Posted by B.L.Renfrow on June 19, 1999 at 20:04:38:
Tom,
First, you should take the time to read the articles on this site under How to Articles, Money Ideas and Legal Corner on lease options. There’s a ton of useful and practical advice there…and it’s free!
As for your specific questions:
Benefits of L/O to seller: payments are guaranteed (by you); better quality of tenants; you’ll be responsible for the maintenance; no management problems; seller remains on the deed and gets the tax benefits; no Realtor commissions; non-refundable option consideration (if you choose to offer it; I don’t); above-market rent; positive cash flow.
No such thing as “standard” forms, but my understanding is that the courses from Legrand and Bronchick contain various examples. (I don’t have either course, so I can’t comment directly on that). I’ve made my own, which were reviewed by my attorney, but I’m constantly refining them. No two deals have used exactly the same forms.
If there’s an underlying mortgage on the property, either arrange for the portion of your payment covering the mortgage payment to go directly to the mortgage holder, or run it through an escrow agent (attorney, bank or whatever) and they will pay the mortgage holder and send the balance to the seller. You should avoid paying the seller directly if there is a mortgage, lest he pocket the money and fail to pay on the underlying loan.
I have some questions about a lease option we hope to do.
Here is the situation. We have found a house at a great price. It has been off the market for about 9 months with a renter in it. It could not be funded because of a leaky basement which I can fix. The owner would like to sell and get her money out of it. We would like to offer her a lease option, but want to know the best way to present it to her so it has a better chance of acceptance. Her equity is about 21k she is asking 65k. (she said that she has dropped the price as low as possible to “dump” the house) I noticed that she and her new husband spent all of last weekend cleaning and making repairs. They now live about 25 miles away and I think they are tired of messing with renting. Here are the questions I have, any additional help is appreciated.
What are the benefits to the seller?
Are there standard forms for L.O.?
What is the best way to set up the payments during the LO?
Thanks for your time and advice.
You indicate that it is at a great price which should mean that you will make 15K or 20% of the after repaired value. L/O are good if there is little equity or the owner is willing to defer their cash. But, don’t overlook the possibility of owner financing for a short term. A note due in a year or two would accomplish the same thing. Give you time to fix the basement and get the buyer financed.
Posted by Bill K. (AZ) on June 19, 1999 at 20:18:16:
Tom,
On your first question, there are many benefits of a lease/option to the seller.
The seller gets a “higher-than-all-cash” price for the home since they are offering “terms” to the buyer, you.
The seller has NO landlording headaches. Those will belong to you.
The mortgage payment is covered.
Tenant/buyers take better care of a property they might own than a tenant who is “just passing through”.
There is no real estate commission to be paid in these transactions.
Finally, the seller may be able to take tax deductions for the property as a rental during the lease term.
On your second question, as far as a set of “standard” forms is concerned, I use forms provided in Bill Bronchick’s “Lease/Option Workshop”. I’m sure that each investor uses what works for him/her. However, you might want to consider:
Lease Agreement (separate from purchase option agreement)
Purchase Option Agreement (separate from lease agreement)
Security Deposit Agreement
Application for Lease
Deed of Trust/Mortgage to Secure Option
Assignment of Lease/Option
All other landlord/tenant notices (30-day notice to vacate, 3-day notice to pay or quit, etc.)
Finally, on your third question, I would suggest that you NOT pay the seller directly. If there is a loan payment involved, you will want to ensure that it remains current. For a few bucks a month, a third party fiduciary will collect your payment, make the loan payment, and forward any difference to the seller.
As far as getting your payment from the tenant/buyer, try to set up an automatic bank draft each month. It eliminates the T/B “forgetting” to make the payment. Plus, you never have to worry about the payment being “in the mail”.