Question about finalizing lease option deal. - Posted by Carrie

Real Estate Investing Self Storages
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Posted by Kristine-CA on February 26, 2011 at 20:51:10:

Ben: again, thanks for sharing your thoughts and experiences. I think
the CRE world really fails to debate the homeownership issue. Should
people with little skin in the game buy a house. Should renters
become owners. Does homeownership fit with the bigger financial
picture and future goals of the buyers. Do the buyers even have any
goals? Or are we just creating a need where there isn’t one. Everyone
needs someplace to live, but not everyone needs to own a house, to be
sure.

Landlording is plenty creative as it requires working with people and
houses (repairs!) and finances, all of which can be moving every which
way at any given time. There’s a rehab buyer/landlord that I’ve sold
about six houses to, some of which I’ve carried back paper. I called
him the other day to talk to him about another deal. I let him know
that every time I get a check in the mail from him I know what it
represents. It represents repairs and evictions and collecting that rent,
usually in person in our farm. Not to mention managing the paper
work and his other businesses (he owns an auto body shop and some
self storage props). He’s plenty creative for me. :slight_smile:

The CRE I’m still interested in and continue to be enthusiastic about is
working with sellers. Distressed sellers and distressed properties. I
still like figuring out how to buy something that the sellers can’t sell or
think they can’t sell. I still like working with sellers and heirs the best.

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Question about finalizing lease option deal. - Posted by Carrie

Posted by Carrie on February 23, 2011 at 23:18:17:

Hello Everyone,

Ok so i leased out one of my houses with an option to purchase almost 3 yrs ago. They have paid perfectly and intend to buy, they will have $6200 towards the purchase price paid from the option fee and rent credits, but i dont know exactly how to proceed at this point. Do I need to write up a purchase agreement for them to take to the bank as well as the option agreement, and a letter from me verifying down payment paid? What is the first step for them to get the financing? Hopefully this makes sense, its late and i just got home from work… oh yea total price for home is $38,000.

Thanks in advance, I love this site though I havent been on here in a while. It taught me so much and inspired me to get into this stuff, and I love being a landlord!

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Re: Question about finalizing lease option deal. - Posted by Kristine-CA

Posted by Kristine-CA on February 25, 2011 at 15:50:48:

Carrie: I would start with referring your buyers to a mortgage broker,
one of your choosing. I’m not so sure a refinance will work with all
lenders, especially these days. Your buyers have an option, not a
contract for deed or other mortgage payment arrangement. It’s a
straight purchase and I know my bank wouldn’t go for a refi in this
situation. A mortgage broker will be able to tell you which paperwork
you have to have in order from them to find a lender.

My option to purchase agreement has instructions on how to exercise
the option. It refers to a separate purchase agreement which is an
addendum to the option. That agreement has the price and terms
should anyone decide to exercise their option. So when and if a buyer
goes to buy, that contract goes to escrow. And in this case, would be
part of the loan application process. You might consider something
like that in future.

Also, congrats to your tenant buyers who are ready and able to buy.
IMO that’s what lease options are for. Hopefully you made out OK too.
Kristine

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Re: Question about finalizing lease option deal. - Posted by james_CA

Posted by james_CA on February 25, 2011 at 13:25:50:

refi interesting! I thought the tenant has to be on the loan and title but who knows. Can they go conventional route?

Let us know how it goes.

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Re: Question about finalizing lease option deal. - Posted by BenT

Posted by BenT on February 24, 2011 at 17:24:22:

The houses I have sold this way were handled via refi. So no purchase agreement was necessary. I’d make sure your tenants have gone to hopefully a good mortgage broker. They may want to see a record or proof of payments, or proof of the original option money. But I’d let them tell you what they want. In the old days of subprime lending, refi’s were easier than new purchase money loans. I’m not sure what the situation on that is today…which is why a good mortgage broker would be important in your deal.

Ben

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Re: Question about finalizing lease option deal. - Posted by Carrie

Posted by Carrie on February 24, 2011 at 08:11:11:

No-one? Hmmm… well i also wanted to add that im in PA - kinda important don’t know how I forgot, lol.

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Re: Question about finalizing lease option deal. - Posted by BenT

Posted by BenT on February 25, 2011 at 18:42:21:

Hi Kristine:

In the old days before the collapse of subprime lending, refi is how they handled them. I haven’t done one since the collapse so I can’t speak to that. I will say that I never have done much financing through a “bank”. Good mortgage broker in my opinion is the way to go.

The problem in my opinion with your deal as you described it is that by attaching the purchase agreement you may well have created equitable title. The way I learned lease/options we tried to keep the agreement in a form where we could evict if it became necessary, rather than foreclose, and could handle the property like a landlord for tax purposes. This took a separate lease, and separate option…and alot of caution as to how your rent credit was worded, in the option. BTW, I used Bill Bronchick’s option form together with my own lease.

When it got around to exercise, lender guidelines really drove the deal rather than the paperwork per se. Just my experience.

Ben

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Re: Question about finalizing lease option deal. - Posted by Carrie

Posted by Carrie on February 25, 2011 at 24:13:32:

Thanks alot Ben!
I never thought of going the refi route. I’m going to get the ball rolling on this. Get them started on the process, help them find a lender, etc. Thanks for your input!

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lease and option are totally separate - Posted by Kristine-CA

Posted by Kristine-CA on February 25, 2011 at 19:27:11:

Thanks for your thoughts. My option agreement was written and
checked by an attorney for just the issue you mention, equitable title.
Forget equitable interest, it’s really about a possible misunderstanding
on the part of the “tenant buyer.” IMO there should be no
“lease/option” and no “tenant buyer”. There is a straight rental
agreement that has nothing to do with the option to buy. I’ve never
offered “rent credit” and probably never would, for just this reason.
The option to buy is a straight option, with option fee.

Eviction is based on the performance per rental agreement. Option to
buy is based on the option addended with the a purchase agreement
outlining price, terms and closing, etc.

This means during the tenant period, the tenant is a tenant and I’m a
landlord. I would not suggest that tenant make repairs or act as
owners in any way. Here in CA I would not want to stand in front of a
judge if the tenant had been treated as an owner.

Back on the day on this site there was so LO hoopla which sounded
great but I couldn’t see how it would fly in some of the tenant friendly
places I live and do deals. The whole idea of taking a deposit and
thinking that one is home free on repairs didn’t ring true to me. So it’s
not my way.

Agreed, lender guidelines will drive the deal to get the buyer’s
financing in the end. But an option to purchase with purchase
agreement addended will probably work in most cases. Just my
opinions here. Kristine

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Here’s what I did - Posted by Wayne-NC

Posted by Wayne-NC on March 05, 2011 at 10:25:31:

I had a straight lease with a relatively large deposit on both the straight lease AND as a deposit/down payment on a purchase agreement. Now here is the difference I believe if I understand you correctly. I then gave the “tenants” (along with the lease) a signed and undated purchase agreement with everything else “spelled out”. All they had to do anytime at their option is sign and date the contract to execute and I was then under obglitation to sell at the pre-negotiated price and terms. There were lots more details ofcourse but this is the basics and it worked like a charm.

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Re: lease and option are totally separate - Posted by BenT

Posted by BenT on February 26, 2011 at 17:26:50:

“Back on the day on this site there was so LO hoopla which sounded
great but I couldn’t see how it would fly in some of the tenant friendly
places I live and do deals. The whole idea of taking a deposit and
thinking that one is home free on repairs didn’t ring true to me. So it’s
not my way.”

I’ve done quite a few lease/options with option fee, rent credits, and tenant “responsible” for repairs. I think I’ve discovered most of the negatives the hard way. Lol!

First, believe it or not, I think I tended to draw the worst from the pool. The good credit people who wanted to buy a house didn’t need me, they simply went and bought. The good credit renters didn’t want me either, they weren’t buying for a reason, and therefore didn’t want to put up an option fee, etc. So in the end I got all the problem people.

I did have a number of evictions. In my state it was not a problem, although I think it would have been in California. BTW, I had a few tenants represented by lawyers in their eviction. The lease/option was never an issue…in my state.

Repairs were a huge issue. My contract made them responsible for repairs. But what I found was that either they made a substandard repair, or, in most cases, didn’t repair at all, either because they didn’t have the money, or because they didn’t want to spend the money. I had a few people actually move out over relatively simple repairs…a hot water heater comes to mind. But in virtually all cases I got the house back with the need of repairs, in some cases, substantial repairs made worse by the lack of timely repair.

I quit doing lease/options a number of years ago because the repair issue was disturbing to me. And because I learned that in most cases people who needed the lease/option to begin with (bad credit people) rarely changed their spots. In other words, they would lapse into their bad credit mode, making them difficult tenants, and eventually requiring eviction.

The subprime disaster came as no surprise to me, after having dealt with a similar credit quality via my lease/options. In my case I was much more active in terms of rental management/collection than any lender could ever be, so I know their efforts were doomed to failure from the beginning.

These days I just rent. I’ve become fairly uncreative. I’ve decided that many of the “creative” forms of transactions end up unraveling for one reason or another typically not thought of or unmentioned by the guru.

Ben