What happens with lease payments when option is exercised?

12 Replies

Hey guys - I'm new to the world of lease options. I am having trouble understanding how the lease is handled when a buyer exercises their option to buy.

Example sandwich option: 

I have a 2 year LO with the original seller 

I have a 1 year LO with the new tenant buyer

Buyer comes across some cash in month 10 of the agreement and is ready to exercise the option. 

The question is what happens with the leases when the buyer does this?  At that point the buyer still owes 2 lease payments to me and I owe 14 to the original seller.  I understand I will have to cash the seller out when the new buyer buys but what about those remaining lease payments that are due?  Are they still owed?  


Thanks in advance.  

Originally posted by @Brad E. :

what happens with the leases when the buyer does this? At that point the buyer still owes 2 lease payments to me and I owe 14 to the original seller. I understand I will have to cash the seller out when the new buyer buys but what about those remaining lease payments that are due? Are they still owed?

  

No, not owed.  A lease is between the owner and tenant / tb / Optionee.   The tenant now is the owner. 

Just as likely, your TB won't pay, so you'll be on the hook.  Bonus, the ones that don't pay usually cause damage. Be well-capitalized if doing SLOs. 

 

"I understand I will have to cash the seller out when the new buyer buys but what about those remaining lease payments that are due? Are they still owed?"

Have no clue - What does the lease say for each?

Word of advice - BEFORE signing any contract, read and understand it.  If you don't understand it, then hire an atty or someone that reads these.

I understand you get left-field events, but unless covered in the agreement, they don't change the basic terms.

Thanks guys.  The lease option contract I have (which I purchased from REIPro) doesn't say what happens to the lease when the option is exercised.  Kind of surprising.  Probably need to have a an attorney review this anyway, but I guess I expected the contract to clearly define that.

Do the contracts normally specify the timing of when an option can be exercised?

Here is what it does say: "Tenant, upon satisfactory performance of this Lease, shall have the option to purchase the real property described herein for a purchase price of $XXX, provided that the Tenant timely executes the option to purchase and is not in default of the lease agreement. Thereafter, each of the parties shall promptly execute any and all further instructions or other documents including a Sale Agreement which may be reasonably required for purchase of real property"

Originally posted by @Brad E. :

Thanks guys.  The lease option contract I have (which I purchased from REIPro) 

Do the contracts normally specify the timing of when an option can be exercised?

Normally can be exercised any time up to the contract expiration.  My strike escalates the longer it takes and are usually extendable for 6 months with additional considerstion. 

For instance,  I just did one Monday as Optionor/seller to an owner-occ TB. It's a 24 month LO  $310k price for 1st 12 months, $314k  if exercised in 13-18 months,  $318k if 19-24 months.  Extendable with 1% additonal consideration for 6 months @ $320k. 

Interesting you purchased one rather than sourced it.  I have seen an individual here sell /assign before but didn't know you could buy one from a company.  How did you underwrite it? Did you just pay their asking price?

 

@Steve Vaughan   Sorry I meant I purchased the paperwork.  Not the actual property.

That is an interesting structure you have there on that example deal.  I like that.

Thank you for sharing your wisdom.

 

Originally posted by @Brad E. :

@Steve Vaughan  Sorry I meant I purchased the paperwork.  Not the actual property.

That is an interesting structure you have there on that example deal.  I like that.

Thank you for sharing your wisdom.
 

You're welcome,  Brad.

I know you just purchased the paperwork / option.  I was wondering how they priced it and what made it attractive for you. Is it a local property to you?  

@Steve Vaughan  

Ah, I see. Yes the property is local. I found the seller through direct mail. It started out looking more like a seller finance deal but after working with the seller a bit it started looking better for me as a lease option. On the lease option I offered about 20K under what my comps are showing for ARV. So it looks like this --

ARV: 400K

Purchase price: 380K

Option pmt: 2500

Monthly pmt: 1800

Term: 24 months

My plan/hope is to lease option it back out like this --

Purchase price: 395K

Option pmt: 8K

Monthly pmt: 2K

Term: 12 months

I know it can rent for 2K b/c it is rented at that currently.  I'm not sure if that is a reasonable option payment.  This will be my first lease option so I'm preparing for a bumpy ride.  I'm not totally clear on the mechanics of the exit.

Thanks again for sharing your thoughts.  

Originally posted by @Brad E. :

Thanks guys.  The lease option contract I have (which I purchased from REIPro) doesn't say what happens to the lease when the option is exercised.  Kind of surprising.  Probably need to have a an attorney review this anyway, but I guess I expected the contract to clearly define that.

Do the contracts normally specify the timing of when an option can be exercised?

You're over complicating this. The lease and the option are two different contract. The option is between the owner and the buyer (the person executing the option agreement). The lease is between the landlord and the tenant.

There are 4 different people here...even though the tenant and the buyer may have the same social security numbers, just like the owner and the landlord might have the same C.C.#.

What this means is when the property is sold, the lease agreement is still in place but is transferred from the old owner (the seller) to the new owner (the option executor).  

Now think about this.  If the new owner has the same S.S.# as the tenant, what do you think happens to the lease agreement? 

Originally posted by @Brad E. :

Hey guys - I'm new to the world of lease options.  I am having trouble understanding how the lease is handled when a buyer exercises their option to buy.

Example sandwich option: 

I have a 2 year LO with the original seller 

I have a 1 year LO with the new tenant buyer

Buyer comes across some cash in month 10 of the agreement and is ready to exercise the option. 

The question is what happens with the leases when the buyer does this?  At that point the buyer still owes 2 lease payments to me and I owe 14 to the original seller.  I understand I will have to cash the seller out when the new buyer buys but what about those remaining lease payments that are due?  Are they still owed?  


Thanks in advance.  

 You probably should of asked these kinds of questions, before doing a sandwich LO. :)

P.S   The former owner can Not  collect rent on a house he just sold when the new tent/ buyer cashes him/ her out..If the tent buys the house from the landlord then there is no longer a landlord/  tent arrangement. 


@Brad E. You can exercise your option to buy at any time during the 2 year term. You are not required to stay the full 2 years hence you’re not required to owe rent payments if you do exercise before the term expires. Tbh don’t do 2 year terms in a sandwich lease. Just assign it to a tenant/buyer if you can’t get a longer term.