Few more questions?

In trying to fully understand the whole process of L/Os, I have a few more questions. They are probably very generic but I just want to make sure.

  1. I have read to do a credit check on both the owner (seller) and the tenant/buyer. Is this necessary for both of them and how do we do a credit check? Is that something we can do or do we hire a third party? What is more economic (cheaper)?

  2. What about a preliminary title check? Do we go with one of those online services or should we use a title company/attorney?

  3. Could someone explain the process of escrow?

From what I understand, It is good to put the deed into escrow, so the property can close quickly without some possible snafus (such as the owner moves out of state, or is difficult to find when it is time to close,etc.)
a. Is this necessary?
b. How do we convince them to do this? Is this a deal breaker?
c. If they agree to do this, what is the next step? How is this actually setup?
d. How do we actually recieve our profit when an option is excersised? How is the difference “put into my hands”?

  1. I also read to set up some type of payment account with an escrow company, or a bonded/established accountant firm to accept direct payments from your T/B so the payments ( PITI) can be made. What are your thoughts on this?

  2. Regarding entities, having never done a L/O deal, is setting up an entity necessary at this time or should I wait?

Any input would be greatly appreciated!!

I used lease options for more than 20 years. I don’t use them anymore. Texas has outlawed them unless you own your home free and clear, and several states are making attempts to limit and/or prohibit them. Read this article: http://www.thecreativeinvestor.com/residential/modules.php?name=Articles&file=article&articleid=1111

Here is a list of five things that may violate the law and cause the judge to classify the lease option transaction as a “disguised sale”. This is not my list, but this list was prepared by a Judge in Arizona who actually co-authored Arizona’s landlord/tenant laws:

  1. Collection of more than 1.5 times the monthly rent as Option Deposit.

  2. Collection of an Option Deposit or Rent Credit to be credited to a Purchase, or to discount the Purchase as in a Down Payment.

  3. Predetermining a Purchase Price, as in delaying or disguising a sale.

  4. The Lessee also holding an option on the same property they are leasing regardless if it is one document or two separate documents. (This is a direct slap at investors who like to option a property and then sublet it to his tenant).

  5. The Lessee being responsible for maintaining the property.

If the lease is not recognized by the court as a lease, it doesn’t get the benefits that go along with a legally recognized lease. If the judge feels a sale has taken place instead of a lease, the rules governing foreclosures will apply. For this reason, possession of the property will be decided by a judge in position to decide matters of title and the process can be extremely expensive. Costs can run $10,000+, not including having to pay the back mortgage payments during the life of the suit.

There are better ways to go, such as a triple net lease giving the buyer “first right of refusal at fair market value” at the end of the lease term. Good luck to you and since this is your first transaction – keep it simple. I recommend that you read up on various strategies, find one you like, and then implement it.

Da Wiz