Tenant wants option $$ & rent credit in escrow - Posted by Jim_NC


#1

Posted by Jeff_Dallas on November 05, 1998 at 08:30:58:

Texas law is very protective of the homestead. So much that a lien on a homestead is not forecloseable unless that lien is retained in the deed to the buyer. The only exception to this protection is the recently enacted “home equity loan” laws which permit equity lenders to judicial foreclosure if they can jump over some very high legal hurdles… Bud may have some more to add to this.


#2

Tenant wants option $$ & rent credit in escrow - Posted by Jim_NC

Posted by Jim_NC on November 03, 1998 at 15:09:33:

I have a house that I just did a sandwich lease on and the tenant/buyer has asked me something that I don’t know how to answer. He has given me his option consideration money and I am giving him a $400 per month rent credit. His concern is what if something were to happen to me. He wants me to put the option money and the rent credit in escrow until he exercises his option to buy. He says he will do this in a few months but technically he could wait up to a year. I am giving him the $400 per mo rent credit but I am only making $200/ mo on the rent. I don’t know what to do. I don’t want to tie this money up for a year. What should I do? I am tempted to give him his money back and get another buyer if I have no other way to do this. He is not being difficult about this deal, he just wants to make sure that when he exercises his option that there won’t be any problems and that he won’t lose that money. Any suggestions will be greatly appreciated.


#3

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


#4

Put it on Video! - Posted by FJW

Posted by FJW on November 03, 1998 at 19:22:34:

You definitely have a smart shopper there. If it’s kosher with you and your contract, why not let him record a memorandum? Make sure though, that he does understand the process. Emphatically stress the facts, perhaps even record the whole document signing process on video. Make sure he understands that it is your intention to have him buy this property under these terms, but it is not your responsibility. It is his. If he has any doubts that he will not be able to exercise the option, he should walk away because the money is non-rufundable. He can not hold you responsible for failing to exercise the option or obtain the proper financing to do so.

Good Luck


#5

Jim you might consider this - Posted by phil fernandez

Posted by phil fernandez on November 03, 1998 at 16:14:33:

Hi Jim,

Interesting question. I would try to work with the tenant/ buyer to address his concerns. Even if you put the option money and rent credits into an escrow account, it should be safe to you because the original lease/ option agreement you made with the tenant/ buyer would give a clear indication of what would happen to the option money if he does not excercise it.

On the other hand maybe you can tell your tenant/ buyer that you will escrow the rent credits but not the upfront option money because that money was his good faith money to obtain the lease/ option to began with.


#6

Tenant wants option $$ & rent credit in escrow - Posted by JohnBoy

Posted by JohnBoy on November 03, 1998 at 16:07:50:

The option money is not a down payment. It is a fee for tying up the property for one year or what ever length of your lease term is and locking in the purchase price that allows the tenant to take advantage of any equity the property may accrue over the one year period. At this point he is only considered a tenant, not a buyer. He only has the “Option” to buy the property. He is not under any obligation to buy. If he does not exercise the option for “Any Reason”, he is not entitled to a refund on the option consideration or any rent credits. Since he is not entitled a refund for any reason, it would serve no purpose to tie up the money in some escrow account. If he didn’t exercise the option the money in the escrow account would go to you no matter what. If he’s not seriously considering to exercise the option then he shouldn’t l/o this property. The same with the rent credits.

The option contract clearly states that if he exercises the option that the “Non-refundable Option Consideration” will be deducted from the purchase price. The same with any rent credits stated in the option contract that applies.

Just explain to him it serves no purpose since that money would be considered “paid rent” IF he decided not to exercise the option for “Any Reason”, therefore tying the money up in an escrow account would serve no purpose what so ever. His contract is his protection.

You could ad a clause in the contract that say’s:

The covenants and agreements of this option contract shall bind and benefit the successors of landlord and tenant.

If something was to happen to you, then who ever your successors were would have to honor the contract.

What if something was to happen to the tenant? Your money would be tied up in an escrow account. This should be more than enough to satisfy his concerns. If its not, then he should find another property.


#7

Re: tell him to take a hike - Posted by Dan Fink

Posted by Dan Fink on November 03, 1998 at 16:06:18:

The option con. and rent credits are your money. he get a credit off the sale price even if you Die it’s in the contract.

If it were me I would set this guy staraight right now and tell him the game is played by your rules not his and if he don’t like the rules he is free to go on his way.

This sounds like he could turn into a teant from he** if it were me i find a new buyer

Dan Fink


#8

Re: Tenant wants option - Posted by Steve Meiners

Posted by Steve Meiners on November 03, 1998 at 23:31:33:

And after all this, still no protection for the purchaser if the man swings with the option money.


#9

Re: tell him to take a hike - Posted by hk CA

Posted by hk CA on November 04, 1998 at 16:43:00:

Your attitude seems a bit harsh, to say the least. The future tenant (buyer) is only concerned with some issues he doesn’t fully comprehend. Sitting down with him and explaining why his concerns are unfounded may make the deal work. It’s certainly easier than trying to find a new buyer and possibly facing the same issues again. A bit of diplomacy can go a long ways.


#10

maybe . . . but maybe not - Posted by Joe Kaiser

Posted by Joe Kaiser on November 03, 1998 at 16:13:55:

This is a people business with lots of different personalities popping up. That’s one of the reasons it’s so much fun. You get to figure out what’s what and where people are coming from, and the person who becomes successful is the person who can figure that out early on and capitalize on it.

No one has ever asked me to escrow the rent credit (he’s clearly not understanding the concept here) and frankly, I’d be a little intriqued about their thinking and want to learn why they believe their position might be at risk.

As long as it’s a friendly exchange, it might be kinda fun to hear them out.

Joe


#11

Re: Tenant wants option - Posted by JPiper

Posted by JPiper on November 04, 1998 at 24:46:38:

How do you figure there’s no protection?? Reread the post.

JPiper


#12

Re: maybe . . . but maybe not - Posted by Jim_NC

Posted by Jim_NC on November 03, 1998 at 16:23:40:

Joe,

He is not being a jerk he is just concerned about the money he is investing. His concern is that, for instance, the house is foreclosed on before he exercises his option, what would happen to his $7000 he paid down. He is not saying it’s going to happen, just “what if” it would happen. How can he get his money back. Is there some way I can record something at the court house so he feels more comfortable?


#13

Re: Tenant wants option - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on November 05, 1998 at 01:07:09:

Jim,
Great answer as usual; hopefully, something like that will keep that buyer satisfied. I won’t ever escrow
option money or rent credits. But, for the record, there is one sticky point that I see here in your theory on protecting buyer’s interest by delivering a deed to buyer in escrow plus other things you mentioned.

The deed that you’d sign to a tenant/buyer and deliver to escrow, would not probably be a good deed (at least in Texas), unless the Buyer is paying the remainder of the purchase price is cash. The kind of Deed you’ll be able to have prepared in advance for buyer would be either a “quit claim deed” or “general warranty deed”.

The problem is that,if buyer obtains the loan to fund the purchase (most likely scenario) the lender’s attorney will have to prepare (again in TX) a “warranty deed with vendor’s lien”. This will tie the warranty deed to the deed of trust securing the lender’s note establishing the priority of the lien. It has a language naming the mortgage company issuing a loan, and referencing loan amount. Obviously, it is impossible to know that information at the time you’d try to prepare that deed for your future buyer.

So, the deed will have to be redone and resigned by you for the financing to occur, and if you are not there to sign it for any reason, the buyer won’t get the property.

For practical purposes of convincing the buyer in my view your arguments would be more that sufficient, though. I was asked by a buyer on a contract for deed just recently a variation of that same question of a good title delivery, foreclosure implicaitons, etc… I offered a much simplified version of what you’d recommended. It appeared it was an overkill for that family. All I had to do was to agree to provide the buyer with the way to check the status of the underlying loan. I am not sure how it actually protects them, but it seemed to have given them a piece of mind.


#14

Re: Tenant wants option - Posted by JPiper

Posted by JPiper on November 05, 1998 at 03:16:55:

Alex:

Thanks for pointing out Texas law (something I am totally unfamiliar with). It goes to show that any advice received here should be considered in light of the laws existing in your particular state. They do differ.

I was interested in your comments that in Texas the deed has language tying it to a deed of trust. You also mention that the deed references the amount of the note. I would be interested in the reason Texas does this if you happen to know. It would seem that it would be unnecessary, inasmuch as the deed and the deed of trust are both separate documents and both recorded against the property. Anyone doing a title search would easily be able to pull both documents. It’s hard to understand why this would be a requirement. Here the act of recording a deed is a separate event, unrelated to the recording of a deed of trust. One evidences ownership, the other is a security interest for a note.

In any case, my suggestion was to execute a quit claim deed to the buyer. This still may not make any difference in Texas. But my reason for this was really because of the possible risk that you may not receive good title from the original seller. The chance here is slim if the other ideas are followed.

Finally, I would point out that if the buyer has a recorded option, he has a means of protecting himself albeit an expensive one, via lawsuit.

JPiper


#15

Re: Tenant wants option - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on November 05, 1998 at 09:36:17:

I’m not a lawyer, but here’s my understanding. This particular language in a warranty deed and a reference to the deeds of trust created at the time of sale is to establish priority of the lien. Besides the conveyance, the deed basicly says “AT THE TIME OF TRANSFER, there are following liens created:…”. We all know that in the courthouse first in record, first in right. Theoretically, if for some reason there is a time delay between recording a deed and a deed of trust securing the financing, somebody can sneak in some other instrument granting an interest in the same property. That may create grounds for a claim and a dispute. With this language in place it’s a one way street for the lenders, they’re first in right even if they are second of record.