on the sell side, but, what about the buy side, where does that put you since you didn't improve the property? Claims from sellers are rather rare, but they happen, more often or as much than a bank using the due on sale, sellers may back out, try to fight the deal once they learn they got cleaned out. But, if they were informed, they had their reasons for walking away, then the flavor changes. I can see a seller walking with a straight sale, accepting a sandwich lease option and walking away is a bit harder to understand, but it may happen.

As a newbie, you seemed to have done well, just like the gurus suggest, your attorney doesn't seem to be aware of recent issues, but you probably made all the newbie mistakes you could have here, compliance wise, I see issues.

Mistakes include allowing a tenant to do repairs, you're in violation of IRS code as to depreciation requirements and deducting costs, you aren't paying for them, either you or your seller are landlords, can't deduct items you didn't pay for, can't increase the basis without declaring the improvements, residential tenants can not declare such work and deduct it like a commercial tenant.

You tenant is also establishing an equitable interest by making repairs, and it's not even your property!

Like I said, lots of mistakes, nothing you might not be able to fix. Good luck! :)      

There are intrinsic values that can apply, I might sell Elvis' Caddy for $200K more than the blue book value, it's a collector's item, you might have that in RE if a property can be shown to have been owned by a famous person, but intrinsic values can not be measured in the market and therefore are not used in valuation of real property. You aren't Frank Lloyd Wright, your property has no intrinsic value to even be considered as to its uniqueness.     

@Bill Gulley  

The seller was in fact distressed - she was 2.5 months behind, unemployed, and two weeks away from her lender filing foreclosure. I was able to bring the payments current and prevent the foreclosure process (something a realtor would NEVER do). She was able to move on and relocate to where she had better opportunities, and found a job. I have stayed in contact with her and she has repeatedly stated how happy she is to have met me and helped her find a solution to her problem. She was the one that named the sale price, and will make $25K from the sell. I didn't do as some guru's suggest and take it for what she owed, even though I could have given the situation, but did not want to be predatory.

On the other side, the buyers were happy that I gave them a chance at home ownership. They owned their own place (2 bed 1 bath trailer) and have 6 kids! They both came from divorces which messed up their credit, so they couldn't qualify for a mortgage to purchase a new home. However, they had the income.I presented them with the comp info and let them name the purchase price. The wife was almost in tears when they got the house.

So based on what you are saying, I was only supposed to sell the house for $134,400 (120 x 12%), even though it is worth $170,000; and because that's what a realtor would have made? Again, as I pointed out above, would a realtor have paid out of their own pocket to keep foreclosure from happening?

The whole thing seems disheartening to hear I could be in violation, or get in trouble for predatory practices, when in fact I felt like I was performing a good deed for all parties involved while making money in the process. I guess what I'm trying to figure out is how or what is the likely hood of this going sour? If one of the parties was to have a change of heart?

My one thought on making this deal kosher is to buy out the owner, then sell to the tenant buyers on a seller financed transaction. This way they can still do maint/repairs and upgrades that they want to. I'd really like to get some advice on how to make this right, if in fact it is wrong. Thoughts?

More details always helps.

Yes, you can be afoul of Dodd-Frank.

If your seller named the price and you agreed, you're out of the woods there pretty much, however, Realtors do that everyday, keep people from getting in more trouble. You know, Realtors know cash buyers, investors too, they certainly sell to others known and can do it, probably much quicker than a non licensee as they often get expedited appraisals, title work and settlement scheduling that folks that do less business can't usually arrange.

No, I didn't say you were only entitled to 12%, in this case you pulled one out of the fire, the seller named the price, so your deal looks much cleaner than as originally posted. If your seller knows the score and is happy, you should be too!

Your plan to clean it up is a good one, first see your attorney for a short meeting, might be done in a few minutes on the phone, they should be able to tell you if DF applies to you. Then take the buyer to a RMLO to originate the deal, if DF applies. Frankly, I'd suggest you get at least some assistance from an RMLO regardless, they can originate the future loan and should give some assistance in getting that loan set up for the future. That RMLO can tell you if you need to comply with DF (they may be better informed that a general RE attorney who doesn't do such deals very often). 

There is more to qualifying your buyer than just their income or DTI ratio, it's also better to shift that liability off away from you as much as you can, the more you are involved the more you can be held responsible.

Under these circumstances, in this case, I'd say you're fine, if you get the financed sale cleaned up. Good luck! :) 

Originally posted by @Bill Gulley :

Lots of chatter here I see.

So, back to Aaron's 33% gain, that is way above the 10% (6%) a Realtor would normally charge for effecting a similar transaction, in the best deal, a Realtor might take a buy side and a sale side on one property, at 12%, so 33% is exploding with predatory aspects. 

Thanks Bill for bringing this up. I wasn't aware a person had to be cautious of the profit other than having a realistic purchase price based on comps, appraisal, or BPO. Can you give us some insight on if/how this is much different than a person say wholesaling a property for a 33% return I.e. wholesaling to investor for 26,600 which he lined up for 20k, or say we talk about a topic on the forum currently that a gentleman purchased a home for $1,000 and sold it in a few weeks getting a 1,100% return?

There is no difference on any strategy, claims of predatory dealing can apply to any transaction. The sky is NOT the limit as gurus suggest. Real estate is unique, so is each transaction.

Many factors come into play, the scope of the transaction, the price and assumptions of risk, personal and financial considerations, knowledge of the parties, how negotiations are accomplished, any misleading information relied upon, any laws violated, is it a deal that a prudent person would engage in??????

Anytime you think you might be hitting a huge out of the park homerun, you better review the deal, I know some people have no conscious at all, they need training on ethics and fair dealing as well as the relationship of value exchanged as consideration, otherwise, you should know when the amount to be made begins to exceed a reasonable level for what you actually did.

Who carries more value, the person who worked for 18 months getting a $12M project closed or the person who got a $120K house sold without touching it in 18 days ? That is meant as who has a higher business value, not personal value as an individual. Scope of the deal!

Those who don't get this stuff aren't business people and they don't understand real estate much less financing rules, regulations, laws and when poor ethics becomes an illegal matter.

Go to the Fair Trade Act, Fair Trade Commission, the Uniform Commercial Code, RESPA, Dodd-Frank, the SAFE Act, the Consumer Financial Protection Bureau, gosh, there are dozens of laws that can be applicable but bottom line, malice, ill intent, fraud, deceptive trade practices, misleading others, taking undue advantage or just plain cheating someone. 

Much of the misperceptions come from attitudes, being entitled to making some grand total simply because you bought a guru book or signed up for some program. This crap doesn't give anyone a unique degree of knowledge or expertise, doesn't give anyone a Doctorial Degree in Real Estate or Law, doesn't even carry the same weight of an Associates Degree at a local Community College. Gurus have really scammed investors.

Not only do we value what is sold or traded for value, but those who facilitate transactions need to assess their real value in the market, by their education level, expertise and experience, don't let ego overstate your true value or feel that there is some entitlement earned overnight after completing some book. Are we selling expertise (real expertise) or are we selling greed?

What is predatory is what regulators, regulatory agencies, state commissions, law enforcement, prosecutors, a judge and maybe your minister says it is. If you can't tell the difference between right and wrong, you missed out somewhere along the line. Being predatory can arise from an honest mistake, without ill intent, that is usually covered by rule, regulation and law. It's much like beauty being in the eye of the beholder and if you deal in RE, you should know what ugly and really ugly looks like. Also need to understand who might advocate ugly, paint it, sell it and promote it.

Life is not black and white, it's not step one through twenty two, business isn't black and white or a simple XYZ, neither is real estate. Mature, good judgment and ethical dealing should prevail, look for those traits in others to follow, experience and local attitudes as well as public expectations should guide you.

I know most here want to do the right thing, I can't teach ethical attitudes and won't try. :)        

More great insight from @Bill Gulley  !  

Some may view your posts as negative. I , personally, rather see both sides . Whether good or bad, and draw a conclusion on how to proceed.

Thanks @Bill Gulley ! You both have provided valuable insight and advice. I definitely know one thing, I learned from that first deal, and have not made the same mistakes this go around. Since that first deal I have been to local REI meetings, found an attorney who is working with me on my current deal, and have an RMLO that I send my buyers to for screening and qualification. Bottom line, I truly want the buyers I work with to purchase the house down the road as much as they want to, and whatever I can do to help facilitate that. The buyers from my first deal are working with my RMLO as well.

Originally posted by @Andrew Hartzel :

Can someone tell me if this is a violation of Dodd - Frank? This was my first deal and I put it together in Sep 2014. It is a sandwich lease. If so, would it simply be a matter of writing a new L/O between me and tenant buyer, and just adjust the sales price to what it would have been as if it had the credit?

Details:

Between seller and me:

I agreed to purchase the property for $120,455, with $10,000 down due when I found a tenant buyer. The remaining balance of $110,455 will be paid at the time the Option is exercised by the tenant buyer. I structured the lease for 1 year term, and auto renew 2 more times unless either side decided to cancel in writing with 30 day notice. The lease and option are separate on both side of the deal.

Between tenant buyer and me:

I agreed to sell the property for $160,000 with a $15,000 non-refundable down payment. The monthly lease amount is $1,000. The original agreement was that the tenant buyer put $20,000 down and pay $950 a month, but they indicated they needed money to do a few things in the house. I agreed to adjust the down payment (-$5,000) and the lease payment (+$50) to accommodate this request. I also agreed that if they pay on or before the 25th of the month, I will credit them $100 towards the purchase price. If it is received later then the 25th, no credit will be applied. This is in contrast to the 5% late fee I would charge if they paid on the 5th or thereafter. 

Here are the figures:

Between owner and me:

$120,455 - Purchase Price

-   10,000 - Down

$110,455 - Remaining

Between tenants and me:

$160,000 - Purchase Price

    15,000 - Down

-     3,600 - $100 credit for 36-month

$141,400

Expected Proceeds:

$141,400

- 110,455

$ 30,945

+ 13,950 - $387.50 x 36 month

$ 44,895 - Net profit if option executed at end of 3 years

Hi Andrew,

I'm reading up on DF so I ran across your post one year later.... how's that transaction going?  

I did notice one potentially major issue, if I understood your terms correctly.  You said that the seller could cancel the lease after 1 year or after 2 years, with 30 days notice.  But what would happen to the end buyer's option if the seller cancelled the lease?