Leasing questions - Posted by Charley Menendez

Posted by Marc Donovan on April 02, 2006 at 19:57:48:

I should have explained my position before I gave my reasoning. I posted Bronchick’s article link and I assumed everything flowed from that.

But you are correct with everyting else you posted.

Leasing questions - Posted by Charley Menendez

Posted by Charley Menendez on March 31, 2006 at 13:03:59:

I currently own a home that I have been trying to sell for 8 months. It is freshly renovated, carpet, paint etc… Well, now I think I need to lease or rent the property because selling it didn’t seem to work at the price I set. I recently refinanced the house, and my mortgage payments should be significantly reduced. I am pretty sure there will be a positive cash flow, but I am a bit leery as to becoming a landlord. I have the lease/option forms etc…
On the form it states " The Lessor for and in consideration of the sum of _______ dollars in hand paid by the lessee, receipt of which is hereby acknowleged, hereby leases to Lessee etc… What sum is this making reference to? This is the third sentence on my lease with option to purchase form. Could someone plese let me know what this refers to?

Thanks,
Charley

Re: Leasing questions - Posted by Innovator

Posted by Innovator on April 01, 2006 at 20:23:23:

According to the Law, here are just 4 things that if any one of them takes place, will constitute a claim of equity.

  1. Pre-Determining a Purchase Price or Discounted Buy-Out
  2. Collecting an Option Deposit of more than 1.5 times the monthly rent, especially if it is used to reduce or be applied to a Purchase.
  3. Collecting or applying a Rent Credit toward a future purchase.
  4. A Tenant that has both a Lease and an Option on the same property regardless if they are separate documents.

Lease Purchases and Options are now being ruled as Delayed or Disguised Sales in the eyes of the law (check out NC and TX new laws as pertaining to L/O). If the law isn’t in your state yet, the laws in those states where they do exist will establish precedence if you get challenged by a good shark attorney. This can and will trigger the Lenders Due-on-Sale as well as a possible reassessment as a sale for tax purposes. It will also eliminate any future potential for a 1031 exchange for the Seller. Tenant Buyer Creditor liens and judgments may also be attached to the property. A Tenant Divorce or Bankruptcy could also have a claim of equity. The real BID ONE is that you can?t simply evict a non-paying Lease Option Tenant Buyer. You would now be required to go through a full judicial foreclosure. And depending on the State you are in, may take as long as 6-12 months to get the tenant out, plus the expense of doing so with no monthly payments coming in to cover the Seller?s mortgage, not to mention your attorney’s bill for billable hours to you. (I personally saw one that took 18 months and the shark attorney influenced two other lease option tenants of this investor to do the same thing. He ended up declaring BK to get out from under it. After three years he is still struggling because of it.)

Every time I post this warning, I get accused of using scare tactics against L/O. It?s not my law, and I?m not the one who made it. I?m just the messenger who is concerned about this happening to some poor unsuspecting sole who has bought into the seminar gurus misleading information, (90% of whom haven’t bought a stick of anything in their lives, we call them Bull Crouchers).

You can ride this (Lease Options) motorcycle without a helmet if you want to, but one day you?re going to come face-to-face with a ?claim of equity?.

Re: Leasing questions - Posted by Sarasoatson

Posted by Sarasoatson on March 31, 2006 at 18:12:24:

I use three different agreements when doing a lease option. A purchase agreemnet, an option and a rental agreement so that each has it’s own conditions and these is no equitable interest if they don’t exercise the option. Just food for thought.

Re: Leasing questions - Posted by James Harris

Posted by James Harris on March 31, 2006 at 16:55:02:

Basically, the blank is for the consideration fee that you would charge for the option. Say, maybe 3-5% of the sales price.

Well, not really… - Posted by Marc Donovan

Posted by Marc Donovan on April 02, 2006 at 08:37:19:

It all depends on the amount of option premium. If you are at 5% you will have none of these problems.

Bronchick puts in simple terms here:

Innovators post is right out of the pitch book for an elaborate trust system. The closing section of the pitch was omitted since that is not allowed here (thats the reason why he gets accused of using scare tactics). So take it for what its worth.

What are you saying here? - Posted by Marc Donovan

Posted by Marc Donovan on April 02, 2006 at 08:50:03:

Signing a purchase agreement or an option with your tenant gives them equitable interest regardles of your other contracts. Can you explain how you think this will go in court and why you are protected here? How does the purchase agreement help?

Forget about the two checks thing. That won’t make any difference if you get to court.

Re: Leasing questions - Posted by Sarasoatson

Posted by Sarasoatson on March 31, 2006 at 20:02:03:

The rental agreement (lease) is for the same term as the option and converts to a month to month after that amount of time. The option agreement is for whatever amount of time that you have agreed upon and reffers to the purchase agreement for clarification. The purchase agreement is for your agreed upon price and also reffers to the option agreement so that there is a defined time frame for that price. This way, you have a lease in effect just like any other lease plus during that time they have an option and you have the price set. This way if they don’t exercise the option, they can’t go to court and say that they have any equitable interest in the house because they paid on a lease/option together. I typically get 5% as a non refundable option fee as stated on the agreement and a security fee as stated on the lease. This is done in two seperate checks so that there is no confusion about what is what. Also, I charge a high rent (if I can get it) with a large credit towards the purchase (like 2200 a month with a 700 credit) so that there is a real want for the buyer to close.

Re: Leasing questions - Posted by Brad Crouch

Posted by Brad Crouch on March 31, 2006 at 19:42:27:

Sarasoatson,

So how does that work? Is the “rental agreement” for a year or longer?
is it a month to month or is it somewhat similar to a lease? Does the
purchase agreement contain a liquidated damages clause so that the
purchase agreement actually functions as an option . . . and if so, why
is an option needed?

You’re teasing me!

Brad

really… - Posted by Innovator

Posted by Innovator on April 02, 2006 at 16:42:08:

As you can see from the discussion that followed my post, the Bull Crouchers all have an assortment of diverse opinions. How would you like to be paying billable hours to your attorney and the mortgage payments on your leased property while the shark attorneys fight it out for several months in court? If you think these guys can go on and on with their varying opinions you ought to see the attorneys play the game, at your expense. They love to get this kind of stuff into the courts.

Donovan claims my post was right out of a pitch book. He’s right, however, it’s not a pitch book, it’s from a patented/registered program that is currently approved for continuing education requirements for licensed real estate professionals (The Department of Real Estate Continuing Education, Certificate #3309, State of California).

Ride this without a helmet if you want to, but in spite of the posts on the board I’d find out what the law is and if there is a better way before I’d risk a ?claim of equity?.

here? - Posted by Nike

Posted by Nike on April 02, 2006 at 12:21:20:

A purchase agreement creates an equitable interest–but an option contract? Are you sure?

I agree that Sarasota seems confused but the two checks might matter as it would go to the intent of the parties. It would not determine the case but the court will look at facts. The intent of the parties is an important consideration in cases involving this question. The existence of an option alone does not create an equitable mortgage.

Re: Leasing questions - Posted by Brad Crouch

Posted by Brad Crouch on March 31, 2006 at 22:15:34:

Sarasoatson,

If the tenant/buyer cannot get financed within the option period, do
you extend the option/rental agreement/purchase agreement to give
them more time (especially if they are good payers)?

If so, do you create new docs or do the current docs leave room for
extensions . . . maybe requiring an additional fee?

Now that I think about it, you would probably create new docs to
reflect a higher purchase price due to appreciation . . . is that correct?

If you do renewals, how many times would you also include such a
healthy rent credit?

You’re right about collecting two seperate checks, upfront. This
solidifies your position as “landlord”, because “sellers” don’t collect
security fees.

I didn’t think there was any room in a lease/option for a purchase
agreement, unless it contained a liquidated damages clause and would
then take the place of an option agreement. But using all three
documents the way you do, makes sense to me now.

Do you screen your tenant buyers through a mortgage broker to insure
they will qualify for financing before the option term expires, before
you execute any documents?

Last question: Are you operating in Florida? By your screen name, it
seems you are in Sarasota.

Thanks for the points to ponder,

Brad [Los Angeles]

Re: Leasing questions - Posted by Brad Crouch

Posted by Brad Crouch on March 31, 2006 at 21:16:08:

Sarasoatson,

Thanks for the clarification. Sounds good to me. Certainly something
to think about.

Thanks again,

Brad

that does not count - Posted by Marc Donovan

Posted by Marc Donovan on April 02, 2006 at 19:46:03:

Nike is one of our best BS detectors. He will question anything that looks fishy. Just because he calls you onto the carpet does not mean there is a big controversy.

Fact is you will be forced to take this to circuit court if the tenant cries foul (and this depends on your tenant being savvy enough to pull this off - read as ‘never’). You will have to go through the first part of a full suit, but you will wind up evicting after paying your attorney a few extra bucks (maybe 2000 max) plus the time factor (a few months depending upon case load). So don’t let this one bother you.

Bull Crouchers?

Don’t get me wrong, the system Innovator is talking about is a very worthwhile thing to study and form your own opinion. There are many good points that it will address. My only point here is that there are simple ways to address this one issue of tenant equity without going overboard.

Re: here? - Posted by Marc Donovan

Posted by Marc Donovan on April 02, 2006 at 13:24:33:

The only difference between an option and a Purchase and Sale is that the P&S is bilateral. Other than that they are essentially the same. Both forms grant equitable title to the buyer. The seller is not able to sell to anyone else as long as the contract is executory.

The seller typically holds title as fee simple absolute, but when he signs a contract to sell, this title is limited since he can’t grant a deed to another party. He has given up the equitable title, or the right to grant his deed. This right of title must either expire or be foreclosed in order for him to be able to sell to anyone else. The buyer is said to have a “conditional fee” title.

The Statute of Frauds requires agreements concerning land to be written. When the contract language is clear and explicit and does not lead to an absurd result, a court will ascertain contractual intent from the written provisions of the contract itself and go no further (they will only look within the four corners of the instrument). So the argument about the dual checks will probably not be considered by the judge and if it was considered it could probably be appealed.

What I do is use an Agreement for Option. This document grants an option at the end of the lease term when the tenant has performed as contracted in the lease. It explicitly states that it does not grant any interest in title.

Re: here? - Posted by Sarasoatson

Posted by Sarasoatson on April 02, 2006 at 13:11:09:

The reason for the seperate contracts is so that if your tenant does not purchase the property, it is easier to evict with just a rental agreement as opposed to a lease option where there may be a right to equitable interest. That is where the seperate contracts come into play. And if you do a seperate rental and option, your also need a p/s to establish sales price and terms that revert back to the option.

Re: Leasing questions - Posted by Sarasoatson

Posted by Sarasoatson on March 31, 2006 at 22:34:28:

I will only extend the option if I know that the tenant is in the process of getting there mortgage. If not then no way.

If I do extend the option, I get new docs and another option fee and may increase the price.

I would issue a purchase credit dependent on the situation but then again if you increase the purchase price, you are still making more money on the deal either way.

I do screen my tenants before I lease/option to them. They fill out an application and I do a full credit and backround check just like any landlord should. I don’t really care about anything other than if they are paying there bills on time. Just about anyone can get a mortgage if they are beathing and can afford the rent.

Another bennefit to the tenant/buyer is, in alot of situations, if they have been in the house for over a year, the mortgage gets treated more like a refi.

Yes, I am in Sarasota, Florida. One of the highest appreciation and over priced markets in the country. The market has slowed down considerably in the last 4 months and people are alot more receptive to lease options when selling. Alot of my deals are no money down lease/options to me that I wrap. Just make sure and file the notice of option or your tenant might try and go around you.

Re: that does not count - Posted by The Frisco Kid

Posted by The Frisco Kid on April 03, 2006 at 24:15:57:

Marc

Why do you assume Nike is a he? If I remember right from my college days Nike was the Greek Goddess of speed, thus the shoe company could use mercury or nike and I suppose they chose not to be associated with a car.

Re: here? - Posted by Nike

Posted by Nike on April 02, 2006 at 14:26:44:

Donovon–you say so many dubious things. They’re not essentially the same thing–and are you suggesting that a purchase agreement is an executory contract? It’s not.

A seller can, despit a signed purchase contract with a buyer, deed to a third party If the third party is a bonafide purchaser (key point being that he had no knowledge of the other contract)then he will prevail. The seller would be liable to the first buyer for any damages.

Regarding the statute of frauds-- you state the obvious, but so what? Raising the issue suggests you’re confused. The issue of two checks goes directly to the intent of the parties. These matters are heard in Chancery court in which the court will grant an equitable remedy rather than a legal remedy. Your statement regarding the four corners of the contract would apply if there was a contract dispute and the plaintiff was seeking a legal remedy (damages etc). Have you ever read a case involving whether an equitable mortgage exists?

Re: here? - Posted by Marc Donovan

Posted by Marc Donovan on April 03, 2006 at 05:14:34:

Seperate contracts is the correct way to do this. The reason is because if you attach a lease/option when you file the eviction the court will not have jurisdiction and you will have to sue in circuit court. Just be aware that the tenant can bring this up in county court and force you go there anyway - if they are smart enough.

You do not need a p/s to establish terms. The option serves this function. If you have an option and a p/s, you have two contracts that say essentially the same thing with slightly diffferent terms and this is ambiguous. You only want to have one or the other, never both.