Taxes & Interest on a L/O - Who Pays them? - Posted by Andy Hansen

Posted by JohnBoy on April 25, 2002 at 22:51:36:

Correct. You can have it set up where the seller pays to an escrow account and if a payment is late or isn’t received on time the escrow company would contact you to inform you the payment hasn’t been made. Then you can contact the seller right away to find out what the problem is.

Another way is you could just have the seller pay you directly and you will take care of paying the taxes and insurance directly. Either way would work.

Taxes & Interest on a L/O - Who Pays them? - Posted by Andy Hansen

Posted by Andy Hansen on April 25, 2002 at 20:46:25:

Hello to any & all willing to help,

I have been reading incessantly lately about L/O and have not found any book/post/site that answers the following questions on a consistent basis. Here they are:

First, let’s assume the seller’s monthly mortgage payment does not include the taxes and insurance for the house. He had been paying them out of pocket the previous years. Thus, if I were to do a L/O, should I still have him cover the taxes and interest, or should I have the new tenant/buyer pay them? Bronchick says too be careful if you have the buyer cover them b/c they could possible use it against you in an equity lawsuit down the line if you evict them. If the buyer doesn’t agree to pay for them since he doesn’t own the house, and the seller says he won’t b/c he wants to wash his hands in the whole thing, what would you try to do to close the deal? How often will this happen?

Secondly, a shorter one for you (thanks for staying). Does anyone out there, when using a L/O, actually have the original seller cover the maintenance over a certain $XX/month (say $300), and have the buyer cover anything under $300/month?

Also, what happens if you do write this in the contract, the roof goes bust, and when approached, the seller refuses to pay because he says it is way too much money to pay for a house he doesn’t live in, rent, etc. What would you do?

Thanks a lot for the help. It is greatly appreciated!

Andy Hansen

Taxes & Interest on a L/O - Who Pays them? - Posted by JohnBoy

Posted by JohnBoy on April 25, 2002 at 21:26:37:

The landlord pays the taxes and insurance.

If you L/O from a seller where you will be sublease optioning to a tenant/buyer, your lease payments to the seller should be enough to cover the taxes and insurance.

If the taxes and insurance are paid separately from the mortgage payments then you should send the mortgage payment to the lender and set up an escrow account to send the taxes and insurance payments to in order to insure the money will be there to cover the tax and insurance bills when they come do. NEVER pay any money directly to the seller. If your rent to the seller exceeds the mortgage payments, taxes and insurance then only send the difference to the seller after paying the mortgage payment to the lender and paying the taxes and insurance to an escrow account. That way the seller can’t use that money to pay for other things.

I usually state in the contract the seller is responsible for any repairs over $500. My contract with the tenant/buyer states they are responsible for ALL repairs and maintenance.

However, you may run into a problem where the tenant/buyer doesn’t have the money to cover a major repair where you may need to cover the cost just to get the problem fixed to secure your investment. If this becomes the case then you can just set up a separate payment plan with the tenant to make monthly payments to repay the cost of the repairs. If any amount remains unpaid at the end of the option period and if the tenant is exercising the option you can adjust the amount owed to exercise the option to get paid any monies owed for the repairs.

If you had to cover any costs because the tenant didn’t have the money then you can fall back on the seller to cover any cost above the $500. But you could also have a problem with this if the seller doesn’t have the money to cover the repair cost either. Then you can deduct the cost over $500 from the balance you owe the seller on the option price if you end up cashing the seller out by the time your option expires. That is assuming the seller would be getting any equity from the deal. Otherwise if your option price will be just enough to pay off what the seller owes then you will get stuck with the repair costs to protect your interest in the deal. So hopefully you would be able to make that up from your tenant on their end since they are responsible to you to pay all repairs and maintenance costs.

Thanks John - Posted by Andy Hansen

Posted by Andy Hansen on April 25, 2002 at 22:11:59:

Thanks a lot John…as always, you come through for me in the clutch! I appreciate it.

Taxes & Interest on a L/O - Who Pays them? - Posted by Brian M. Powers(MI)

Posted by Brian M. Powers(MI) on April 25, 2002 at 22:10:12:

are you saying you “always” pay the sellers taxes/insurance? i had a recent deal in the works (it fell through for other reasons) where the owner had a 10.5% mortgage. the payments were PI only, but the high rate made the PI payment about the same as market rent. i had agreed w/ the seller that she had to pay taxes/insurance, and that we would set up an escrow acct. where she had to pay into it each month to cover the costs of taxes/insurance. she also was responsible to prepay the first year of taxes/insurance.
it was in the agreement that this was her responsibility so failure of her to make that payment would result in non-performance.
is this a bad business practice?

Taxes & Interest on a L/O - Who Pays them? - Posted by JohnBoy

Posted by JohnBoy on April 25, 2002 at 22:33:47:

In a L/O the landlord pays taxes and insurance in addition to their mortgage payments, whether the taxes and insurance are included in the mortgage payment or not.

The tenant only pays rent! In some cases you may not be willing to pay rent in the amount that would equal what the seller’s PITI payments are on the property. So you may be able to get the property for less where the seller agrees to pay so much per month out of their pocket just to get rid of the house. This is all fine and dandy as long as the seller continues to pay every month. But you can’t count on the seller paying. Many times a seller will stop paying once they’re out of the property. They may later decide they just don’t care any more! The problem with this is if you have a tenant/buyer you are subleasing to then you are going to have to make up the difference to protect your tenant/buyer’s interest.

The seller is in breach of the agreement if they stop paying, but that has nothing to do with your tenant/buyer and the agreement they have with you. So you couldn’t just walk away if the seller stops paying because they breached their contract with you. You will have to pay the difference so you don’t breach your agreement with your tenant/buyer and end up with them suing you for breach of contract.

So any time you get a deal where the seller will be paying out of their pocket, just make sure the deal will still work out on your end if you had to start covering the extra payment. You only count anything the seller agrees to pay as extra gravy on the deal. If they pay, great! You make more money. If they don’t pay, as long as you are still covered by the amount your tenant/buyer is paying you then you won’t end up with a negative cash flow, you’ll only make less profit then if the seller was paying the difference.

Taxes & Interest on a L/O - Who Pays them? - Posted by Brian M. Powers(MI)

Posted by Brian M. Powers(MI) on April 25, 2002 at 22:43:25:

thanks JB.
the reason i wanted the escrow set up is anytime the taxes and insurance aren’t being covered by the mortgage payment of the seller, i want to have a way of knowing the taxes/ins. are being paid.
i wasn’t implying that i could walk or even want to walk if she wasn’t paying.