Posted by Innovator on April 19, 2006 at 23:21:50:
I said REDNECK, NOT Cowboy! I said handsome, NOT sexy! I DEFINITELY do NOT have ANY Broke Back Mountain tendancies!! I have a beautiful Park City, Utah gal, she’s no Cowgirl, but a “Great Lady” that has a major job keeping me walking the line!
Scared to do Lease Options? - Posted by Matt
Posted by Matt on April 14, 2006 at 13:29:55:
My wife and I have some money we would like to invest. We were planning on buying undervalued properties and lease optioning them out for 1-2 years. We like the tax benefits of holding properties for at least a year. But,recently we have seen so many threads about the DOS clause that we are now second guessing our strategy.
My question is for those of you who use lease options as a major part of your strategy. Do you sleep well at night? Are you nervous about the DOS clause—or do you believe that this is one of those things that could happen, but in practice probably will not happen(even if interest rates continue rising)?
Thanks for your insights-Matt
Re: Scared to do Lease Options? - Posted by Brad Crouch
Posted by Brad Crouch on April 15, 2006 at 24:29:38:
Matt,
There is obviously a learning curve to understanding land trusts. This
simple post is not an attempt at such a course. I recommend Bill
Bronchick’s course on land trusts (because I think it is the best!) for
anyone wanting to learn the straight scoop on land trusts.
However, let it be known that Chicago Title is willing and able to be a
trustee for land trusts, and the fees charged for this service, are fair. It
is never a good idea to be the trustee AND a beneficiary at the same
time, in the same land trust.
In my opinion, more than one beneficary (you) simply convolutes the
structure and leaves you without COMPLETE control. I would never
recommend more beneficiaries than just one . . . YOU, the investor!
Chicago Title has offices in most major cities, and I would trust them
and their legal expertise, implicitly.
Brad
Never crosses our mind… - Posted by MatthewC
Posted by MatthewC on April 14, 2006 at 20:41:46:
To be honest with you, my partner and I have a respectable portfolio where we use a variety of methods to buy property including “subject to” mortgages and co-investor loans and then we lease-option to our tenants. Been doing this in the public eye and even told lenders and attorneys, and it has never been a concern.
In fact, we will be going on TV to educate our community on “subject to” mortgages and how we can help our community with it.
We are quite comfortable with it and even going public with it to the realtor community.
MatthewC
Re: Scared to do Lease Options? - Posted by Dons
Posted by Dons on April 14, 2006 at 19:13:34:
I’m confused Matt.
Are you talking about buying the house with convential financing then doing a L/O to a tenant buyer? If this is the case you are renting it to them until they exercise their option to purchase. The DOS does not apply until they actually buy the house. Again when they purchase they get financing and that pays off your loan.
Are you talking about obtaining the house through L/O by leasing it from the “seller” yourself and then doing another L/O to another tenant/buyer? If so, you’re leasing the house from the “seller” and not buying it until you and/or your L/O buyer exercise the option. At that time financing is acquired and the original loan is paid in full. It is then a sale and the DOS applies.
Or are you talking about acquiring the house sub2 and then doing the L/O? In this case the DOS would apply if the bank holding the mortgage decides to push the issue, but…
…Some of the sub2 guys here will have to give you their experience on that.
Don
Don
Re: Scared to do Lease Options? - Posted by Matt
Posted by Matt on April 14, 2006 at 22:14:59:
Don,
Thank you for your response and sorry for the confusion.
We are thinking of buying conventionaly and then doing a lease option as a selling technique. We have heard that when some lenders have found out about the lease with an option to buy, the lenders have called the loans due. I have also heard that this rarely occurs–but just wanted to see what experiences you all have had.
Thanks-Matt
Re: Scared to do Lease Options? - Posted by Chris in FL
Posted by Chris in FL on April 18, 2006 at 16:34:05:
Matt, Let me see if I can answer your question with no discussion of landtrusts whatsoever. Yes, I do lease/options routinely, and yes, I sleep well at night. First, let me say lease/options carry some risk, and you should study them extensively before using (esp. equitable interest, which innovator mentioned). Also, local rules and regulations vary: many areas are trying to do away with them altogether. Next, your lease should never mention that there is a ‘contract for option’, leading me to, you should do a 'contract for option, and not give tenant/buyer an actual option. Without getting into all of the details (look for a post I did in the past week about lease/options), here is why you don’t need to worry about DOS. When you lease/option to a tenant/buyer, there is no reason you should record their option, or even get it notarized). Nobody outside of you and the tenant/buyer needs to know that you are doing anything except a lease, hence part of the reason the lease does not mention the option. There is no reason your mortgagor should ever find out (plus, if you pay on time, odds are long and tall against them calling your note even if you were foolish enough to tell them about the option). Make sure contract for option references lease, and states tenant/buyer will not get an option unless they fulfill all terms of the lease and the contract for option. Lease and contract for option should both state that tenant does not currently have equitable interest, and can be evicted according to statute abc of state xyz landlord/tenant law. There is more, but this goes a long ways towards explaining why DOS clause is not a concern when lease/optioning to tenant. I hope I didn’t step on toes of you landtrust fans; landtrusts are probably a good way to go for various reasons (especially privacy), but are not neccessary JUST to avoid DOS when doing lease/options. Best wishes!
Innov and LP are jaded - Posted by Marc Donovan
Posted by Marc Donovan on April 16, 2006 at 20:00:46:
They are speaking through rose colored lenses. They have the right idea but they are sold on the hype of a snake oil salesman. Yes a trust can make you invisible. Yes if you are a partner holding beneficial interest you will have a barrier to a law suit. But all it takes to become a partnership is to have a partner.
I have everything they talk about in my deals and I pay my trustee $100 per year per property. That’s not even close to their payments. The only thing I am missing is a non-profit collection company and I see the logic to that but I disagree with the practicality of it.
Frankly, the whole thing is way overblown. Just my opinion…
In my experience the lender does not care unless you stop making payments.
Re: Scared to do Lease Options? - Posted by Innovator
Posted by Innovator on April 14, 2006 at 23:38:37:
Based on you buying conventionally and then doing a lease option, you should not have any problem with DOS. Unless it is specifically spelled out in your mortgage the lender does not have the right to call their loan because you are leasing/renting it out, unless you signed a mortgage that disallows you to rent or lease the property after you have purchased it. That would be dumb, and the lenders knows this and as a result I doubt very much if they would even try to include this in their mortgage contract much less try to enforce it. If they did, FIND A DIFFERENT LENDER, you don’t need to sign any contract that does not allow you to rent or lease. Some lenders add vacancy provisions that could be used to call the loan, but as long as the mortgage payment is kept current that probably won’t happen either.
It’s not the DOS clause you should be concerned with, but you should be concerned with the equitable interest issue that could happen with a L/O.
Re: Scared to do Lease Options? - Posted by Brad Crouch
Posted by Brad Crouch on April 14, 2006 at 23:31:29:
Matt,
Consider putting the property in a land trust. This is commonly done
as an estate planning move, so won’t alarm the lender, especially if
you’re the only beneficiary to the trust. You can then lease out the
property and when the time comes for your tenant to secure his own
financing and exercise his option to purchase, just sell the beneficial
interest in the trust instead of the property itself. The trustee can be
substituted for one of the buyer’s choice, at that time.
I hope this helps,
Brad
Re: Scared to do Lease Options? - Posted by Chris in FL
Posted by Chris in FL on April 19, 2006 at 09:54:23:
Brad Crouch e-mailed me personally asking if I am able to collect a nonrefundale option fee since I do a ‘contract for option’, and not an actual option. Yes. The ‘option for contract’, IMHO, has every benefit of the option itself, but gives you more protection from unintentionally giving tenant/buyer an equitable interest. I state in my documents that the contract fee is non-refundable, and, in the event tenant/buyer does not purchase the property, all contract fee is forfeited as rent (same as you would say about option fee).
Also, something I should have mentioned about equitable interest. If tenant/buyer puts enough money down, and builds enough ‘contract for option’ fees, they, at some point, do have an equitable interest. Regardless of paperwork or anything else, if the tenant/buyer has accumulated 30% of the property values in contract fees, they deserve to have an equitable interest. Anyone who thinks they should build up that much and have to forfeit it completely doesn’t have the same values I do (I am not in this business to take advantage of people; I am in it to help people). If they build up that much equity, and want/have to leave, I anticipate I will offer two options: 1) they can find a cash buyer for the property and sell it for FMV; they buy it from me on their contract, and sell it, and make a profit in between, which might be more or less than their contract fees, or 2) we negotiate a settlement fair to both parties, where I keep some of the contract fees and return some as well.
My thinking is that, all paperwork done correctly, tenant/buyer is unlikely to get away with ‘stealing’ an equitable interest (forcing me to refund money not due to them, or forcing me to foreclose for nonpayment instead of evicting). Reality is, if they try to, and negotiating fails, it will come before a judge, and whatever happens is case by case. I hope any judge would be able to see that I do fair business, am not trying to take advantage of anyone, and rule on my side. However, I recognize that anything is possible.
Now, my understanding is that there is a magic number where accumulated buyer/tenant fees reach a certain percentage of sell price or FMV (I mentioned 30% above in speculation), that legally gives them equitable interest. Does anyone out there have insight into this??? If so, please share! Thanks, and Best wishes!
Thanks Chris - Posted by Matt
Posted by Matt on April 18, 2006 at 17:04:06:
Chris-
Thanks so much for your insights-Your response helps answer a lot of my questions. I think I remember your post a week or so ago, but am having difficulty locating it through the search function. Does anyone have that one saved?
Also, would you feel comfortable sharing your lease and “contract for option” paperwork with me(all of us)? I am trying to put together a game plan with the appropriate paperwork.
Thanks again-Matt
p.s-do you hold title to your lease options in an llc?
Re: Innov and LP are jaded - Posted by LeasePurchase
Posted by LeasePurchase on April 16, 2006 at 22:11:49:
Not sure what you mean by rose colored lenses or snake oil but here are the facts.
I pay nothing per year for my Trustee, the Resident does and only what the Law Requires. To be a valid Beneficiary Directed Trust the law requires the Trustee to charge an industry standard. The Trustee must also be a 501 C 3 non-profit Corp.
The Collection agent may not charge a fee for it’s services by law and must also be a non-profit corp.
Anything other would allow a Creditor to invalidate the Trust and get to the property. If the Collection Agent charges a fee or is not a non-profit then it is considered an Association or Management Company and may violate the doctrine of equitable conversion and invalidate the Trust. So I don’t think it’s overblown.
Why is it that you guys take legal short cuts and call the only Fully Patented and Legal Process of Documentation overblown? I don’t get it. By the way, I have never paid one dime out of my pocket to make a transaction work. It all comes from the Resident, and they gladly pay it.
Re: Scared to do Lease Options? - Posted by Mark (SDCA)
Posted by Mark (SDCA) on April 16, 2006 at 15:51:50:
In fact, some lenders nowadays ARE specifically including in the mortgage language that a lease with an option to purchase is a violation of the DOS.
Mark
Good post innovator - Posted by jeff in Ohio
Posted by jeff in Ohio on April 15, 2006 at 21:36:56:
Good post
be careful! - Posted by Innovator
Posted by Innovator on April 15, 2006 at 24:02:23:
I’d use the land trust with at least three beneficiaries (settlor, investor, resident) with a separate third party trustee holding title (in escrow so to speak) to lease the property and avoid the equitable interest problem inherent with L/Os!
If you take Brads advice be careful of ?The doctrine of merger? which refers to the combining of legal and equitable title in the case where a person becomes both the sole trustee and beneficiary of a trust.
Re: Thanks Chris - Posted by Chris in FL
Posted by Chris in FL on April 19, 2006 at 09:10:00:
Matt,
I give out a lot of free advice, partly because I received a lot (on this site) when I was getting started, but I don’t give away my paperwork for a few reasons. First, the obvious; I spent a lot of time, energy, and money getting my documents to be the best they can possibly be (for me). Second, I am not a lawyer (though my re atty. did approve them for me). In spite of how good I think they are, I would hate for someone to use them, have problems, and put that blame on me. Third, I fear people will use the form, think that they have ‘covered their bases’, and not learn and understand what they are doing the way I believe they should. Lastly, this kind of thing is changing, and is governed largely by local law, so what is applicable in one area may not be in another. As I mentioned previously, laws/rules about lease/options are changing daily. They are a hot political topic right now. A few people are using them unethically and/or illegally to take advantage of innocent people, and the crackdowns are happening now. This is an area where it pays to be a learner, and not a learned (is it R.K. who says ‘the learned inherit a world that no longer exists?’). Anyhow, I hope that explains why I don’t give away my paperwork, without making me a harda@#. Best wishes!
Doesn’t matter what lender does - Posted by Innovator
Posted by Innovator on April 17, 2006 at 05:50:09:
It doesn’t matter what the lenders specifically includes in the mortgage language. If they violate Federal Law they can not enforce anything. A lease option has always been a violation of the DOS clause and it doesn’t matter if the lender has it in their docs or not, if they want to call the loan they can.
What I have been trying to say in this post is you should be more concerned with a L/O causing an “equitable interest” in your property.
The properly designed trust is legal and the lender can not call the DOS without breaking Federal Law and they know it! It also avoids “equitable interest” if done properly.
Brad’s one beneficiary land trust won’t hold up under either of these.
Re: Scared to do Lease Options? - Posted by LeasePurchase
Posted by LeasePurchase on April 16, 2006 at 22:12:40:
It always has been.
Re: be careful! - Posted by Brad Crouch
Posted by Brad Crouch on April 15, 2006 at 24:28:29:
There is obviously a learning curve to understanding land trusts. This
simple post is not an attempt at such a course. I recommend Bill
Bronchick’s course on land trusts (because I think it is the best!) for
anyone wanting to learn the straight scoop on land trusts.
However, let it be known that Chicago Title is willing and able to be a
trustee for land trusts, and the fees charged for this service, are fair. It
is never a good idea to be the trustee AND a beneficiary at the same
time, in the same land trust.
In my opinion, more than one beneficary (you) simply convolutes the
structure and leaves you without COMPLETE control. I would never
recommend more beneficiaries than just one . . . YOU, the investor!
Chicago Title has offices in most major cities, and I would trust them
and their legal expertise, implicitly.
Brad