Posted by Bill K. - FL on May 23, 2000 at 21:29:26:
The seller in this case was an investor who had no intention of selling but used the tenant and his ignorance against him. Sure the tenant could have taken the seller to court but maybe he didn’t have the money for an atty. or decided it was easier to walk away. I have seen this more than once. How knows why people do things but it is up to you to anticipate and protect yourself in all RE transactions. Don’t assume everyone is as honest as you.
Hello everyone
Thanks in advance for your input. We are lease optioning a fsbo for our own use, and eveything is turning out great so far, we will have the option to buy in 5 years. What can I put in the contract to give me proof that the owner is paying the mortgage every month? We want to make sure we don’t run into any problems, the owner has several properties and is putting out a lot of money right now so we just want some piece of mind. My parents rented a house once and we had to move out 3 months into the lease because the owner wasn’t paying the mortgage and the house was going into foreclosure, not a fun situation. With my husband and my situation, we defintley have an interest in the house, we are going to be remodeling and putting quite a bit of money into the property. Thanks for your help!!!
All your documents (deeds, contracts, etc) should be placed in escrow with a third party. You could then use a clause similar to this:
In the event of any default in payment of any mortgage on the above described property; on in failure to pay taxes when due; or to keep the property fully insured against loss by fire, windstorm, flood, or natural disaster in an amount of no less that fair market value until the time of transfer; or in the event of any impairment to the title, by liens or encumbrances, or by any physical deterioration, normal wear and tear excluded which reduces the value of the Optionee?s interest; title to the premises shall pass immediately to the Optionee or his assigns, without further compensation to the Optionor.
Of course this will not give you notice if the seller defaults, that is easy enough to check by getting the info and calling the mortgage co., but it does give you a specific remedy and a club to hold over the seller’s head. It also may be cheaper than having to foreclose on the seller via a performance option.
(FYI: I am not an attorney, but this clause was reviewed by one.)
What the others have said is the proper approach. The first line is to know the minute they are not making the payments. The third party collection accomplishes that. What it does not do is protect you when they don’t. Your recourse is to sue. That takes time and money. You can be making the payments for them but it means they are in financial trouble. Liens and judgements have a way of attaching to non-homestead property very easily. That is where the performance mortgage comes in. if they can not give you clear title when you are ready you foreclose to clear subsequent liens or judgements. It secures your interest in the property. The other party is unlikely to have heard of such an arrangement so it will take some explaining.
For the same reason insurance becomes a problem. What happens in a total loss and you have put in all these improvements. Do they have to pay you the insurance proceeds. The issue of that underlying loan can be a problem to if your lease is not in accordance with the note. The typical solution is to have them place the property into a land trust. The trust is added as a beneficiary on the insurance. You contract with the trusts for the increased value you add of the insurance proceeds.
Make sure the seller(s) sign a performance mortgage or trust deed to insure that they will allow you to exercise your option.
Our experience is that when the property has appreciated in value the seller has second thoughts about allowing you to exercise your option. We had to hire an attorney to threaten “specific performance” before the Seller would allow us to exercise our option. This happened twice!!
If they sign a performance trust deed, if they do not allow you to exercise your option you can foreclose on them.
Tammi
Get a third party escrow set up to handle the transactions at the owners expense. You pay the escrow company and the escrow pays the mortgage company it’s share and the owner his share.
Or, get the owner to give you the loan account number and the number to the account information for that loan and call it yourself each month for a few months to make sure payments are going thru.
Thank-you to everyone who took the time to help me out, I always know where to come for expert advice. I defintely feel safer going into this transcation now!
Bud: Didn’t understand the last paragraph of your post regarding ‘your lease not in accordance with the note’ and its relationship with insurance. Please explain. Maybe an example would help me.
you MUST always cover yourself BEFORE a transaction
not AFTER…you have entered into an arrangement for which you were not totally prepared. Also your term of 5 years is a long time and alot can go wrong. You must be assured that the title to the property is clean and that the seller continues to make payments----a little late now. If you like this property, I would try to exercise the option ASAP. I would not invest alot of $$ in improvements until the property is yours.
Use the $$ towards buying the property===you left yourself with your pants down.
Gary, Many of the due on sale notes have a prohibition against a loan longer than 36 months. Similar to the IRS that can interpret a long lease as a sale. There are even some notes that prohibit the lease of the property without approval. Easy enough to create a lease for 35 months and renew. But one needs to read the clauses in the note to determine what it supossedly prohibits.
Thank you for you input. Perhaps I was misleading, we have not signed the contract yet, this will take place within the next week (I believe my pants are still up!). I am doing my “due diligence” now, before anything is signed, including title work. We are going for the term of 5 yrs so that we do have that time if we want, we can exercise our option to buy earlier, the day after the contract is signed, for that matter. We are not buying the house now because the work needed prohibits conventional financing; however, it does allow us flexibility with terms/price that makes this a very good deal for us both now and in the future. Thanks again for your time.
Re: What clause in contract assures me FSBO makes his pymt? - Posted by Bill K. -FL
Posted by Bill K. -FL on May 23, 2000 at 16:54:56:
Tammi,
I agree with DD above when it comes to making substantial improvements while leasing. I have seen owners renege on the option after all the work was done. I would want the owner to sign the deed and place it in escrow until such time as you exercise. I would also recommend recording a memorandum of option to cloud the title. The other idea about using a third party to collect and disburse payments is good also. Don’t give the owner an opportunity to mess up.