I’ve been reading up on owner financing and lease options and everyone acts like they are the way to go in this tight credit market. I have not read anywhere on what happens though if you cannot make the payments in these cases. Can an individual place a “foreclosure” or eviction like settlement on your credit report for a lease option or owner finanacing.

We don’t talk about it because you should never get in such arrangement if you cannot make the payments.

As a general rule, a lease option tenant only needs to be evicted for non-payment of rent. If you bought with seller financing, then a foreclosure will be used to reclaim the property.

Evictions and foreclosures are a matter of public record. A thorough credit search will also examine the public records for any judgements and they will be reflected on your credit report. Even if the seller does nothing, a foreclosure or eviction may still appear on your credit report.

There are two things which are important to protect yourself when you are purchasing a house with a lease purchase agreement (whether you want to live there, or get a tenant-buyer into the property).

Protection #1: You should always have a liquidated damages clause in your lease option agreement to give you an easy out of the contract. This clause is a legal clause that basically says that you can walk away from the agreement and the property owner get’s to keep the money you’ve given them, but they can’t sue you for any more money. It looks good to the property owner because they are thin king about keeping your down payment, so they are likely to agree to this clause. The bottom line if you want to play it safe is that you shouldn’t enter an agreement without a liquidated damages clause.

Protection #2: Use a corporation or LLC. If you haven’t done this before, this may sound hard but it’s not. You can form a corporation for about $500 online. A local CPA won’t charge you much because the company won’t have that many transactions. Sign the contract with the corporate name and seal. This way if you get into a situation where you can’t pay the lease money, it won’t adversely affect your personal credit.

There are always other ways out of contracts that a competent attorney would be able to help you with. It is smart for you to have a way out of the contract before going into it just in case things go wrong.

Another option is to get a tenant-buyer into the property to pay the lease plus some monthly cash flow. This is a spread where you can buy a property with a lease purchase agreement (LPA) and then find a tenant-buyer to sell the property to with an LPA. This is the lowest risk real estate situation I know of.

I agree with Fadi that ou shouldn’t get into a deal where you can’t pay the lease, because this will still cost you your down payment money, and the potential profit you could have made from the deal had you been able to keep making payments.

I hope this helps you,