Lease Option Critic....Does this guy know what he is talking about? - Posted by Rocker Fella

Posted by Steve C., Houston on May 18, 2000 at 17:18:07:

That hits the nail on the head!

I think if you do what others have posted here, and walk the T/B through the pre-qualification process, you have done more than your due diligence, you’ve done theirs, too.

The plug for his $29.95 book was the tip-off to his guilt trip.

Lease Option Critic…Does this guy know what he is talking about? - Posted by Rocker Fella

Posted by Rocker Fella on May 17, 2000 at 16:01:57:

This is a cut and paste from John T. Reeds Website. His review and thoughts on Cluade Diamond and Lease Option Programs. Do his views hold water?

Claude Diamond (Chula Vista, CA and Winter Park, CO)-I do not recommend
Lease-option guru. I talked to Diamond and he seemed pretty sharp at the time. But I cannot recommend him for two reasons: His lease-option program has a 50% failure-to-exercise rate and his price for his “mentoring” service is in the multi thousands of dollars. See What you need to know about lease options for a discussion of their problems. See my Why you should not buy expensive seminars or mentoring services for more on Diamond’s fee and my opinion of it.

I have received many different responses to negative reviews on this page—threats, attempted bribes, extortion, and attempts to “kill me with kindness.” Diamond, however, takes the prize for the most juvenile response. “Juvenile” is not a word usually associated with mentors
What you need to know about lease options
by John T. ReedCopyright 1998, 1999 by John T. Reed Last update 4/15/00

Seminar and home-study course ratings | Real estate investment page | Order form | Real estate investment books

There are two major problems with lease options the way they are being taught in seminars:

The percentage of tenants who fail to buy the home is scandalously high
There are numerous other serious, potential ethical and legal problems
High failure rate
Claude Diamond runs his lease-option business in a way that I object to, although it’s pretty typical. He says about 50% of his lease-option tenants are unable to exercise their options. That means that about half the people who do business with him as lease-option tenants end up thousands of dollars poorer as a result when they walk away from their large front-end payments and year or two of above-market monthly rent payments. These are people who entered into the deal in the hope of becoming homeowners and leave less able to become homeowners than they were when they first met Diamond.

That reminds me of the trade schools whose students pay thousands of dollars tuition, then a high percentage of the “graduates” of the school cannot find a job in the field for which they were trained. When I voiced my objections about his high rate of his lease-option tenants being unable to exercise their options, Diamond asked, “Whose responsibility is that?” In other words, if a lease-option tenant pays Diamond thousands of dollars for the lease option, then loses it all because they are unable to exercise the option before it expires, that’s the tenant’s problem, not Diamond’s, even when it occurs half the time. I disagree with that attitude toward such a high failure rate. And I give the general advice that whenever you deal with anybody in any field of endeavor, you should make the working assumption that the person will treat you the same way he treats other people.

Other lease-option practitioners have failure rates as high as 95%. That’s not right. The lease-option tenants are typically young couples who cannot afford their dream of home ownership and are convinced that a lease option is a back door to owning a home. In fact, the vast majority lose the thousands or tens of thousanad of extra dollars they shell out, above and beyond what a lease would have cost. When the lease option is over, they are far less able to afford a home than when they started. I suspect many permanently lose their ability to buy a home because they fell for the false promise of the lease option.

There is no question a lot of real estate investors are making a lot of money from lease options. But most of it is dirty money earned by scamming young couples, not by finding a need and filling it, the age-old legitimate path to profits. Rather, this is the predators’ way: a fool and his money are soon parted, so devote your life to finding fools and taking their money.

Legal problems
Lease options are explicitly named in numerous laws and legal documents as triggering events. They trigger almost all mortgage due-on-sale clauses. They trigger reassessment for property-tax purposes in California, thereby wiping out the protection California homeowners normally get from Proposition 13.

Another problem is the legal doctrine of substance over form. It is possible to do a lease option that is clean. But the various gurus advocate doing lease options in a way that arguably triggers the doctrine of substance over form.

That doctrine says that what you call something does not necessarily determine what the law will regard it to be. Calling a lease option a lease option does not mean the court will treat it as a lease option. In fact, I believe they will treat most guru-designed lease options as land-contract sales in substance. The legal implications of such a determination are amazing in their number and seriousness. You could have a tax-free exchange invalidated. You may find that you are unable to evict the tenant. IRS may say that all your lease options were installment sales and that you must pay overdue tax and penalties on them, tax that will be inflated by the typically inflated option prices.

The gurus are not interested in finding out what the law really is on lease-options. I have long urged them to obtain an IRS private letter ruling on the income-tax legality of their lease-option agreements. The cost of such letter rulings was just drastically lowered. But not a single lease-option guru has ever requested such a ruling, in spite of the fact that it would help his clients and help him market his material. The fact is they know what they advocate is probably illegal and they are afraid to get a ruling.

I cannot give you the whole picture here because I am in business to sell this information, not give it away. To get all the details on lease options, you should read my special report, which is only $29.95. Hell, given the astronomical prices they charge, the other lease-option gurus probably expect you to tip them more than that.

Re: Lease Option Critic…Does this guy know what he is talking about? - Posted by GregNorman

Posted by GregNorman on May 18, 2000 at 14:55:06:

With the ‘exercise rate’, I think you are doing a diservice if you know that there is no way your t/b’s will qualify at the end of the term (or if the possibilities are so small, they should be considered 0). I also run by t/bs thru a mortgage broker before accepting them. I can’t say that it raising the success rate to 100%, but it prevents what Reed complains about WRT to ‘ripping off young couples’ in his article (unless interest rates go thru the roof like they are now).

Also, WRT the sellers: I like what Bill stated and also use that as a closing method. If people are afraid that t/bs won’t exercise… ‘How long do you want your payments guaranteed for?’ If they want to sign a short 2-3 year term, let them know that there is a possibility they will get the house back if they sign such a short lease term. Most people want a short lease term to ‘push’ you to close faster. Unfortunately, that’s not going to do it!

I think all the tax stuff could be argued both ways. I can’t see getting something from the IRS b/c the possibilities and situations are endless.

My $.02.


Agreed - Posted by PBoone

Posted by PBoone on May 17, 2000 at 16:15:50:

John T Reed uses his information/advertising to sell his own book (notice the “for only $29.95” at the end. He uses guilt/fear invoking words such as Ethical/legal to further is own agenda.
It is our experience that only about half of the people who enter into lease / options with us actually go through with the purchase. Is that my responsibility? I do not think so, we offer a house for a small down and monthly payments, if the tenant / buyer does not make the payments they move. These (down and monthly payment) are agreed to in advance by both parties.
The other point he brings up is correct in most cases also. That is a part of the risk involved, also known by all parties concerned.
I guess the what is most important is for YOU to determine if L/O’s are a way you want to invest. Weigh the pro’s and con’s to make an educated decision.

How to Stay Out of Court!!! - Posted by gmay

Posted by gmay on May 17, 2000 at 19:55:06:

Use Wm. Bronchick’s disclosure documents with Claude Diamonds contracts and, in my opinion, you will stay out of court.

If the tenant buyer (optionee) has signed off on the disclosures then he knows the risks of entering into a lease option agreement.

Not according to a post a few days ago! - Posted by Glenn-OH

Posted by Glenn-OH on May 17, 2000 at 20:52:14:

I’d rather avoid the legal fees.

Yes you can, Yes you can - Posted by Laure

Posted by Laure on May 18, 2000 at 04:42:58:

50% follow through rate. Well, for me that’s true. I have one I am closing next week, Tenant Buyer got financing and deal is closing, and One Tenant Buyer who asked to be let out of her contract as she is getting married and moving into his house. We’ll see how the rest of my contracts pan out, but I expect a much higher closing rate than 50%…maybe I’m being optimistic. I am running my TB’ers through my mortgage company FIRST now, so the TB’ers have a picture of what they need to do to qualify for a loan at the end of the Lease. If they, then do not make the committment to repair their credit and are unable to exercise, then what can I do? I feel this is NOT in any way a scam. When their option is getting close, 6 months away, I call the TB’ers and go with them to the mortgage broker. I want to close these deals, and do whatever I can to get it done. I suppose there are some TB’ers that will never own a house simply because they can’t get their bills paid on time. But I can’t help that. I am not out to screw anyone. The “system” overwhelms them and they already feel defeated. I find myself in a “cheerleader” position most of the time saying Yes, you can, Yes you can !

Laure :slight_smile:

50% the FIRST time around . . . - Posted by William Bronchick

Posted by William Bronchick on May 18, 2000 at 10:03:49:

What Reed overlooks is the fact that only 50% of tenant/buyers exercise the FIRST time around. I have NEVER given a property back to an owner that I did a sandwich lease/option with - although my t/b exercise ratio is 50% (or less), the second or third t/b ends up exercising. Thus, my closing ratio is 100%.

Should we shut down Bally’s Health Clubs because only 10% of its members show up to work out every week? Who’s fault is that?