lease/option length of yrs. - Posted by ron rappe

Posted by Ron Rappe on June 21, 2001 at 14:32:18:

Bill GAtten

Thank you for your response to my post. I missed it when it came in and just noticed it today.

I don’t understand what DOS stands for. Also, I don’t understand how, under the trust method you mention in your post, I would be able to credit all of my lease payment to the purchase price with me as leasee and then collect(as the leasor) an amount over the lease amount as a small monthly payment toward the option to buy. I know none of this would be mentioned in the contract but this is what I want to accomplish as the bottom line.

I would greatly appreciate it if you would explain these points further. Thank you, Ron.

lease/option length of yrs. - Posted by ron rappe

Posted by ron rappe on March 23, 2001 at 13:41:27:

I want to lease from sellers for 5yrs with options to extend for another 5yrs in case interest rates or other problems occur making it not a good time to finance at the end of the lease. Most or all of the lease/option payment would be applied toward the down payment when I exercised my option. I then want to lease to a tenant/leasee for 5yrs at which time they would be able to exercise their option. They would put up option money upfront and pay a small monthly payment along with their lease payment for the option which would be applied toward the purchase when they exercised their option. What kind of problems could occur with this kind of length of options: IRS, problems with length of contract if it went to court, etc. Thank you for your help.

The other white meat - Posted by Bill Gatten

Posted by Bill Gatten on March 25, 2001 at 16:38:53:


The reason we prefer the PACTrust over just about anything else…

ANY lease for more than 3 years is a violation of the lender’s due-on-sale clause (12USC1701-j-3). Also ANY lease with an option to purchase is a violation of the DOS as well (but that?s the easy part).

Chances of a lender calling it loan in on the latter is small (unless they have another agenda); but on the former…their security can be seriously imperiled when a lease tenant can claim an equitable interest in the property. And tenants do this (their attorneys do) in order to forestall eviction and force judicial foreclosure processes, in order to buy time and free rent when they are in default (i.e., when a leasehold is for more thn 3 years). A lender (and/or you) could have to go through some real red tape to foreclose and eject.

Also, if your tenant were to chose to exercise the option to purchase after the option period has expired, you could be in for long expensive run. You would probably even have to sell to them at the option price, even though a year or two had passed since the option terminated. This is due to their equity claims and your conversion of the leasehold interest to a real estate interest and an equity position.

Personally, Ron, I’d suggest never leasing to, or from, anyone for more than 2 years, 11 months and 29 days and never with an Option. As far as the Option and term issue is concerned…if an owner puts its property into a co-beneficiary land trust, then leases it to you, or to a resident CO-beneficiary tenant: there are ways to ignore and circumvent ALL of these restrictive issues. As a matter of fact, by doing it this way, you can lease the property (in or out) for up to 20 years or more with ALL the benefits of an Option: but without there actually needing to be one. The method I’m referring also affords (can afford, if you wish it to) the tenant/s full income tax benefits and ALL of the many other incidents and benefits home ownership (which they will gladly pay for in addition to the cost of normal Fair Market Rent).

By doing it all this way, Ron, the process obviously serves well to increase your net rental income by a 100% or 300% or more, while simultaneously eliminating all of your maintenance costs, management, repairs, negative CF, vacancies, etc…

  1. Property goes into the land trust
  2. You become a co-bene with the seller
  3. Your tenant becomes a 3rd co-bene and leases the property

The property is now schedule for sale in 5-10 years (less or more), at the end of which time the seller relinquishes his interest to you; the tenant is afforded the first right to buy at FMV (less the monies owed to him by the trust in which he is a beneficiary). This all happens only AFTER you receive all of the equity you’ve been carrying, and after your receipt of the Positive CF over the years (plus? the fee you collected up front as a Bene Contribution…not an “option fee”). And the way I do it?AFTER receipt half of whatever the appreciation and principal pay-down has been.

Oh, the 3-year term issue? The contract provides that even thugh the trust wont terminate for 5 more years, the lease is up in 2 years, 11 months and 29 days. After this period, it states that if the tenant remains in possession, he is deemed to be on a Day-to-Day Holdover until evicted by the landlord. The landlord, of course, being the trustee, who may only act under mutual direction of all beneficiaries…the tenant (unwilling to evict himself) then stays on the Hold-Over until the trust terminates and the property is refinanced or sold.

Zis help?

Bill Gatten

Re: lease/option length of yrs. - Posted by Dee-Texas

Posted by Dee-Texas on March 23, 2001 at 15:16:28:

If you hold your T/Ber for longer than 3 years, it starts looking like a sale not a lease.
If your going to be doing L/O’s, contracts for deed, wraps, etc. GET…Bronchicks Cash Cow…anything that he has is excellent. It comes with the contracts that you will need for the deals, pro seller and pro buyer…you can buy it here or check out his site at
Best Success