Posted by chris on March 08, 2000 at 17:27:31:
Read Bronchick’s articles here. One thing he mentions
is using a seperate option form and a seperate lease
form to avoid the equitable interest problem. The PACTrust as mentioned earlier is also something to look into.
Lease Options / Owner Financing vs. Tenant Buyer Bankruptcy - Posted by LC (IL)
Posted by LC (IL) on March 08, 2000 at 09:30:47:
Hello everyone.
I am currently learning all that I can about lease options and owner financing transactions. I am extremely interested in Bill Bronchick’s techniques as taught in his ‘Cash Cow’ course (which I hope to purchase soon).
It just occurred to me how ugly it could get if you positioned yourself in the middle on lease options and your tenant buyer has established ‘equitable interest’ in the property and s/he filed bankruptcy.
Or worse, you sell a property on contract (where you still owe a mortgage) to a buyer whom files bankruptcy. You, as a seller, are on the hook for the underlying mortgage and your buyer gets a forebearance. Obviously, if you don’t want to wreck your credit, you will need to carry the burden.
How do you protect yourself on such events? Do you make the seller sign a notarized document that states that this property could not be tied up in a bankruptcy?
As you may be able to tell, I am a newbie just learning the business. Interested in any and all replies.
Thanks!
Bingo - Posted by JPiper
Posted by JPiper on March 08, 2000 at 09:45:10:
Bingo! You’ve reached a point of enlightenment when you finally realize that yes…there is some type of risk in virtually every transaction. The question is how do you address the risk?
First, the whole point of the lease/option is to hopefully structure it in a manner that the tenant’s interest will not be viewed as an “equitable” interest. I suspect Bronchick covers that in his lease/option course…I know his forms are written to attempt to accomplish that.
Second, if you are holding a note in which the buyer defaults…he doesn’t get any “forebearance” unless you give it to him. You’re not going to do that are you? If he files bankruptcy this may hinder your ability to take the property back…but if there is little or no equity, you should be able to break the property out of bankruptcy with an attorney’s help…and complete your foreclosure.
Either way, when you receive upfront money in the form of option consideration OR down payment…don’t spend it all. Rather, set some aside as a contingency fund on each deal so that when or if a problem occurs, you’re not wondering where the money is supposed to come from. Given enough time and enough deals, a problem WILL occur.
Get some courses…knowledge is one way to protect yourself.
JPiper
Real world story… - Posted by Mark (SDCA)
Posted by Mark (SDCA) on March 08, 2000 at 12:41:35:
I would be much more concerned about #2 than #1. With #1 you are looking for an eviction, not a foreclosure. Much easier.
This story relates to Cali law- and everyone knows how whacky our real estate laws are, right?
I had a friend who was basically a hard money lender. He generally had high enough interest, low enough LTV to protect himself. In this one case, he leant on a 4BD house with a separate guest house. Through a series of bankruptcies and property transfers within bankruptcy (dad to mom to daughter back to dad etc), this family was able to tie up the property for a year, making no payments and still collecting rent on the guest house. It took a year for a judge to recognize and tire of the shell game before he put a stop to it and my friend got the property back.
Cheers,
Mark
Re: Bingo! - Posted by LC (IL)
Posted by LC (IL) on March 08, 2000 at 09:51:05:
Thanks JPiper. I was hoping at least you would respond as I (and I know others too) value your judgment.
I own one of LeGrand’s Fast Cash courses which is excellent for learning the business. I have a fairly good grasp of the mechanics involved but am interested in learning the legal aspect…enter Bill Bronchick’s course(s).
Again, thanks for your response.