We do not put a dollar amount on any lease option tenant. The tenant is responsible for all repairs. Some call most do not, when they do call I just tell them its their house fix it. We have had occasion in the early stages of L/O with a new tenant and offered them a refund if they move out immediatly but none have taken us up on the offer. We have had good luck with t/b er’s after many deals and many many l/o’s. One secret of our success is staying in the upper end of the house cost spectrum
Pat
Pat
Responsibility of T/B for repairs - Posted by Alan-Baltimore
Posted by Alan-Baltimore on October 21, 2000 at 18:10:56:
I?m in the middle of renovating two properties that I am going to lease/option as soon as the work is complete (should be by the end of November).
This is my first foray into lease/option end of real estate. Up to now, I?ve stuck with multi-family and, as the landlord, been responsible for all the repairs. However, as I understand it, with a lease/option one of the benefits is that the T/B takes care of most of the upkeep of the property. I have Bronchick?s material and his lease states the following:
?Tenant shall be responsible for repairs not to exceed $500 per year.?
However, how I don?t see an easy way to enforce this. I have a concern that the T/B could let a small problem become a big one rather than spend any money at all. I?d like to avoid a situation where the T/B doesn?t call the plumber to fix a leak for $50-100 and this turns into repairs that cost thousands of dollars when an overflow of water ruins a floor or ceiling. Or perhaps in a worse case, the T/B tries to fix something that they are not qualified to do and causes more damage than if a professional had been called in from the start.
Ideally, the T/B should treat the property as his future home but somewhere along the line, he might decide that he?s not going to exercise the option and since he?s going to lose that deposit anyway, he might not want to put any more money into someone else?s house. I will be carefully screening the potential T/Bs but I know from experience that no system is perfect and given enough properties problems are bound to happen.
Do all of you who do lease/options simply figure this in as the cost of doing business or do you have any tricks that help keep the T/B fixing those small problems right away?
I?d appreciate any tips that you could supply from your lease/option experiences.
Thanks for the great responses - Posted by Alan-Baltimore
Posted by Alan-Baltimore on October 24, 2000 at 10:29:38:
Thanks for all the great info about this area of lease/options. It was really gratifying to get comments from so many of this board?s MasterMinds.
I?ve decided to go with the system of having the t/b be responsible for all the repairs, give them my list of preferred contractors and stipulate in the lease that I have the right to make periodic inspections. I would also have a clause where I would do the repairs and bill them if they were not able to handle the problem themselves. Of course the agreement would be void if they cause significant damage to the property and that would include damage by neglect.
You say that you are in the middle of a couple of rehabs and that you plan on L/O to find possible buyers. If your approach is to have rental property and are going to have L/O as a way of getting premium rents that is one question. If your approach is to recoup your investment and make a profit then you should consider other alternatives. A good mortgage broker can get most people some type of loan. An owner financed note can be sold to get much of your cash. You can even lose a few thousand by doing a cashout refi and selling a.l.a. PACtrust.
A L/O works for a defective property(bad area, unattactive appearance, less than perfect house) but for a rehabbed property is less desireable. It brings in less down and lower payments than other creative financing in many cases.
In approaches like the PACtrust or Piper’s lease not doing the repairs can become a default in the agreement and a tool to recoup costs for any repairs you do have to do.
The more you get the T/B to feel that it is their home and they need to do the repairs the better off you will be. Screening tenants for their history of paying on time, capability of paying, and stability are imperative. Of course, the point would be moot if the mortgage broker can get them to cash you out.
Posted by Hope(Fl) on October 22, 2000 at 06:19:35:
We have found that we are better off paying for the repairs because it has been our experience that the tenants will generally not do the repairs properly. As our homes are in excellent condition, we do not have a problem with this.It also gives us a chance to inspect the property and see how it is being maintained. It has been our experience that most t/b DONT buy, so ultimately we will get the property back anyway.We always make sure that we get a nice amount of $ for the downpayment to help us cover any repairs. We have had t/bIMPROVE the property at their expense, fence, paddle fans, garage door opener,etc. BUT we shy away from them doing repairs as it is usually not up to our standard and will cause more problems for us when we get the house back
I use Bronchick’s lease, and mine reads that Tenant is responsible for all repairs in exchange for reduced rent. I have done quite a few L/0 deals. 3 of them put down 3k option money and walked already this year ! YIPPIE ! Some have closed…too. They are really, a win win win deal. I love them.
With my Tenants who have been in the house for a longer period of time, over 6 months, I like to go in and check for repairs, such as leaking sinks etc. Never had a problem yet. But I still like to check. Sometimes, I even use his lease on regular Tenants. I did this for the first time this summer. Tenant has now been in place for about 4 months, and I just picked up the phone to discuss any problems. I’ll check in around the first of the year in person.
I have not leased to anyone on a L/O for a long term, so I haven’t really had any problems crop up yet. Before I enter an agreement, I usually know up front that the buyer will be able to get financing within a year. More often, less time than a year, or I don’t go with that Tenant. I have one who had a two year option on a home I had owned for a while. I wasn’t really interested in selling it, so I set the price high. She asked to extend the option last week for another two years. YES ! Two more years without a vacancy, without cleaning carpets, without painting, without fixing doors… LIFE IS WONDERFUL ! This is the longest I have gone with one… but this was also my first, and she had me ammend the agreement, and I pay for all repairs. So, I’m not too worried about her.
Re: Responsibility of T/B for repairs - Posted by JohnBoy
Posted by JohnBoy on October 21, 2000 at 19:48:04:
First of all, the $500 per year clause in Bronchick’s contract is the contract that YOU would use as the BUYER doing a L/O deal that YOU would be buying from a seller and sub-lease optioning to YOUR tenant/buyer.
The second set of contracts that Bronchick uses would be for YOUR tenant/buyer with you being the Landlord/Seller. That has two separate contracts to use. One as the lease agreement and one as just an option agreement.
The money your tenant puts up is NOT a deposit in any way. It’s for “Consideration” of BUYING the OPTION to buy the property at a later date at a predetermined price IF the tenant elects to exercise their option.
Dealing with the repair issue, YOUR tenant/buyer would be responsible for ALL repairs for ANY AMOUNT that they might cost. However, in some cases you may have to step in and help pay for these repairs if your tenant/buyer doesn’t have the money to pay for them. You would end up doing this simply to protect your investment on the property. You would work something out with the tenant/buyer for them to pay you back somehow. That could be by having them pay you extra each month, add the cost to the sales price, or whatever works for you.
You can have a clause in your contract that allows you as the landlord to be able to inspect the property every few months. If upon your inspection of the property you found anything needing repairs you would have the right to have those taking care of and the tenant/buyer would be required to pay you any cost involved since they have breached their agreement by not properly maintaining the property. Otherwise they would lose their option, option consideration paid and could be evicted by you for breach of contract.
You should also get enough option consideration up front to give the tenant/buyer more incentive to properly maintain the property and follow through with exercising the option. Otherwise they stand to lose a lot more if they decide to walk away. Plus you will have a decent amount of THEIR money from the non-refundable option consideration to pay for any repairs that may be necessary.
The LESS you accept as non-refundable option consideration, the MORE you risk in absorbing a loss because the tenant/buyer has a lot less to lose.
I think your concerns are absolutely valid. These concerns tend to be glossed over in the lease/option courses. But I think in reality that you will find that the tenant/buyer may not maintain the house, or if he does maintain it may be done improperly or incompetently?.such that when and if you get the property back you will find yourself performing ALL of the neglected maintenance and/or damage at once. You?re also right that some types of repairs when neglected will result in more serious damage with time. I think it also goes without saying that your tenant/buyer will not have YOUR experience in being able to select a contractor to perform the repairs, resulting in high prices and perhaps incompetent repairs for the tenant/buyer.
Of course if ALL of your tenant/buyers exercise their option successfully, then this won?t be a concern. I haven?t reached that particular pinnacle as of yet. It?s also true that if your upfront option consideration is ample then the repairs can be performed with the tenant/buyer?s money when he leaves.
My lease and option make the failure to perform maintenance a breach. These days I have a lengthy discussion with the tenant/buyer about the maintenance issue. The goal of this discussion is to 1) let them know of their responsibilities and 2) let them know that we are in the same boat together, and that we are BOTH interested in making sure that the property is kept in good repair. After all, when the tenant/buyer exercises the option the lender will conduct an appraisal, and this will be IMPORTANT to the tenant/buyer in terms of obtaining his proposed financing. I tell them that if they get into a situation that they don?t feel comfortable with or competent with, then they should call me?keep me in the loop?.that I may be able to lend them some of my own experience or expertise regarding maintenance. What?s important here is that you may be able to refer a particular contractor that you know is reasonable and competent. Or if the repair is serious enough or costly enough that it is beyond the tenant/buyer, then you may be able to renegotiate some aspect of your deal in return for handling the repair. What I don?t want is to be surprised at the end of the lease.
I have started a plan to inspect the property periodically, and the tenant/buyer is now informed of this at the inception of the lease. Maintenance issues will then be addressed with the tenant/buyer in the event that they exist.
