Re: Any lease option horror stories? - Posted by JPiper
Posted by JPiper on January 26, 1999 at 12:34:42:
I think what you need to understand is that anytime you step away from the conventional sort of real estate transaction that you heighten POTENTIAL risks. This general statement is true for any type of creative real estate transaction, in my opinion. For this reason, you need to make certain that you have strong paperwork in place, and have dealt with potential risks upfront.
As a buyer via lease/option one of the clear risks is that you have agreed to a scenario where the seller will at some point in the future deed you the property, at your option. In the interim between the execution of the option agreement, and the execution of the deed, you have no control over what the seller may or may not do. He could die, go bankrupt, get involved in a lawsuit resulting in a judgment, overencumber the property, leave town, not pay his underlying loan, etc. All of these events carry the potential to affect the ability of the seller to deliver title when you exercise your option.
The paperwork that you put into place at the inception of your deal will help to mitigate against the above potential events. Things like performance mortgages, collection accounts, and pre-executed deeds held in escrow go a long ways toward eliminating these sorts of problems. Checking the condition of title at the inception of your lease/option and prior to recording a performance mortgage is imperative. If you are setting this lease/option up for the purposes of reselling to a tenant/buyer, YOU want to be certain that you can deliver title. The point here is that most problems can be addressed, IF you address them upfront.
As a seller via lease/options other issues come into play. These issues range from non-payment by your tenant/buyer, to things like issues of equitable title, or tax issues concerning the installment sale provisions of the IRS, or issues revolving around the due on sale clause. Again, your paperwork and the basic structure of your deal can go a long way toward dispelling some of these types of problems. Being cognizant of IRS rules concerning the differences between a sale and a lease comes into play regarding taxes.
My only negatives experiences have arisen from non-payment (an risk that is run on ANY rental transaction) and one situation involving poor paperwork. About 10 years ago, on my first lease/option I sold with paperwork where the issue of the non-refundability of the option consideration was confusing. In numerous places my option form stated the consideration was non-refundable. However I had also executed a real estate sales contract in conjunction with the transaction, which provided a financing contingency. My buyer defaulted when he couldn?t get financing one year later. He went to a lawyer who claimed that I had to return the option consideration because of the financing contingency. Rather than pursue this in a court I compromised and returned half of the consideration. In other words, I had poor paperwork.
If you have taken some of the courses available here you should be well versed in some of these issues. Don?t forget the importance of adequate legal advice on a local level.