Re: lease/option challenge - Posted by JPiper
Posted by JPiper on February 27, 2001 at 17:37:59:
Let?s clarify something here: The ability to convey good and marketable title to a property has absolutely NOTHING to do with how long you?ve owned a property, or whether in fact you own it at all.
What you?ve run into here is called ?title seasoning?, meaning that some lenders now have a requirement that the owner ?own? the house for a certain period of time (normally one year) before THEY will loan to your buyer. Has nothing to do with the condition of title?PERIOD. This is little more than a lender guideline?.an act that some lenders have taken to attempt to avoid some of the fraudulent flipping scams that have proliferated in the last few years.
So to sum up here, the problem with the buyer buying has nothing to do with title problems, it has to do with lender guidelines (problems).
Frankly I think this is an important issue. I think one way to solve this problem is to do a ?subject-to? transaction when you buy?.that way you have time to season title. Another way to solve the problem is to record a performance mortgage with your lease/option. When and if the optionee exercises the option, you have the owner deed the property (no seasoning problem). You are paid your profit as the payoff to your performance mortgage.
Either way, you option agreement should state a couple of things: 1) that the option consideration is non-refundable and 2) that the option agreement is not contingent on anything. The latter means that if they can?t get financing, they don?t get their money back. Think about it?lets assume for a moment that next week the interest rates were to go up and the buyer can?t qualify for the mortgage. Or let?s assume that the banks all decide that times are too risky, and they won?t make any loans anymore unless the borrower has perfect credit. These are changes in underwriting guidelines?which you have no responsibility for. Likewise, the ?some? banks have decided that title seasoning is now an underwriting criteria. None of these issues stem from an inability on your part to deed the property?.they stem from an inability on the buyer?s part to get a loan.
Now I would go on to say that in the latter case the reason why the buyer can?t get a loan is because YOU haven?t owned the property long enough. And therefore, you owe it to the client and to yourself to come up with a way to get past this particular requirement. But you can?t be the guarantor of this transaction at the same time. In other words, between now and the time of exercise something else could happen?.the banks could change something which make it impossible for your optionee to get a loan. Under those circumstances he loses his money under the contract. Your contract should state that it is not contingent on obtaining financing?and that the option consideration is nonrefundable.