Questions about Lease Options

19 Replies

Hello,

I have some questions about Lease Optioning a property:

1) Who has the insurance on the house? The originial owner?
2) Who pays the taxes and/or gets the tax write off on the property?

Any help would be appreciated.

Gloria

answer is: the owner of the property is responsible for all of that, since , technically, they are just leasing the house as a landlord. however, renters insurance would be smart of the inhabitants of the house. once the option is exercised, it all goes to the new owner obviously. hope that helps

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Originally posted by "Charles":

If you do a lease option, make sure you have the deed signed in advance and held by your escrow agent. Too many times you can't find the owner when it is time to exercise your option.

Protect yourself.

Great advice. Thanks for all the great Tips, Charles!

To further protect yourself:

1. Open escrow and place the deed in escrow. One less thing to do when the buyer wishes to exercise his option.
2. Check the title with a title company.
3. Check the credit of the tenant/buyer and check the credit of the seller (why not?) You wouldnt want to send payments to a seller who is pocketing the money and not making the payments.
4. Record a memoramdum of option to place a cloud on the title in the event the seller tries something fishy behind you. Imagine if the seller tries to sell behind your back while you have a good tenant who pays on time?
5. Have good contracts. I have 8 specific contracts that protect me. It depends the hat im wearing at the moment. Am I subletting? Cooperating with the seller?
6. Make the payments yourself.
7. Send a Notice of Default to the lender. This will let you know whatever is going on with the property.
8. Collect a good chunk of option deposit and give rent credit. The more option the more interest the seller haves NOT to loose the property and pay on time.
9. Rent due on or before the FIRST. Second is late, third day eviction starts. You have to place the strength where it belongs. To train them to think like home owners.

That was alot of typing and typos!

To your success,

Diana Fontanez
Lease Purchase Specialist and Consultant

Where do you get the contracts and how do you know if they legal? Do you take them to an attorney to review?

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Charles,

I'm not planning on putting anything illegal in the contracts but I just want to make sure I don't include something that the law disallows. However, if any contract signed by two consenting adults is binding as long as it doesn't violate the law, I guess I could go ahead and type one up myself, right?

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To Diana Fontanez, Lease Purchase Specialist and Consultant

Diana Fontanez wrote on Nov. 11, 2005:

To further protect yourself:

1. Open escrow and place the deed in escrow. One less thing to do when the buyer wishes to exercise his option.
2. Check the title with a title company.
3. Check the credit of the tenant/buyer and check the credit of the seller (why not?) You wouldnt want to send payments to a seller who is pocketing the money and not making the payments.
4. Record a memoramdum of option to place a cloud on the title in the event the seller tries something fishy behind you. Imagine if the seller tries to sell behind your back while you have a good tenant who pays on time?
5. Have good contracts. I have 8 specific contracts that protect me. It depends the hat im wearing at the moment. Am I subletting? Cooperating with the seller?
6. Make the payments yourself.
7. Send a Notice of Default to the lender. This will let you know whatever is going on with the property.
8. Collect a good chunk of option deposit and give rent credit. The more option the more interest the seller haves NOT to loose the property and pay on time.
9. Rent due on or before the FIRST. Second is late, third day eviction starts. You have to place the strength where it belongs. To train them to think like home owners.

Is your advice in reference to a seller/lessor or renter/lessee?

I've always thought that in a lease-to-buy, the renter/lessee is a regular renter who paid extra for a right to buy by a certain time. He is not an owner, he doesn't have any "equitable ownership", he has a right of possession for the time of lease, that's all.
The owner remains an owner until, and if, the renter exercises his option. If yes, it becomes a regular sale. If not, it may continue as regular lease.
May be I am missing something, but what does your list of steps above refer to.

Charles Parrish wrote:

Make sure you have a back door clause (subject to and contingent upon third party assignment before settlement) and that you give yourself enough time to re-cycle the property (buyer shall have 60 banking days to settle) and a safty clause (buyer has the right to extend the settlement by 25 banking days if necessary to complete all settlement paper work) and make sure you have the right to remarket the property before settlement ( buyer has the right to remarket property by private treaty or public auction any time before settlement)......and so on.

Charles, it sounds as an interesting concept. Could you expand on it.
We know about the assignments. But I've never heard about the escape clause in a contract where the deal would be contingent on third party assignment before settlement.
Inspection clause is logical, financing clause is logical. Why would a seller agree to a deal depending on whether a wholesaler finds somebody to assign to.
Another issue, 60 + 25 banking days to close, it's 16 calendar weeks. Why would anybody agree to such long closing, ESPECIALLY if it's contingent on the wholesaler CONTRACTUAL ability to assign to a 3rd party. And if it's not assigned, the seller just lost 4 months.

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Originally posted by "gloria aderinokun":
Hello,

I have some questions about Lease Optioning a property:

1) Who has the insurance on the house? The originial owner?
2) Who pays the taxes and/or gets the tax write off on the property?

Any help would be appreciated.

Gloria

1) The owner has the insurance on the house. I add this cost onto
the monthly rent to make up.

2) Again the owner pays this.

Good Luck,
Jeremy Blunt

Charles,

"Having a clause that is contingent on third party assignment while in contract is the BEST LEVERAGE a real estate investor can have."

What makes it so good for investors? 3rd party assignment meaning that you can assign the lease option to another investor?

"As long as you make all of your disclousure up front. It take some time to learn the CONTROL & ROLL method that we use, but it is very profitable once you get it down."

So when the buyer is signing the contract you point out every paragraph/disclosure to them and exactly what it means? Also can you explain the control & roll method?

Jeff

Chris,

There are a number of resources online for you to get your legal documents (specifically for a Lease Purchase), but if you have never done it before, you definitely want an attorney to look over your documents. A few hundred $ up front now to protect you from bungling thousands is well worth it!

best of luck,

In my experience, the owner pays taxes and insurance, and, usually gets the benefits of tax write offs as well. The LO tenant pays all other expenses.

Just my two cents.

Good luck!

I am also interested in the Control & ROLL method, can someone explain this in detail please?

WIll agree with joey here, but of course, it all needs to be in the lease contract and you'll be good to go on who specifically get what.

My, my, my,

I think this got way off base, I didn't see where the original post said anything about this being an option flip deal.

Some points were made as to legal requirements, recognize that each state is different. Lease Option deals are all over the place, it's really best to find out what local custon is for a long term lease option. These deals end up in circuit court, a judge in Arkansas may have an entirely different finding on the same deal than a judge in NY. As to drafting agreements yourself, so long as you are a party to the contract, you can draft anything you like, but if you screw it up, you might lose out, no, you'll probably lose out if it's a long term deal.
There is an equitable interest in and to the property conveyed to the optionee (buyer) under an option. How this interest is determined and what equitable rights are conveyed is an issue to be determined at a local level, in the event of conflicts, but to whatever extent such are determined to be, they certainly exist.
There needs to be a good reason for doing the lease/option on a longer term basis, one year or more, as opposed to a land contract or a contract for deed, or even a transfer of deed and Note and DOT. First, what are you trying to accomplish, picking the L/O, especially for a buyer, is probably not the best route to take, but, I'll write that book later.
What do you do if the seller takes bankruptcy, dies, becomes incapacitated? What if the seller doesn't pay his taxes and the IRS knocks on your door. These contracts should really not be used except for short durations, like one year or less. You should consider a more structured purchase/installment agreement for longer terms, like a CFD at three to five years. What consititutes default, non-payment? What keeps the seller from just throwing the check away? Nothing! How do you prove you made a payment" You can't! Under a lease the landlord begins eviction in three to five days, before you even know if your check cleared!
These are the most abused and misused contracts in real estate! They can be safe transactions, they can work, but I have yet to meet anyone, I mean anyone, including attorneys who have boilerplate L/Os, that covered the bases sufficiently. I have serviced and been a party to over a thousand installment contracts, developed a program to guarantee these deals and have acted as a registered credit's representative in bankruptcy court to secure the interest conveyed under these agreements. I appraised contracts as a fee appraiser for state government. If it comes across as kind of a sore spot with me, please let me appoligize at this point, but seeing people getting messed over 90% of the time, even if both parties had good intentions, gets old. Sorry!
First , make two seperate contracts, one for a lease and another for an option to buy. Simple and clean. Just use a standard lease, Who usually pays taxes, insurance and maintenance on a residential lease? The Landlord! Rent is sufficient to pay that as well as the profit from renting it. Now do an Option Contract. Pay an option price. The more in the option price that is paid, the more of an equitable ownership in the property that is established. Cross the line of what is locally customary and you could find yourself having to foreclose as a deed of trust in a judicial process, even harder to get out of than a note and deed of trust! There are other sites where these contracts are extensively discussed and explained and I'm sure there are other comment here as well. If you want more information on them please feel free to contact me. My thing is to see that installment contracts are designed for the purpose intended and actually work while accomplished safely, that's all. I'd hate to see regulators ban installment deals because they are so widely abused by one side or the other, which is being considered in many places. Look at Texas! This is really Real Estate 101, and guru books is no place to get an education, they are to get marketing ideas. Good Luck, Bill

Actually, I suggest you contact your attorney instead of some guru on any lease option arrangement vs other longer term agreements. Options are best used in shorter terms.

As to a sandwich lease, pretty simple concept, but still these are not ideal arrangements for any significant term, more than three years and a few months allowing a buyer time to actually qualify for financing.

If anyone has the answer on any video, I suggest you post it here. Good luck!

Hi Gloria,

Carleton Sheets, remember him? Says two important things.

1. Go on the owner's policy as an Additional Named Insured, instead of having insurance placed in your name. Reason: when the insurance owner changes, the insurance company tells the bank, and the bank can call the loan due. They don't have to.

2. Have Separate agreements for Lease and for Option. Reason: If it's one agreement and you have to evict, the evictee might successfully claim that all the money paid in is equity, meaning you might have to pay part or all of it back. Sort of amazing, what?

Cheers,
David

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