Re: Tenant wants option - Posted by JPiper
Posted by JPiper on November 03, 1998 at 20:20:32:
Jim:
These issues are not issues that have ever come up for me. I?m with Joe?.what makes this guy tick??
Having said this, he makes some valid points, and some which are not valid. First, let?s hope that you have tied this property up correctly with YOUR seller. By correctly what I mean is that at a minimum you should have a deed executed by the seller to you, and held by a third party escrow agent with instructions as to what to do with the deed. Further, assuming there is an underlying loan, this escrow agent should be collecting payments from you, distributing the underlying loan payment, and then sending the difference, if any, to the seller. In addition, you should have a recorded memorandum of option at minimum, and preferably a performance deed of trust/mortgage recorded.
Now here?s what all this accomplishes. You are assured that you can receive the deed from the seller if you exercise your option. You are also assured that when you make your payment, part of it goes to pay the underlying loan, so that the loan does not go into default. And you are assured that if the seller attempts to sell the property or further encumber it, you can block this. Finally, if the seller has judgments filed against him, etc. you can foreclose to receive title under your performance mortgage.
Now, let?s get to your buyer. His valid questions have to do with your ability to deliver the deed. If you have the above set up, you could include him in your collection account as an example. Now when he makes his payment, the escrow agent will pay the underlying loan, send any money due the seller, and finally send the difference to you. The buyer knows the payment is made. You could record an memorandum of option for the buyer. This is a protecting device. You could even execute a deed, just make sure that you have reviewed this with your attorney. Personally I would make this a quit claim deed from you to the new buyer. This deed would be held by the escrow agent to be recorded at such time as the buyer exercises his option and you deed your interest.
Now you have a situation where the money is being handled by a third party for the benefit of all. Protections are in place for all. Your buyer should have no further concerns except invalid ones.
Let?s say he is worried about foreclosure. If he is making his payment, the escrow agent is paying the underlying loan. Sounds safe to me as long as he does what he says he?s going to do.
What I would not do is escrow either option money or rent credit. Option money is not held to be returned later. It is NONREFUNDABLE?..period. The deeds are in escrow, everything awaits the buyers performance. But to hold this in escrow will tie the money up if he decided not to perform. DON?T DO THAT. Rent credits are just that. They are credits toward the purchase price?.bookkeeping entries if you will. They aren?t actually cash. They are a means of enabling the buyer to build equity. This rent credit is not earned until the buyer performs?.period. And then he earns it in the form of a credit against the purchase price, not in cash. I might point out too that if you were to escrow the rent credit, there undoubtedly would not be enough money available to pay the underlying mortgage payment. Again, it?s a bookkeeping entry, not cash (similar to depreciation).
Spend your time addressing the issue that the buyer is really concerned about?..your ability to deliver title. Make sure you will have ability to deliver title if you haven?t already done so. Then if he persists in wanting these funds escrowed, find another buyer. One thing for sure, if he wants ALL the safeguards of a deed, let him go get a loan and buy the property now.
JPiper