Posted by Matt B on February 27, 2001 at 09:49:45:
It’s funny that I’ve heard of this situation more than a few times now, but have never run into it myself. I think the reason for that is because I maintain a close relationship with my tenant/buyers. I hold their hand (only once literally) as they go to MY mortgage broker who knows how to handle lenders’ requirements. It is rare that any of my tenant/buyers ever go out on their own and find financing. I usually help along the way.
I think the key here is to shop around for a good mortgage broker with multiple funding sources. They should be someone who is familiar with creative deals like lease options.
As far as the buyers getting spooked and wanting their deposit back, simply make sure that you write it up correctly when you sign it up. Make sure that it is very plain IN WRITING ON THE CONTRACT that the option deposit is NON REFUNDABLE. That gives you a lot more power when they come crying to you, wanting it back.
Posted by Robert on February 27, 2001 at 08:27:02:
I badly need some advise from experienced lease/option investors outors out there. It seems that more & more lenders are requiring that the seller of home (namely me) have held title to the property for an extended length of time before they sell the property. I guess this is to give them greater comfort that the seller can convey good title (I always thought title insurance was enough). When my optionee gets this info from the lender they get spooked and sometimes try to demand their front-end option deposit back from me, which usually I picked up 1-2 years prior. Their argument is that I am unable to convey clear title to the property-- an inaccurate idea implanted, either intentionally or unintentionally, by the lender’s comments. Has anyone else experienced this headache? How have you gotten around it? Have you simply told your optionee to go to another lender? What have you done when your optionee has said “No, give me back my deposit!!!” ? Is this problem becoming more prevalent out their in the creative investment community? Am I making to much out of this issue?
Posted by JPiper on February 27, 2001 at 17:37:59:
Robert:
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.