Increasing interest rates/current market conditions/Lease Options

Hello to everyone reading this post. I have some concerns about real estate markets around the country and lease options. It appears that the real estate markets around the country is beginning to slow down due to increasing interest rates. Increasing interest rates probably will result in less homebuyers being qualified to purchase properties. Also, a probable outcome from increasing interest rates will result in higher holding cost for investors that are looking to acquire, fix and sell their properties quickly.

Are lease-options a sensible marketing/profit reaping strategy to utilize under current market conditions?

Is a shorter lease-option period (1-1.5 year) preferable than a longer lease-option period under the current market conditions?

With increasing interest rates, the chances of a bank invoking the DOSC increase as ALL lease options are in violation.

§ 1701j–3. Preemption of due-on-sale prohibitions
"d) Exemption of specified transfers or dispositions - With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon— (4) the granting of a leasehold interest of three years or less NOT containing an option to purchase;

A lease MUST be less than 3 years and NOT contain an option to be in compliance. Combine this with the fact that setting a sale price and granting rent credit provide your tenant with an “equitable interest” and may qualify your transaction as a “disguised sale”, and your concerns are well-founded.

Finally, combine this with the possibility that the IRS may characterize a lease-option transaction as a sale if one of the following factors is present:

* The lessee acquires equity through lease payments.
* The lessee acquires title to the property after the required number of lease payments has been made.
* The lessee's total lease payments are due in a relatively short time, and the payments substantially cover the amount required to purchase the asset.
* The lease payments substantially exceed the fair rental value of the property, indicating that the transaction is financed over less than the life of the asset.
* The property will be acquired by the lessee at the end of the lease term for a nominal sum.
* The lessee participates with the lessor in the acquisition of the asset by guaranteeing a loan or through similar agreements.
* The lessor has little or no at-risk investment in the property (the IRS looks for a minimum at-risk investment of 20 percent of the asset's cost). THIS MEANS NO SANDWICH LEASE OPTIONS. 

Congratulations to you for being thorough in your investigative approach to your investment strategies. Best of luck to you.

Da Wiz

The above is a completely useless post, as it does nothing to answer the original posters question about market conditions and how they effect using a lease option. This is called thread hijacking and it is getting ridiculously out of hand.

The best thing to do is ignore any post by Da Wiz, because they all do the same thing, degrade all types of investing other than the one he uses. This is called thread hijacking and is not supposed to be allowed.

Wiz, offer proof that the above is anything other than an isolated incident. Otherwise, you should quit misleading investors with false information. A few isolated incidences doesnt mean these things are common, becasue they arent. If you can prove with some percentages that they happen a lot, do it.

How much more of this do we have to put up with before something is done? Tell me his answer had even one thing to do with the posters question…it didnt. It is the old song and dance thread hijacking, and we all know where this post is heading.

Smart people will just pass over Da Wiz and his board hustling and look elsewhere for REAL answers to the questions they ask. This answer didn’t even address his questions about market condition.

The DOSC is a non issue right now because rates havent went up enough for any lender to call a loan due. You can worry about it if they go 4-5% higher than the original loan. don’t let Da Wiz and his fear tactics scare you. They get called occasionally, but not enough to do the things he does to protect himself.

Sandwich lease options are done almost all over the country, with a couple of exceptions, despite what the IRS is allowed to do. If it was an issue, investors would not use them. Use common sense instead of listening to fear tactics.

Always nice to see a normal debate on the

in this corner is your Trust guy Mtnwizard

Today it looks like he wil be squaring off with his long time buddy!


For those of you just tuning into this brawl let me recap we are currently in round 185. And wondering just how long can it last?

Ding ding let round 185 end and 186 begin Oh Oh it looks like bobo has struck the wizard with a Due on sale clause and the Mtnwizard has come back with a trust… What is going to happen now WOW it looks like the chances of the bank calling it due are slim to none but do to the fact the property is in a turst it is going to take some time for the banks to figure it out… Wait wait another turn of events… A lease option on the property has been thrown into the ring… What now holy cow I never would have seen this coming now we have a lease option and a Subject to Oh no not the double Due on sale!.. What is this a new ref in the ring It is it looks like REOConsultants has come in to finish off what other ref’s have tried… And Bam whats this REO knocks out the Subject 2 and the Lease option totally gets rid of the Due on sale clause puts the property into another investors name then in a trust and signs a Shared Equity Agreement with his new tenant and the investor there it is folks a great ending to a long a violent match. Wow who ever thought it would end like this… Bobo and mtnwizard both relize they are fighting a loosing battle and return to start other topics elswhere.

Thanks for tuning in!

Be sure to stop by tomorrow Where there will be new matches and hopefully I can be there to anounce them for ya… Have a great night and thanks again for the support!

Oooooo…Wizard has poked Bobo in the eye with his National ID card that hasn’t even been issued yet…that’s gonna leave a mark!

You’re killing me, Robb!

I want to make myself perfectly clear why I posted what I did. It had nothing to do with the issues, it has to do with a poster hijacking threads.

The poster asked a question about how interest rates and market conditions affect lease options.

Did he ask about thje DOSC? NO

Did he ask about equitable interest? NO

Did he ask about the IRS? NO

The above 3 things are posted over and over by Da Wiz, even though 90% of the times he posts it, nobody asked about it. That is called thread hijacking. Period.

What answer was not given? The answer to the posters question.

So someone tell me what Da Wiz’s post had to do with the original question about interest rates and market condition. I can answer, it had NOTHING to do with it.

The only reason he does this is so when someone responds to his post, he can go into the trust song and dance. This is classic board hustling.

I may not have as much direct investing experience as others…though I have more than Da Wiz claims. However, I spent many years in my younger days living in a bad area in Detroit, and I definitely know more about con games than the majority of people in here. I can spot this stuff a mile away. I feel obligated to make sure people are aware of the above. Frankly, I don’t know why this is allowed in the first place.

You don’t expect him to cut and paste an answer and then actually edit it so that it makes sense, too do you, Tony?


Here is my 2 cents .Increasing interst rate is good and bad. For example. FEDS raised rates to slow the housing market.But right now is a buyer market! . Due to option arm or pick a pay that are suppose to be for investors are causing a alot of foreclosures.Some loan officers and some bank account executive do not know the value and benefits, and when to used it. Some clients do not understand the loan they have or why they have it.Payment shock… qualified for too much home and kept it to long.Same with investment property. Which causes a lot of short sales or foreclosure. HUD predicted 40 million foreclosure in the next 5 years. This screw up the comps. A client house was appraised last year for 800,000. Today it is 720,000. Result to a higher loan to value to get qualified.Higher LTV… higher the risk.100 % Financing the piggy back loan 80/20 . People are max out… home value dropped. Now don’t forget about the new BK laws that is harder to qualified. Also the new credit card laws concerning the minimum payment.Some credit card and HELOC are variable rate. When the FEd raise the rate anything that is varable will go up.New car loans and credit cards are also affected.Now an extra 300 to 500 will keep most people out of BK. Imagine a increase in thier bills… BK or Foreclosure. Most people are living paycheck to paycheck to make ends meet. On average I see 100,000 to 200,000 in in equity, because I deal in the foreclosure business nationwide also. It cost the bank any where from 30,000 to 80,000 to foreclose on a house. Our company is averaging 62 cents on the dollar. We have investor that get good return in a few months.But don’t forget about the delta factor also in your calculation.What we do is lease options to get into these homes. What people should have have done was sell high. Buy low. The real estate market run in cycle. The last few years the rates have been low. A lot of properties will come on the market … get ready to ride this trend. I get my opinion from reading the Federal Reserve website, bloomberg, bankrate, wall street investor on stock and bonsds, mortgage-x dot com. Hope this help .

The man was concerned about how interest rates affect lease options, whether a lease option is a suitable strategy, and questioned the proper length of an option. His questions were answered. Don’t take my word on lease options:

What the experts say:

Donald J. Valachi, CCIM, a well-respected real estate authority. Here is his summary:

“Although the lease option is a valuable strategy in many situations, it should be used with great care. There is always a threat that the IRS may view the lease-option transaction as a sale and the lease as merely a financing device. Rents that are significantly above fair market rents, when combined with a “bargain” option price, indicate that the transaction is likely to be characterized as a sale and that the rental payments are, in fact, installment payments on the purchase price. Thus, both the rental payments and the option price should be set by the parties with reference to going market values and rents for similar properties. And the parties should be prepared to justify their estimates of rent and purchase price if the transaction is later challenged by the IRS. Rental value and property value are best established through independent appraisal by experts.” Here is the link to the full article:

John Cash Locke: ""A Lease/Option can be considered that the Tenant Buyer has “Equitable Title” in the property and a judicial foreclosure is required to remove the T/B, I have seen it happen so I know this for a fact. Even if you separate the lease from the option once the T/B says he has an option the judge can rule “Equitable Title.”

John T. Reed: John T. Reed, (whom I do not like but who many believe) says: “The gurus are not interested in finding out what the law really is on lease-options. I have long urged them to obtain an IRS private letter ruling on the income-tax legality of their lease-option agreements. The cost of such letter rulings was drastically lowered years ago. But not a single lease-option guru has ever requested such a ruling, in spite of the fact that it would help his clients and help him market his material.”

Scott Moyes (Realtor, Investor, Author):
"As a result of the Lease Option and the ensuing claims of “Equity” (i.e., the tenant held an “equitable interest” in the property as a result of having paid an option fee and being given rent credits) a simple eviction was not in the cards. I would now be relegated to the time and expense of a foreclosure process instead (you can’t evict an owner with “equitable interest”, which foreclosure no doubt had to be followed by an ejectment action in order to retain possession and entry, and then a quiet-title action to remove the legal claims and clouds to the deed in order to allow it to be sold (sigh). After months of no rent for me and free payments for the tenant, the lender finally began foreclosure proceedings. After another 10 months, the property was sold on the courthouse steps.

The tenant buyers sued me for their $10,000 option fee, and all the rent credits I had given them. To add insult to injury, the optionor (owner) didn’t like me anymore and sued me for making him lose his house to foreclosure. I decided right then and there that I was finished with lease options."

Even our good friend Rob the Moderator (reoconsultants) posted this on another thread: "Rob (REIclub Moderator): "There is risk involved in any activity and it does not matter if we are talking about Real Estate investing or not. The key is to simply select activities that will minimize that risk. Personally I have seen the DOSC kicked in on a Lease Option situation. I don’t do lease options just for that reason. As we all know they are cracking down on Lease Options across America and there is a reason for this. What is that reason? The United States Government does not like the fact that you are giving someone a specific time frame to purchase the home and or lose your deposit on that property and personally I do not blame them for that. Is there a creative yet simple way around that? Yes and someday when it is not 1 am I will share that with you if you would like.

Here is the bottom line on this situation If you are doing Lease Options chances are you are also doing Subject 2. I have also seen the DOSC kicked in there as well. So it gets back to the key point here which was select activities that will minimize that risk."

The original poster now has enough information to make an informed decision. Peace.

Da Wiz

Once again, the above post has nothing to do with the original posters question. The post is clearly against forum rules. It is clearly against forum rulers to keep repeating the same things over and over. It is nothing but thread hijacking, which is out of hand.

I appreciate the feedback provided by all. Thanks again for the information and continued successs in all your investment endeavors.