lease option deal turning sour - Posted by tarun

Posted by JohnBoy on March 16, 2001 at 07:41:56:

You may have to eat the negative on this if your seller doesn’t perform. You have to protect your tenant/buyers interest in the property.

You should have made sure you would be able to cover the negative by getting enough rent from your tenant/buyer from the beginning. It’s not uncommon for a seller to stop paying on a negative after they move out of the property! If you couldn’t account for the negative then you shouldn’t have done the deal.

If you try to force your buyer into paying the negative and they can no longer afford it, you could end up forcing them into filing a BK. That could possibly create even more problems for you.

Since the seller claims they can no longer afford the negative and now they’re crying they want to just get the thing sold…see about just taking their loan over “subject to” and get the deed!

Since your tenant/buyer can’t get financing right now due to a prior BK, if you get the deed, then sell it to them with owner financing! Only THIS time, charge a high enough interest rate to cover the new payment amount, AND, any future payment increases based on the adj. rate, AND, some extra to make some cash flow on the deal!

If you can qualify for financing then YOU refinance for new loan and better rate once you take title to the property!

As far as you “ALLOWING” the seller to refinance the property…YOU can’t stop him from doing that as long as the amount being refinanced doesn’t exceed your option price! They still OWN the property. You only have an OPTION to buy it at a later date. You can only prevent them from financing MORE than what your option price is, and that’s assuming you have something recorded against the property to protect your interest that would show up when their lender checks title for any liens prior to funding the new loan.

At this point I think I would probably get the DEED taking their loan over “subject to”, in exchange for RELEASING THEM from having to pay out the negative every month, as per THEIR agreement! Then I would offer to carry the financing to my tenant/buyer at a high enough rate to cover the PITI plus some cash flow! They can refi later when they can get qualified for a better rate to lower their payments whenever they choose! The incentive to offer your tenant/buyer for doing this NOW, vs just waiting until later is that YOU are only offering to finance them NOW if they take the offer. If they pass this up NOW, and should they have a problem later when their option is about to expire, oh well…they’re SOL and any renewal on your part will only INCREASE the purchase price, increase the rent, and require them to come up with MORE option consideration! So to take you up on your offer NOW, would be an EXCELLENT advantage on their part! They wouldn’t have to worry about getting a new loan soon, they wouldn’t be faced with a increase in rent if they needed to extend, they wouldn’t be faced with paying a much higher price later from having to extend, and they would be faced with having to come up with more option consideration to get the extention! This would totally to THEIR ADVANTAGE to LOCK IN NOW!!!

lease option deal turning sour - Posted by tarun

Posted by tarun on March 16, 2001 at 24:16:04:

I did a sandwich lease option deal a year ago.
My payments to the seller were 1000/mo and his payments to the bank were 1050/mo. He was taking a $50 loss. The property has an adjustable mortgage on it.
His payment just went up and he calls me today telling me that his wife just lost her job and he cannot take the loss anymore. He is coming out of pocket about $130 on the house.
A week ago, I also sent him a certified letter stating that I wanted to renew the option for another year as per our agreement for the same terms.
My agreement clearly states that I can renew the option for 2 more years.
My tenant/buyers filed for a bk a year and a half ago so there is no way that they will be able to excersise the option at this point.
The seller also tells me that “his attorney” told him that he has the choice of not approving the renewal of the option which is not true since my agreement clearly states that.
I am getting about 1100/mo from my tenant/buyers.
The sellers payments are about 1130/mo. He wants to sell the house ASAP.
What should I do? Should I just tell him that we have an agreement and he has to live with it? I was thinking of maybe allowing him to refi to a fixed rate. I know that this will eat into my back end profit, but what else can I do?
Any suggestions?

Re: lease option deal turning sour - Posted by B.L.Renfrow

Posted by B.L.Renfrow on March 16, 2001 at 08:44:26:

I would do exactly as JohnBoy suggested, and offer to solve the seller’s problem NOW by taking the property off his hands via a subject-to deal.

If you sell to your tenant/buyers on a land contract, you should be able to increase their monthly payment enough to cover the payment to the bank and provide at least some cash flow. The buyers’ increased payment will be offset by the tax deduction they will receive.

Once they are 2 years post-discharge of their BK – which will only be another six months – they should be able to qualify for financing, assuming they can demonstrate some positive credit and meet the lender’s usual requirements. You might want to insert a two or three year balloon in your note to increase your liklihood of getting cashed out.

Brian (NY)