Hi, ive got a deal in the works wherein a seller has agreed to a 2 year lease option in order to build up down payment money on a owner finance deal. The lease purchase will turn into a true owner financed note. ( mortgage). The sell terms are gonna be part of the lease option contract. Its gonna make it real tight, so i thought about going back and asking for a 4 year deal instead of 2 years to lower the payment. The seller isnt in a hurry for a sell, but DOES want to get rid of the property.
My questions are:
- Are 4 year lease options done?
[b]Yes. Not often on residential transactions, where this was the seller’s primary residence, and he wants to qualify for tax treatment on the sale. He has to have lived in the house for 2 of the 5 five years to qualify (if I’m not mistaken).
Well, that theoretically means he can’t wait more than three years, after he’s moved out, to actually sell the house, and capture the tax treatment.
However, if your lease/option morphs into an installment sale, then the seller can take advantage of is tax treatment, because there is a sale. And that appears what you have in mind.
Many sellers use lease/options to “qualify” their buyers, before offering them full-on financing. If the tenant/buyer pays on time for a year or two, he offers them an installment sale.
Issue: In this market, the mortgage payments can be significantly less than any lease/option payment, and the spread disappears, after the seller converts the rent to a amortized loan payment. Just saying. That’s one reason that sellers want higher interest rates, to compensate for the lost spread in payments. [/b]
- The owner has an existing mortgage. How can i protect myself to make sure that HIS payments are made?
Make payments through a note servicing company. There are tons of them, with varying costs. They process many different kinds of payments, including rent payments and note payments. They also provide the buyer/optionee a verified record of payments, which will help them qualify for new financing later on. This does means the seller has to sign up for the note servicing account, and provide copies of the note/lease/option agreements.
- This is my first lease option. Is there anything else i should be looking out for?
[b]As a tenant/buyer, you need to be aware that a lease, and an option, are technically two different things. And you need to decide whether, or not, you want these agreements mutually dependent, or separate.
For example, if the agreements are mutually dependent, then a default on the lease, extinguishes the option. And the expiration of the option, terminates the lease.
If they are separate agreements, and you default on the lease, the option is not extinguished, but remains in effect. At the same time, if the option expires, the lease is not necessarily terminated.
As an investor/optionee (buyer), I want separate agreements. If my sub-tenant drops the ball and doesn’t pay, and somehow the lease defaults, I still want to retain the right to buy at the price and terms I agreed.
That also means I’ve created an incentive in the seller to let me reinstate the lease, and find a new sub-tenant. Otherwise, the seller can’t sell to anyone else, until my option expires anyway, and he’s not likely to get the same money from anyone new, because the can’t offer an option.
And …the house needs to be rented anyhow, so the seller will just want to continue renting to me, under the same terms as before. Meantime, “separate” options don’t necessarily default, they just expire.
As a seller, I want the lease and option to be mutually dependent. And this is most likely what you’ll have to agree to, since this is the most common way to offer lease/options.