Lease Options and Equitable Interest

General Real Estate Investing
1

There have been many posts regarding this topic over the past several weeks and I have been the target of some rather heated posts accusing me of creating fear in newbies or young investors. My point is that “equitable interest” is very difficult to disprove for the seller who faces expensive foreclosure procedures in default situations. Bobo likes to point out that “equitable interest” never happens. Well, here is what his mentor, John Cash Locke had to say on the subject on another forum:

"Glad to meet you. 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”.

I always use a Land Contract and in over 500 deals never had to file for a judicial foreclosure to remove anyone from my properties that fell behind in payments, go figure."

John $Cash$ Locke

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So, if you are a Seller and you want to do a lease option, please know that it is not just Da Wiz who thinks you have much better and safer choices. Remember, a home is an asset and it is vital that you manage it properly. John likes to use land contracts, I favor land trusts. Whatever you choose, don’t take unnecessary chances. Good luck to all.

Da Wiz

2

A properly structured lease with option does not give equitable interest.

However, most people do not have properly structured L/O’s because they use the guru/free forms to create their contracts.

Now, what is a properly structured L/O agreement will vary according to your state laws, so it is very important that you have a good, preferrably referred, RE attorney review and revamp your agreements to fit you and your state’s requirements (this is true regardless of what form of investing/method that you use).

But one of the easiest ways to get a properly structured L/O is to closely follow commerical properties. Commerical properties are routinely “sold” via L/O’s but they do not have the equitable interest issue that residential properties tend to have.

Some general guidelines to follow (again, review with your legal counsel).

Make sure that you don’t collect a downpayment, but rather an option fee. Very important difference and you should have it in writing that the tenant/buyer understands it.

Collect a security deposit on top of the option fee. Lessens the chance of any confusion (real or manufactured) that the option fee was a security deposit.

Don’t give rent credit. You can always choose to reduce your purchase price for timely payments, but don’t set up your agreement to state that so much of each payment goes toward the principle/balance/etc. or that so much is for rent and so much is for principle payoff.

Have separate lease and option agreements.

Don’t base your lease payments off of an amortization table.

Don’t setup your agreements for terms longer than 3 years.

Carefully select your tenants. IF you pick tenants that will pay and will eventually buy, then you don’t have a problem.

Finally, as Doc says, don’t take unnecessary chances. Regardless of what method you choose to use, the most unnecessary risk that most new investors take is to not have their contracts/forms reviewed by a good local RE attorney.

Raj

3

As I had posted on another thread, I had to go to court for an eviction on 6/20/06.

I knew my paperwork was fine and had filed all the correct notices and eviction papers for the court. My tenant decided to try to stall and fight the eviction by filing an answer with the courts.

While before the Judge, the tenant tried to pull that equitable interest defense.

Judge told him that is not what we were here for today and refused to hear this type of defense; that this case was about an eviction for non-payment of rent. When the tenant stated he didn’t have the money, the Judge ruled in our favor and told the tenant to either have the money in our hands by noon Friday 6/23/06 or be prepared to immediately get out.

No show/No call for payment on Friday…Constable did the lock out on Monday. Tenant is finishing up their move out this Saturday.

The Judge will rule however the Judge sees fit based upon your case and how well your paperwork is prepared. Just make sure all your ducks are in a row and you should be fine.

John (LV)

4

This is one case in Nevada, hardly representative. John is an attorney and the moderator on another forum who likes to delete my posts if they say anything positive about land trusts in relation to a subject to or lease option. This is why I imported the John Cash Locke post which echoes mine.

Da Wiz

5

Kind of like one case you use over and over from Kentucky regarding an equitable interest issue…hardly representative.

6

With all due respect, I won a case as a tenant several years ago, and I posted the story by a realtor/investor in Salt Lake City. Equitable interest is common. Even your favorite guru warns of it. The Kentucky case to which you refer was a land contract gone bad.

Da Wiz

7

Equitable interest is definitely not common. Sure, it can happen if you have poor paperwork, but saying it is common is a major exaggeration.

8

Are you saying your favorite guru is wrong? Here, again, is what he said: "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.”

Your paperwork doesn’t matter, even if you separate the option; the existence of the option itself gives the tenant a legal claim of “equitable interest”. Section (d)(4) of US Code TITLE 12 > CHAPTER 13 > � 1701j�3 makes a lease option a violation of the DOSC, but of course, you just say to ignore that, too, and Trust banks.

Have a nice Holiday. Peace… and, while your head is in the sand, here’s a loan so you can keep an eye out for a good deal.
http://user148333.websitewizard.com/images/PEEPER.GIF

Da Wiz

9

CAN be…which still doesn’t mean it’s common.

Kind of like you CAN be struck by lightning.

10

Thanks for the “Promotion”, however I not an attorney, just a layman like yourself.

John (LV)

11

As an investor in Texas, and as one that is concerned with the legislation recently passed in Texas regarding lease options here is my opinion. (As always, my opinion is worth the price charged)

The L/O legislation (again, in Texas only, I can’t speak for other regions) omits (for the most part, but not entirely) agreements less than 36 months. Also, the nature of the legistlation is to protect the rights of those who are unfairly targeted (the under educated, illinformed and often times mislead tenants) from unscrupulous landlords. The L/O were used in many cases to swindle tenants out of money unfairly.

However, locally we’ve had quite a few meetings and examples of where the L/O if practised in fairness has not been unfairly dismissed in court proceedings.

As on poster has pointed out, although the law is definitely in place to protect the tenants now, the courts still render decisions that are greatly dependent on the intention and actions of the parties involved. Essentially, if you act in good faith, evidence has shown that the courts have been tolerant of binding contracts that are in place even given the new legislation.

Basically, although the letter of the law is now more clear and tenant friendly, the spirit of the law is still being considered. The L/O legislation in Texas was started by ACORN and was generated by consumer advocacy groups. As long as the parties are acting in good faith, the legislature hasn’t started kicking the L/O unilaterally.