How to Structure this Lease Option

31 Replies

Just came across this deal yesterday. The house is worth about 120K, still owes 116K, and has 29 yrs left on mortgage. Monthly PITI is around $850, can be rented for $950. As you can see, it's a low equity, low cash flow type of deal. I plan to have a Lease Option agreement with seller and then just assign it to a tenant buyer, and be done with it. Say rent at $850, $100 down payment and purchase at 120K. I then charge an assignment fee of 4K to the tenant buyer. But my question is... how can I make sure that 4K apply to the final purchase price of 200K, assume seller is okay with it.

@Andrew Y. That's easy, just reduce the price to $116k, that way their $4k fee has already applied to the price.

I'm not sure what @Joe Villeneuve means. I don't see why a seller can't give you an option to buy while there's a mortgage in place. That's like saying the seller has to pay off their mortgage before they can accept an offer to purchase.

Here is what I came up with. Charge consultation/service fee of 3K by finding and placing the tenant buyer in place for the seller, asking for 6K at minimum for down payment, provide lease option agreement for both parties. Seller can get 3K at least in this case, buyer can use full down payment when applying for loan, I get paid 3K. Win win win...

@Andrew Y. I hope you are a lawyer and a real estate broker. Because what you just described is both brokering and practicing law.

The tenant/buyer's option fee can not apply to their down payment, it's the fee they pay to lock in the exclusive option to buy. At most it can apply to the purchase price by reducing it. If you want it to apply to their down payment you need to sell on a land contract/contract for deed (whatever it's called in your state) and then you or the owner (if you assign) has to be prepared for the possibility of having to foreclose.

Originally posted by @Andrew Y. :

Here is what I came up with. Charge consultation/service fee of 3K by finding and placing the tenant buyer in place for the seller, asking for 6K at minimum for down payment, provide lease option agreement for both parties. Seller can get 3K at least in this case, buyer can use full down payment when applying for loan, I get paid 3K. Win win win...

 What you are attempting to describe here is a Sandwich Lease Option.  That is a great way to invest.  It involves very little out of pocket (and that for only a very short time before you get it right back), and has multiple ways of making money (3 actually) on the spreads.

Originally posted by Account Closed:
Originally posted by @Joe Villeneuve:

You can't do an option on this property with a mortgage still in place.

 Actually you can do an Option with a mortgage in place. Check out:

https://www.biggerpockets.com/forums/600/topics/58...

 Actually you can't.  Here's why.

When you buy an option, you are buying the first right of refusal to buy the property in the future within a certain time period.

When there is an existing mortgage on a property, that lender has first lien rights on that property.

Can you sell someone an option to buy, and still have an existing lien in place?  Technically you can, however it is impractical, and from where I'm sitting, unethical.  

What if the seller, for any reason, stopped making payments or couldn't continue to make payments, on a property they also sold an "option to buy" to a REI. What value does that Option have? None, when the lender forecloses. In this case, the REI bought a contract with no value.

The object of the Option is to gain complete control over the property during the option period. If there is a mortgage in place on that property, that lien limits (actually makes the Option's Control an illusion) that control the REI paid for.

Both the Loan and the Option people are expecting the have 1st position control, but only the Lender actually has it.

Originally posted by @Joe Villeneuve :
Originally posted by @Mike M.:
Originally posted by @Joe Villeneuve:

You can't do an option on this property with a mortgage still in place.

 Actually you can do an Option with a mortgage in place. Check out:

https://www.biggerpockets.com/forums/600/topics/58...

 Actually you can't.  Here's why.

When you buy an option, you are buying the first right of refusal to buy the property in the future within a certain time period.

When there is an existing mortgage on a property, that lender has first lien rights on that property.

Can you sell someone an option to buy, and still have an existing lien in place?  Technically you can, however it is impractical, and from where I'm sitting, unethical.  

What if the seller, for any reason, stopped making payments or couldn't continue to make payments, on a property they also sold an "option to buy" to a REI. What value does that Option have? None, when the lender forecloses. In this case, the REI bought a contract with no value.

The object of the Option is to gain complete control over the property during the option period. If there is a mortgage in place on that property, that lien limits (actually makes the Option's Control an illusion) that control the REI paid for.

Both the Loan and the Option people are expecting the have 1st position control, but only the Lender actually has it.

 There is a huge difference between a "lien right" on a property and the option to buy. With a Lien you do not own the property. With an Option you do not own the Property. 

A lien gives you the right to foreclose, an Option does not. An Option gives you the right to buy the property at some point in the future for a designated amount. A lien does not give you the right to buy the property, you only have the right to foreclose. A right to buy by Option is exclusive. A right to foreclose is not exclusive, anybody can bid on the property at auction, typically including the lien holder.

The option payoff also pays off the underlying lien. You do not have complete control under an Option, it is only an Option for the future until you exercise the Option. You must exercise the Option to gain complete control. An Option does not give you ownership. Properly exercising an Option gives you ownership when you convert the Option into a Purchase.

The owner always has first position of control with both the Lien and the Option below the owner's ownership. The seller can pay off the lien, can sell the property and satisfy the lien, can negotiate new lien terms, can borrow against the property to pay off the lien. The lien is a finance issue (not a title ownership).

Title ownership and financing or liens are two entirely different things and the courts treat them as such.

Someone who has no ownership on the property can sign a note for financing on a property if the lender is willing to accept it. It's commonly called cross collateralization. (I once was a loan officer.)

Respectfully.

Originally posted by Account Closed:
Originally posted by @Joe Villeneuve:

You can't do an option on this property with a mortgage still in place.

 Actually you can do an Option with a mortgage in place. Check out:

https://www.biggerpockets.com/forums/600/topics/58...

 Actually you can't.  Here's why.

When you buy an option, you are buying the first right of refusal to buy the property in the future within a certain time period.

When there is an existing mortgage on a property, that lender has first lien rights on that property.

Can you sell someone an option to buy, and still have an existing lien in place?  Technically you can, however it is impractical, and from where I'm sitting, unethical.  

What if the seller, for any reason, stopped making payments or couldn't continue to make payments, on a property they also sold an "option to buy" to a REI. What value does that Option have? None, when the lender forecloses. In this case, the REI bought a contract with no value.

The object of the Option is to gain complete control over the property during the option period. If there is a mortgage in place on that property, that lien limits (actually makes the Option's Control an illusion) that control the REI paid for.

Both the Loan and the Option people are expecting the have 1st position control, but only the Lender actually has it.

 There is a huge difference between a "lien right" on a property and the option to buy. With a Lien you do not own the property. With an Option you do not own the Property. 

A lien gives you the right to foreclose, an Option does not. An Option gives you the right to buy the property at some point in the future for a designated amount. A lien does not give you the right to buy the property, you only have the right to foreclose. A right to buy by Option is exclusive. A right to foreclose is not exclusive, anybody can bid on the property at auction, typically including the lien holder.

The option payoff also pays off the underlying lien. You do not have complete control under an Option, it is only an Option for the future until you exercise the Option. You must exercise the Option to gain complete control. An Option does not give you ownership. Properly exercising an Option gives you ownership when you convert the Option into a Purchase.

The owner always has first position of control with both the Lien and the Option below the owner's ownership. The seller can pay off the lien, can sell the property and satisfy the lien, can negotiate new lien terms, can borrow against the property to pay off the lien. The lien is a finance issue (not a title ownership).

Title ownership and financing or liens are two entirely different things and the courts treat them as such.

Someone who has no ownership on the property can sign a note for financing on a property if the lender is willing to accept it. It's commonly called cross collateralization. (I once was a loan officer.)

Respectfully.

 When the owner sells an option to buy to someone else, the owner relinquishes control over any future sales of that property during the option period.  The seller can't sell the property to anyone else during that time period, thus, the buyer of the option "controls" the purchase of the property during that time period. 

Other than that, you are correct with your comments.

However, it doesn't change the fact that if there is an existing loan, with an ability to foreclose, that potential foreclosure eliminates the Option.  This negates the "control to buy" that is the Option agreement.  If the property is foreclosed on by the lender, the Option Agreement can't be exercised...and is worthless.

Since this potential situation exists with a loan in place, to me, this means that buying an option to buy on a leveraged property is at the very least...a stupid thing to do.

Correct me if I'm wrong but shouldn't the investor with the option be paying the lender directly to ensure this type of situation doesn't occur? Whatever you agree for rent, you write two checks. One goes to the lender for the mortgage, the remaining goes to the seller. If the seller has a problem with that, walk away.

Originally posted by @David Rawls :

Correct me if I'm wrong but shouldn't the investor with the option be paying the lender directly to ensure this type of situation doesn't occur? Whatever you agree for rent, you write two checks. One goes to the lender for the mortgage, the remaining goes to the seller. If the seller has a problem with that, walk away.

 No.  The investor isn't buying the property yet.  They just have the option to buy it.  That's what they paid for...only.  The investor is making lease payments...nothing is credited towards the purchase.

I'm not referring to the Option itself. I'm saying to prevent a foreclosure due to non-payment, the investor should pay the mortgage directly each month. It would look like this:

Lets use a Sandwich Lease Option for instance

P+I: 850/mo

Rent: 1100/mo

Tenant/Buyer gives investor $1,100, investor writes a check to ABC lending for $850, investor writes a check to seller/owner for $250.

In my eyes this would be the best practice. No worries about the seller pocketing the money and leaving you and your TB up a creek when the bank comes knocking.

Originally posted by @David Rawls :

I'm not referring to the Option itself. I'm saying to prevent a foreclosure due to non-payment, the investor should pay the mortgage directly each month. It would look like this:

Lets use a Sandwich Lease Option for instance

P+I: 850/mo

Rent: 1100/mo

Tenant/Buyer gives investor $1,100, investor writes a check to ABC lending for $850, investor writes a check to seller/owner for $250.

In my eyes this would be the best practice. No worries about the seller pocketing the money and leaving you and your TB up a creek when the bank comes knocking.

 Not going to happen, if the seller is smart.  This opens the door to the investor saying this is a Land Contract, and getting credit for the payments to the bank towards the purchase.

Originally posted by @Joe Villeneuve :
Originally posted by @David Rawls:

I'm not referring to the Option itself. I'm saying to prevent a foreclosure due to non-payment, the investor should pay the mortgage directly each month. It would look like this:

Lets use a Sandwich Lease Option for instance

P+I: 850/mo

Rent: 1100/mo

Tenant/Buyer gives investor $1,100, investor writes a check to ABC lending for $850, investor writes a check to seller/owner for $250.

In my eyes this would be the best practice. No worries about the seller pocketing the money and leaving you and your TB up a creek when the bank comes knocking.

 Not going to happen, if the seller is smart.  This opens the door to the investor saying this is a Land Contract, and getting credit for the payments to the bank towards the purchase.

 @Joe is correct. In addition, You also want to be compliant with Dodd Frank. The investor has an Option, but does not own the property. If you don't trust the seller, don't buy the Option. Also, you want to keep some money in reserve to cover a potential problem like that. If the seller fails to make payments, your written agreement covers that contingency and you follow the agreement. 

Originally posted by @Joe Villeneuve :
Originally posted by @Mike M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Mike M.:
Originally posted by @Joe Villeneuve:

You can't do an option on this property with a mortgage still in place.

 Actually you can do an Option with a mortgage in place. Check out:

https://www.biggerpockets.com/forums/600/topics/58...

 Actually you can't.  Here's why.

When you buy an option, you are buying the first right of refusal to buy the property in the future within a certain time period.

When there is an existing mortgage on a property, that lender has first lien rights on that property.

Can you sell someone an option to buy, and still have an existing lien in place?  Technically you can, however it is impractical, and from where I'm sitting, unethical.  

What if the seller, for any reason, stopped making payments or couldn't continue to make payments, on a property they also sold an "option to buy" to a REI. What value does that Option have? None, when the lender forecloses. In this case, the REI bought a contract with no value.

The object of the Option is to gain complete control over the property during the option period. If there is a mortgage in place on that property, that lien limits (actually makes the Option's Control an illusion) that control the REI paid for.

Both the Loan and the Option people are expecting the have 1st position control, but only the Lender actually has it.

 There is a huge difference between a "lien right" on a property and the option to buy. With a Lien you do not own the property. With an Option you do not own the Property. 

A lien gives you the right to foreclose, an Option does not. An Option gives you the right to buy the property at some point in the future for a designated amount. A lien does not give you the right to buy the property, you only have the right to foreclose. A right to buy by Option is exclusive. A right to foreclose is not exclusive, anybody can bid on the property at auction, typically including the lien holder.

The option payoff also pays off the underlying lien. You do not have complete control under an Option, it is only an Option for the future until you exercise the Option. You must exercise the Option to gain complete control. An Option does not give you ownership. Properly exercising an Option gives you ownership when you convert the Option into a Purchase.

The owner always has first position of control with both the Lien and the Option below the owner's ownership. The seller can pay off the lien, can sell the property and satisfy the lien, can negotiate new lien terms, can borrow against the property to pay off the lien. The lien is a finance issue (not a title ownership).

Title ownership and financing or liens are two entirely different things and the courts treat them as such.

Someone who has no ownership on the property can sign a note for financing on a property if the lender is willing to accept it. It's commonly called cross collateralization. (I once was a loan officer.)

Respectfully.

 When the owner sells an option to buy to someone else, the owner relinquishes control over any future sales of that property during the option period.  The seller can't sell the property to anyone else during that time period, thus, the buyer of the option "controls" the purchase of the property during that time period. 

Other than that, you are correct with your comments.

However, it doesn't change the fact that if there is an existing loan, with an ability to foreclose, that potential foreclosure eliminates the Option.  This negates the "control to buy" that is the Option agreement.  If the property is foreclosed on by the lender, the Option Agreement can't be exercised...and is worthless.

Since this potential situation exists with a loan in place, to me, this means that buying an option to buy on a leveraged property is at the very least...a stupid thing to do.

 Your comment: "If the property is foreclosed on by the lender, the Option Agreement *can't* be exercised...and is worthless."

Are you saying that any party in the deal can't do a cash payoff of the property thus exercising their Option in the event the mortgage payments aren't being made? This clearly isn't how it works. Anyone in the chain of Options can exercise their Option thus paying off the underlying loan in question. It's called a double closing. Your word is "can't" be exercised. Besides, in an Option agreement, if a lender is not getting paid they will entertain doing an assumption with whomever has a properly executed Option on the property. The bank does not want the property. They will typically do anything they can to get payments instead of the property.

Originally posted by Account Closed:
Originally posted by @Joe Villeneuve:
Originally posted by Account Closed:
Originally posted by @Joe Villeneuve:
Originally posted by Account Closed:
Originally posted by @Joe Villeneuve:

You can't do an option on this property with a mortgage still in place.

 Actually you can do an Option with a mortgage in place. Check out:

https://www.biggerpockets.com/forums/600/topics/58...

 Actually you can't.  Here's why.

When you buy an option, you are buying the first right of refusal to buy the property in the future within a certain time period.

When there is an existing mortgage on a property, that lender has first lien rights on that property.

Can you sell someone an option to buy, and still have an existing lien in place?  Technically you can, however it is impractical, and from where I'm sitting, unethical.  

What if the seller, for any reason, stopped making payments or couldn't continue to make payments, on a property they also sold an "option to buy" to a REI. What value does that Option have? None, when the lender forecloses. In this case, the REI bought a contract with no value.

The object of the Option is to gain complete control over the property during the option period. If there is a mortgage in place on that property, that lien limits (actually makes the Option's Control an illusion) that control the REI paid for.

Both the Loan and the Option people are expecting the have 1st position control, but only the Lender actually has it.

 There is a huge difference between a "lien right" on a property and the option to buy. With a Lien you do not own the property. With an Option you do not own the Property. 

A lien gives you the right to foreclose, an Option does not. An Option gives you the right to buy the property at some point in the future for a designated amount. A lien does not give you the right to buy the property, you only have the right to foreclose. A right to buy by Option is exclusive. A right to foreclose is not exclusive, anybody can bid on the property at auction, typically including the lien holder.

The option payoff also pays off the underlying lien. You do not have complete control under an Option, it is only an Option for the future until you exercise the Option. You must exercise the Option to gain complete control. An Option does not give you ownership. Properly exercising an Option gives you ownership when you convert the Option into a Purchase.

The owner always has first position of control with both the Lien and the Option below the owner's ownership. The seller can pay off the lien, can sell the property and satisfy the lien, can negotiate new lien terms, can borrow against the property to pay off the lien. The lien is a finance issue (not a title ownership).

Title ownership and financing or liens are two entirely different things and the courts treat them as such.

Someone who has no ownership on the property can sign a note for financing on a property if the lender is willing to accept it. It's commonly called cross collateralization. (I once was a loan officer.)

Respectfully.

 When the owner sells an option to buy to someone else, the owner relinquishes control over any future sales of that property during the option period.  The seller can't sell the property to anyone else during that time period, thus, the buyer of the option "controls" the purchase of the property during that time period. 

Other than that, you are correct with your comments.

However, it doesn't change the fact that if there is an existing loan, with an ability to foreclose, that potential foreclosure eliminates the Option.  This negates the "control to buy" that is the Option agreement.  If the property is foreclosed on by the lender, the Option Agreement can't be exercised...and is worthless.

Since this potential situation exists with a loan in place, to me, this means that buying an option to buy on a leveraged property is at the very least...a stupid thing to do.

 Your comment: "If the property is foreclosed on by the lender, the Option Agreement *can't* be exercised...and is worthless."

Are you saying that any party in the deal can't do a cash payoff of the property thus exercising their Option in the event the mortgage payments aren't being made? This clearly isn't how it works. Anyone in the chain of Options can exercise their Option thus paying off the underlying loan in question. It's called a double closing. Your word is "can't" be exercised. Besides, in an Option agreement, if a lender is not getting paid they will entertain doing an assumption with whomever has a properly executed Option on the property. The bank does not want the property. They will typically do anything they can to get payments instead of the property.

 First, who does double closings now?

Originally posted by @Joe Villeneuve :
Originally posted by @Mike M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Mike M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Mike M.:
Originally posted by @Joe Villeneuve:

You can't do an option on this property with a mortgage still in place.

 Actually you can do an Option with a mortgage in place. Check out:

https://www.biggerpockets.com/forums/600/topics/58...

 Actually you can't.  Here's why.

When you buy an option, you are buying the first right of refusal to buy the property in the future within a certain time period.

When there is an existing mortgage on a property, that lender has first lien rights on that property.

Can you sell someone an option to buy, and still have an existing lien in place?  Technically you can, however it is impractical, and from where I'm sitting, unethical.  

What if the seller, for any reason, stopped making payments or couldn't continue to make payments, on a property they also sold an "option to buy" to a REI. What value does that Option have? None, when the lender forecloses. In this case, the REI bought a contract with no value.

The object of the Option is to gain complete control over the property during the option period. If there is a mortgage in place on that property, that lien limits (actually makes the Option's Control an illusion) that control the REI paid for.

Both the Loan and the Option people are expecting the have 1st position control, but only the Lender actually has it.

 There is a huge difference between a "lien right" on a property and the option to buy. With a Lien you do not own the property. With an Option you do not own the Property. 

A lien gives you the right to foreclose, an Option does not. An Option gives you the right to buy the property at some point in the future for a designated amount. A lien does not give you the right to buy the property, you only have the right to foreclose. A right to buy by Option is exclusive. A right to foreclose is not exclusive, anybody can bid on the property at auction, typically including the lien holder.

The option payoff also pays off the underlying lien. You do not have complete control under an Option, it is only an Option for the future until you exercise the Option. You must exercise the Option to gain complete control. An Option does not give you ownership. Properly exercising an Option gives you ownership when you convert the Option into a Purchase.

The owner always has first position of control with both the Lien and the Option below the owner's ownership. The seller can pay off the lien, can sell the property and satisfy the lien, can negotiate new lien terms, can borrow against the property to pay off the lien. The lien is a finance issue (not a title ownership).

Title ownership and financing or liens are two entirely different things and the courts treat them as such.

Someone who has no ownership on the property can sign a note for financing on a property if the lender is willing to accept it. It's commonly called cross collateralization. (I once was a loan officer.)

Respectfully.

 When the owner sells an option to buy to someone else, the owner relinquishes control over any future sales of that property during the option period.  The seller can't sell the property to anyone else during that time period, thus, the buyer of the option "controls" the purchase of the property during that time period. 

Other than that, you are correct with your comments.

However, it doesn't change the fact that if there is an existing loan, with an ability to foreclose, that potential foreclosure eliminates the Option.  This negates the "control to buy" that is the Option agreement.  If the property is foreclosed on by the lender, the Option Agreement can't be exercised...and is worthless.

Since this potential situation exists with a loan in place, to me, this means that buying an option to buy on a leveraged property is at the very least...a stupid thing to do.

 Your comment: "If the property is foreclosed on by the lender, the Option Agreement *can't* be exercised...and is worthless."

Are you saying that any party in the deal can't do a cash payoff of the property thus exercising their Option in the event the mortgage payments aren't being made? This clearly isn't how it works. Anyone in the chain of Options can exercise their Option thus paying off the underlying loan in question. It's called a double closing. Your word is "can't" be exercised. Besides, in an Option agreement, if a lender is not getting paid they will entertain doing an assumption with whomever has a properly executed Option on the property. The bank does not want the property. They will typically do anything they can to get payments instead of the property.

 First, who does double closings now?

 Try Chicago Title. Almost any real estate attorney. Smaller and local Title & Escrow companies.

And since you record a memorandum of Option (but not the Option itself, except where required by law) , if the time ever comes that a foreclosure is initiated, the memorandum will show up on the title report the attorney pulls and you will get notification.

Originally posted by @Joe Villeneuve :
Originally posted by @Mike M.:
Originally posted by @Joe Villeneuve:

You can't do an option on this property with a mortgage still in place.

 Actually you can do an Option with a mortgage in place. Check out:

https://www.biggerpockets.com/forums/600/topics/58...

 Actually you can't.  Here's why.

When you buy an option, you are buying the first right of refusal to buy the property in the future within a certain time period.

When there is an existing mortgage on a property, that lender has first lien rights on that property.

Can you sell someone an option to buy, and still have an existing lien in place?  Technically you can, however it is impractical, and from where I'm sitting, unethical.  

What if the seller, for any reason, stopped making payments or couldn't continue to make payments, on a property they also sold an "option to buy" to a REI. What value does that Option have? None, when the lender forecloses. In this case, the REI bought a contract with no value.

The object of the Option is to gain complete control over the property during the option period. If there is a mortgage in place on that property, that lien limits (actually makes the Option's Control an illusion) that control the REI paid for.

Both the Loan and the Option people are expecting the have 1st position control, but only the Lender actually has it.

First you said he can't, now you're saying it's impractical and unethical. From what I've seen of your posts on here, you seem to push your subjective opinions as facts but you never have anything to back it up. Case in point, first you said he can't do it, now you say it's impractical and unethical to you. So are you now saying that it can be done you just don't like it???? Are you an attorney??

We have done about 20 of these lease options since the beginning of 2017.  We have loans on all of these properties with the bank. Would it be possible for me to just stop paying the mortgages and have the bank forclose on my properties? Yes. But it would be unethical and dishonest and I would expect to be sued and lose my license to provide therapy - thus losing my livelihood.

The lease option is truely a great tool and opportunity for certain people to be able to get into a home. If someone is abusing it or misusing it and taking advantage of people with it, then I think they should be sued.