On the contrary! Contracts are not assignable unless expressly provided otherwise (i.e. explicitly spelled out) in the contract. Ask any lawyer! Say you have a contract with Ricky Martin to perform at a concert on a specific date at specified venue, say for $10 million. He cannot assign that contract to Madonna and have her perform instead!!! If he did, you could sue him for specific performance.
The bottom line is if you want a contract to be water tight, if you want it to be assignable, spell it out, if you don’t want it to be assignable, you also spell it out clearly.
I’ve been reading alot about L/O techniques. I’m definitely still learning about this but I do have a question. What are some of the benefits to the seller of a L/O deal? I can understand the benefits to the buyer. But, the only benefits I see to the seller is the fact that you’ve got a tenant, therefore, you’re theoretically getting your monthly payments to cover your expenses and debt and the tenant, theoretically, has some ‘pride of ownership’ and hopefully will take better care of the property. The other benefit would be if the buyer did not exercise their option they would then forfeit their option consideration given to you (assuming your contract said something about non-refundability). In my neck of the woods (CT), I don’t see alot of positive cash flow coming in. The monthly rent would be more than your expenses, but I can’t see it being any more than 100 or 150 dollars. (Not that this is a small amount. 150 bucks is 150 bucks!!)
I’m obviously missing something here because every person I listen to speaks very highly of a L/O strategy and that it’s probably the best way to get into REI (I’m a newbie, can’t you tell!!) Any thoughts would be greatly appreciated.
Posted by Frank Chin on March 14, 2001 at 17:31:25:
I have a SFH that I’m currently ready to sell and I’m seriously considering a L/O.
To sell a house, it takes TWO months at least to find a qualified buyer - maybe three.
It takes another two to three months to get to closing, a total of 6 months.
The house will be empty for 6 months. If I L/O, I can find someone faster, maybe one month, and I’ll be collecting payments for another 5 months till closing. Since the house rents for 2,000/month - its not small change.
Further more, insurance companies have problems with house sitting empty for 6 months. If they find out, they would require me to pay a house sitter. SO I’ll be paying someone to live there instead of collecting rent.
I have since heard on this board that I can buy special very expensive insurnace to cover this contigency.
Non-refundable option deposit (3-5% of the purchase price) up front.
Monthly cashflow. Yes, it may be anywhere from $50-$500, but how much work do you have to do for that cashflow every month after getting the deal all set up? (Hint: Rhymes with HERO!)
The difference in purchase price between what you buy it for and what you sell it for to your tenant/buyer when they excercise their option to purchase.
Frank,
Excellent points! I think I am going to remember this for use in answering some of the objections I get from sellers. I have said various things similar to this, but nothing so clearly stated.
Thanks for the FAQ site. Question, you mentioned that there’s zero work after getting the deal all setup. Aren’t you still the owner of the property? Don’t you still have the landlording headaches for the L/O period? Or, are you assuming that the buyer has a vested interested in the property and therefore would take better care of it? Even if they take the best care of it, you still may have a furnace go or a roof that needs replacing or any other bigger ticket items go on the property. You’re still responsible for those repairs and headaches aren’t you? I guess that’s where my big question lies. What’s the different to the seller when you L/O or just rent to the buyer when it comes to the landlording responsibilities. That’s my big concern. Thanks for the follow up.
I never own any of the properties that I lease option first off, so I am never the owner of the property. I control, not own, though a lease option.
I am not a landlord and don’t care to be one any time soon. All these expenses are passed on to my tenant/buyers. They are told when they get the place that since they are the future owners of the house, they are expected to maintain the house. This is added to my contracts as well.
Any repairs or maintenance are dealt with by the tenant/buyer. The one exception would be if something were to happen to the house requiring an insurance claim to be made. At that point, the homeowner’s insurance would cover the repair.
The big difference difference between renting and lease optioning as far as landlording goes is that if you are lease optioning a property to a tenant/buyer, you should not be doing any landlording. You should be managing the payments and sale of the property. Landlords have a HECK of a lot more work to keep up with.
That’s the answer I was looking for!! (I’m sure it was my fault because I didn’t ask the right question.) The bottom line is, you always L/O from the original seller first and THEN sub-lease/option to the next tenant/buyer. And, by putting the clause into the contract stating they are expected to make any repairs and maintain the property because they’re the future owners that, to a degree, releives you of your landlording responsibilities. PERFECT! Could you pass along the clause you use in your contract that states the tenant/buyer is expected to maintain the property? I am a CS student so I have his documents. Is it in there? If so, I’ll take a look.
You’ve been responding to alot of my questions, and again, I want to thank you for your time and knowledge.
Yep, I think you’ve got it now. Seriously, I would highly recommend looking into buying yourself a lease option course if you want to pursue lease options, which I think is a great way to get started in real estate investing.
I’ll have to pull my contract up on my home computer, which I’m not currently at to give you the exact wording for the tenant/buyer. I do not have Carlton Sheets’ material, so I wouldn’t be able to tell you if his contracts contain that. However, as far as I know, he doesn’t discuss lease options, right? I would assume that means that it won’t be there.
I’m happy to help with any questions that I can. I have been a participant on this site for a couple of years now and got my start here. I love discussing real estate and have even done some mentoring. If you think of any more questions that I or someone else might be able to help you out with, feel free to post them.
Uh, I’m not familiar with the term you’re using. Could you explain what type of deal you mean by “Assignment for Deed”? Do you mean a contract for deed or land contract?
There is a significant difference between the two from the legal standpoint. Although from the perspective of the entrepreneurial RE investor, they seem to be much the same in effect. Let’s take the scenario where you have a deal with a seller and then sell the rights onto a buyer down the line. If you buy a L/O, a right to exercise the option (or not), that is what you have to sell to the next person. You can simultaneously exercise your option to buy from the seller when your T/B exercise their option to buy from you. Or you can assign your option rights to the T/B for a consideration (provided the original option contract allows assignment). Simply put, you can only sell or assign to the next person down the line what you have.
As for contract for deed and land contracts, if that is the deal you have with the seller and the contract is assignable, then you can assign or sell your rights to the contract to the next person.
From a practical standpoint, say if you sell your rights to a land contract to a buyer by assignment, I see no reason why you can’t let them live there for a monthly payment, call it rent, lease, interest or whatever, until such time when the land contract kicks in and title can be transferred.
In the realm of creative RE financing, there are many possibilites! Hope the above makes sense.
OK, Greg, I guess I can give you an answer based on that. When you start doing your marketing (putting up “we buy houses” signs, running ads, putting up flyers, etc.) you will of course get calls from sellers in all sorts of situations. I prefer doing lease options simply because they are very easy for me to pitch to the right type of seller and very easy to sell to a buyer.
Of course, a lease option does not fit every situation or need of a seller. For instance, if a seller calls me and tells me they are 2 months behind on their payments and they just want to “dump” the house, many times, I will offer a “subject to” deal. I will not put money into a house in that situation unless I am being given the deed for it.
On the other hand, if a seller is current on their payments and is open to taking payments for their equity, but does not like the idea of a lease option, I will then offer a land contract deal. This way they can receive payments and I still get a creative, no down deal that I can put a buyer into and start making money from.
It all depends on the seller’s needs and their situation. It does take a while to learn how to fit the right type of offer to the specific situation, but that really isn’t something a newbie needs to be greatly concerned about. Just getting out there and using some of what they’ve learned is what’s most important. Too many people buy course after course and use them for nothing but expensive dust collectors, thinking that they’ll break them out “some day” and actually try one or two things from it.
I hope this helped you a bit. I know I wasn’t very specific on each situation that a particular type of deal would apply, but this should help explain a little bit why different types of deals work for different types of situations. All no money down of course!
I believe any contract is assignable unless stated otherwise. In reference to your statement below.
As for contract for deed and land contracts, if that is the deal you have with the seller and the contract is assignable, then you can assign or sell your rights to the contract to the next person.