Lease/option tenant is causing trouble! Help - Posted by Tim_wa

Posted by Rich on March 22, 2006 at 08:20:04:

Did you have an inspection done prior to their moving in? Or at least one from when you purchased the property? Do you have a copy of their inspection?

At one house in TX I had an inspection done while under contract and my inspector came up with foundation problems and the pictures he included showed the potential of a big ticket repair. After I cancelled the contract, the seller brought out their own engineer to evaluate and report on the foundation.

You might want to have your own ASHI certified inspector go over the property and, if they had turned up one of the big problem items such as foundation problems or roof replacement, then you should put together a pro-forma on what kind of reduction you would give based on FULL comparable sales in the neighborhood. You may want to hire an appraiser to get this done professionally.

So your starting price for negotiation should be FULL market value based on YOUR appraisal. Then deduct estimates you have obtained for repairs from that to arrive at the modified sales price. I will bet that it is above what the tenants are asking by a large margin. You will have also put together the documents neeeded to fight anything they may try to pull in forcing you to reduce your price.

You should also get some sort of anaylsis together as to what interest rate and mortgage they could get on the open market for their credit history (you should have pulled a credit report before signing an agreement with them).

Put this package together with a notice to perform from your attorney stating that the price they already agreed on is below what it would sell for with the stated problems unresolved on the open market.

Never let the other side set the starting point for reductions in price. You should research and support every price and concession yourself, including the starting price for negotiations. By starting at the artifically low price in your contract, they are trying to essentially get their $20K back from you either in cash or equity. By supporting that your price is ALREADY generous, you can head this off.

For comparables without MLS, I have been using, which seems to have a lot of info on it for pricing and price growth. It also explains their method so you can package up the info and use it to support (or not) your starting price for renegotiation of the contract.

Above all, NEVER just take their word on the kind of repairs and costs are involved. Have your own inspections done and make sure the folks doing it are of the highest caliber. You cannot prevent someone from going to court but you can prepare yourself to win.

Lease/option tenant is causing trouble! Help - Posted by Tim_wa

Posted by Tim_wa on March 21, 2006 at 08:55:59:

My lease/option tenant signed the rental agreement and option to purchase last August. We settled upon the price and terms and also used the exact forms provided by Peter Conti and David Finkle.

A month ago the tenant/buyer called to exercise his option. We signed a purchased and sales agreement to start the process. Well, tenant/buyer then went and got an inspection for his peace-of-mind. The inspection came back with a few problems and tenant is using these problems as an excuse to try and drastically reduce the price of the house.

I absolutely do not want to reduce the price and would be ok if tenant doesn’t exercise his option. However, tenant did deposit 20k and I fear that this tenant might cause trouble by attempting to get back his non-refundable deposit.

Any advice?


Lease/option tenant is causing trouble! Help - Posted by rent-to-own

Posted by rent-to-own on March 26, 2006 at 15:37:06:

So what would the actual cost be to repair everything?

Did you give them a disclosure statement on the property? Does your state require it? Mine does and if you fail to provide on you lose! You would have to refund their money for failure to comply.

Foundation problems? Bug problems? Those sound like valid concerns. What is the actual cost to repair? That is all they would be entitled to.

Depending on your state laws, these are your options.

Deduct the actual cost of repairs.

Offer them their option money back if they don’t want the property.

Tell them to pound sand and be ready to fight it out in court!

Re: Lease/option tenant is causing trouble! - Posted by inspections

Posted by inspections on March 21, 2006 at 20:15:01:

Did you get an inspection done for yourself before you LO’d or whatever you did to get the house from the original seller? especially for such a high-priced house? If you have one, and it shows no structural damage, then it is highly unlikely that there is now such damage 7 months later unless there’s been an earthquake or something.

Buyers in the price range you are dealing with are not normally stupid people and if they want the house they will most likely get it after putting down 20k. They could possibly be playing you in an attempt to get a better deal but on the other hand their claims may be totally valid.

You might want to get an independent inspection of your own to verify their inspector’s report. Unless there is something to protect you written in your paperwork, you will most likely have to negotiate with them or else be taken to court. The court will most likely consider an inspection as a regular part of any purchase whether the purchase was the result of exercising an option or not. I would attempt to avoid going to court if at all possible.

Re: Lease/option tenant is causing trouble… - Posted by Chris in FL

Posted by Chris in FL on March 21, 2006 at 15:18:56:

Tim, Did you and/or the tenant/buyer know about the defects at time of agreement, or were they hidden? If you are a stand-up guy, you should be able to negotiate something that is fair to both parties; what is fair would depend on a number of things. If you knew about the defects, and the tenant/buyer did not, them shame on you and you deserve the trouble you face. If you disclosed the defects to the seller, then negotiating is still your best option, but you shouldn’t be willing to give away as much (because, in that case, they are in the wrong). I sell on lease/options, and I notify my tenant/buyers up front that 1) the paperwork is designed to protect me, 2) all money paid is nonrefundable according to our contract, and 3) should they take good care of the place, and pay good, I would have no problem working with them on giving “some” of their deposit back to them, though I would also keep some profit for my troubles. I tell them I would do this only out of the goodness of my heart, only if they were model tenants, and that I am under no obligation to do so. Contract states “there are no other agreements than this unless in writing and signed by both parties” - if a problem tenant tries to fight me they don’t have a leg to stand on. If your tenant/buyer is legitimate, and the repairs are a surprise to them, do you think it is fair that they lose their $20K because it is in your contract? I don’t speak for everyone, but I DON’T! Also, a legal battle will cost you more than a negotiation with your tenant/buyer, hands down. So negotiate, figure out what is fair to both parties, and DO THE RIGHT THING! If your margin on the house won’t allow you to reduce the sell price, then refund the tenant/buyer most (or maybe all) or their $20k, and figure out how you can make up for the defects without cheating an innocent tenant/buyer out of their money. All investing should be done looking for win-win solutions. Those few who are willing to cheat innocent people out of hard-earned dollars “just because they can”, give investors as a whole a bad name - don’t got that route (if applicable).

Re: Lease/option tenant is causing - Posted by Russ Sims

Posted by Russ Sims on March 21, 2006 at 14:45:46:

Tim, I think you should stick to your guns. Tell the tenant that the price was negotiated up front and the home was being sold as is.There will be no concessions. I know your contracts state this. Then just wait to see what the tenant does. If he really wants the home (and I’d say that the $20,000 option fee is an indication that he does!)he’s not going to back out over a few thousand in repairs. It could be that he’s really just trying to get the price down to what his loan has been approved for. Try to talk with his mortgage person. You might gain a lot of insight to your tenant’s financing prospects.

If you stick to your guns I think it’s most likely the tenant will hang in there with the purchase. He probably doesn’t want to lose the home and he certainly doesn’t want to lose his 20 grand. If I’m wrong and the tenant want’s to back out of the deal and demands his 20,000k back, well, then I guess the matter is headed for court. Even though you have strong contracts that support your position, Washington state doesn’t have a great track record for siding with landlords. Your tenant may have a strong equitble interest argument. If it gets to this point I’d really try to negotiate with him… maybe meet him halfway on repairs or something. We use a great landlord legal service in Tacoma if you feel you need advice or God forbid, eviction help. E-mail me if you want the referral. Russ

Re: Lease/option tenant is causing trouble! - Posted by Rich

Posted by Rich on March 21, 2006 at 14:32:31:

Depends on your state. I am looking through my Real Estate legal newsletters for the court case citation in which the CA Superior Court held that due to the language construction of the lease option the deposit paid was a “security deposit” for the tenancy and not lease option deposit. The same attorney further said that in cases getting to court, the odds of keeping the option fee are pretty low. So I would check with an attorney specializing in Real Estate or negotiate with the tenant/optionee.

What Is Drastically Reduce? - Posted by Randy (SD)

Posted by Randy (SD) on March 21, 2006 at 14:14:11:

You didn’t post any numbers relating to how much of a reduction your tenant/buyer is seeking. What defects did the inspection disclose? What is the cost to fix the defects? Considering the lease option is only six months old if these are structural deficiencies that must be corrected, consider negotiating a resolution. Offer to pay all or part of the cost to repair or some kind of equivalent discount… make the deal work for both of you. The flip side is you may be a defendant in a legal dispute, considering the current attitude and recent court rulings regarding lease option being “predatory” real estate transactions and in many cases the court’s ruling against the big bad investor, you could end up forfeiting the $20 K. and have to correct the deficiencies. Don’t play hardball, you might get smacked with the bat.

Re: Lease/option tenant - Posted by Joe

Posted by Joe on March 21, 2006 at 13:23:34:

The option is for a given price and time. If the option isn’t excercised at that price within that time, then it’s not excercised. They made the option payment to be allowed to excercise that option, they don’t get anything else.

Having said that, you might be better off just negotiating with them. If the repairs are something like a roof that’s been about ready to go for 5 years, you might just do it yourself. But if it’s something like worn carpet or drains not draining well (stuff that’s been used for the last 6 months), I’d tell them no deal because the damage could be their own doing.

What kind of repairs and costs are we talking here?

In the future… - Posted by Marcia

Posted by Marcia on March 21, 2006 at 11:19:10:

I’m curious. Did you give them the right to have the inspection prior to moving in? Then they would know up front if there are any issues or have no right to expect you to take action after the fact. Just a thought for the future, I know it doesn’t help you at this point.

You’re fine… - Posted by Luke Hoppel

Posted by Luke Hoppel on March 21, 2006 at 09:50:16:

You’re in a good spot here man and congrats on picking up a 20K deposit!
Like the previous poster said, “As long as the contract states that the deposit is non-refundable and the price was stated in the option contract”, you’re good to go. The Tenant/Buyer may try to create some problems and if that happens just get a lawyer and you’ll have no issue.

Might be wrong - Posted by Patrik

Posted by Patrik on March 21, 2006 at 09:46:46:

Im fairly new to the whole real estate game. Though if Im not mistaken. If you both signed a contract saying that the 20k deposit is non refundable then he cant do nothing. Plus, did you agree on a price in the lease option contract? If a price was pre agreed on, once again that is legally binding and you dont have to drop the price for him.

Re: Lease/option tenant is causing trouble! - Posted by RogerN

Posted by RogerN on March 21, 2006 at 18:59:54:

Then why are we even bothering to sign contracts if the courts don’t uphold the? It’s one thing if it’s an illegal contract but if they’re doing on a whim.

Maybe this is why this stuff should be done in a land trust. Then the tenant would have to sue himself out of his own deal.

Re: What Is Drastically Reduce? - Posted by Tim_wa

Posted by Tim_wa on March 21, 2006 at 15:43:25:

The exercise price is 515k. We already agreed to a 10k reduction which makes it 505k. They went and got an appraisal for the loan and it came it at or over 528k.

They didn’t complain while living in this place for over 7 months. This is a brick rambler sitting on a flat plat of land. But they claimed foundation damage and beattle problems and all kind of things and try to get the price reduced to 450k.

At this point, I wouldn’t mind giving them back their 20k because similar houses are going for over 530k right now.


You’re not fine . . . - Posted by Joe Kaiser

Posted by Joe Kaiser on March 21, 2006 at 16:26:59:

Not picking on Luke, but you’ve got an issue, for sure. You are not fine.

This is something you negotiate. Standing firm is your best opening
posture, I think. You then gauge their response and figure out what to
do from there.

It’ll be fun.


Re: Lease/option tenant is causing trouble! - Posted by Rich

Posted by Rich on March 22, 2006 at 18:54:45:

The problem is we are no longer in a society that allows deals to hold together based on a handshake. In order to have that kind of deal, both parties need to have the same frame of reference: same values, same right and wrong, and so on. Now that we’re in a relativistic society, even commonplace sentences don’t get their legal meaning until tested before a judge.

Contracts are only used when a dispute happens and most people don’t really expect a dispute to happen. But without common frames of reference, the number of disputes is actually increasing. In addition, people are taking a much more self centered approach to dealling with others. It used to be a person’s word was his bond. Now its only good until it benefits the person to change his or her mind.

So they sign a contract to bind you never expecting to be bound by it if it becomes inconvenient. As a long time landlord (17+ years) I find that leases only bind the landlord. Tenants walk out on them all the time and never see the problem with it. So my leases are written to savage their credit report and make them pay collections costs if they walk. Whereas my Dad has a tenant who has been his tenant for 20 years. There is no lease and never has been. Its a handshake deal between people who’ve known each other for a very long time.

What many people count on is the fact that enforcing a contract is a roll of the dice, even when you’re careful, and very expensive. For example to get a judgement against a tenant who walks and trashes the place would cost me $10,000 in Arizona, a place where the courts are a friendlier than they are elsewhere. The tenant who walks or breaks the agreement knows and counts on this.

Here’s what I suggest.

  1. Do the research to see if there really is a problem,
  2. Get a CMA on the property and deduct the costs of problems found
  3. If the number is higher than the contract, inform the tenant of that fact and that any renegotiation will result in a higher, not lower price,
  4. Inform the tenant that you intend to enforce the contract as written unless they want to go to the higher price supported by your research,
  5. Inform the tenant that they have not yet exercised their option and have x number of months to do so,
  6. If the tenant stops paying rent, evict their butt and get someone else or just sell the place
  7. Make sure your liability insurance is paid up, and make sure that you have enough coverage for the value of anything they could attach for a judgement (at least $1 million or the insurance company won’t really fight the lawsuit) because they will sue to get back their $20K and you want your insurance coverage to help defend you.

Now We Know the Rest of the Story… - Posted by Randy (SD)

Posted by Randy (SD) on March 21, 2006 at 16:10:20:

With those kind of numbers I would tell them to “go pound stand”! The price is the price take it or leave it. Better yet, as you said “please, don’t exercise your option just move out”.

And of course I would not give them back their option consideration. FYI for future reference it helps to post pertinent details like this.

Legally I see no problem here - Posted by Luke Hoppel

Posted by Luke Hoppel on March 21, 2006 at 18:45:32:

If he has a contract and set option price, what is the t/b going to do? Sue him for not taking a reduction on his option price? NO! These are all things the T/B should have taken into consideration when he signed the paperwork. Granted the paperwork was done correctly, I see no issues here.
I could be wrong but I’m not seeing where.

Re: Now We Know the Rest of the Story… - Posted by Rich

Posted by Rich on March 21, 2006 at 18:42:47:

Let them sue you for the return of the deposit. They might win, but they might not if they’re having to front money to an attorney because they’r ecase isn’t strong enough to take on contingency.

Re: Legally I see no problem here - Posted by Joe Kaiser

Posted by Joe Kaiser on March 21, 2006 at 18:58:57:

Doesn’t work this way in the real world.

Judges don’t consider $20k insignificant and may view lease option
contracts as something other than you and I.

In other words, it would not be unlikely for this to get kicked out of
eviction court with Tim having to foreclose instead.

Nobody walks away from a $20k deposit on a house. Whether they
have an argument or not, you’ll still have to defend that action and you
never know how that ends up.

We did a deal recently where we sued, won, and the judge gave us an
amount equal to what we owed rather than what our profit would have
been. NOBODY, including the appeals court, could figure out that line
of reasoning and corrected the error.

You just never know.