Just wanted to survey the folks in NC. My question is that I had heard that after a 3 year period if you have a T/B on a lease option they could claim equity in the house, does anyone know if this is true? If so after the 3 year mark if your T/B can’t perform do you terminate their contract? Or do you work out some other agreement.
Thanks in advance.
The way that works is any lease purchase or lease option agreement that is ORIGINALLY for a term longer than three years will be viewed as a land contract/owner financed transaction as opposed to a standard lease agreement. In that situation, yes, the tenant would have an equity rights position to the property, and you would probably be forced to foreclose on them to reclaim your property as opposed to just evicting them.
However, there a couple of things that you can do to not get into this situation. First and foremost is to never sign up a tenant for more than a 3 year lease term. In fact, its much better to do 1 year terms with a renewal each year. This solves the 3 year problem. Remember, people can rent a property for 20 years and not have an equity hold position.
Second, have the tenant sign completely separate lease and option agreements, with the lease agreement being a standard lease contract (no mention of an option agreement). The option can have the lease referenced to tie them together (something like, “if lease of same date is terminated, the this option agreement shall become immediately null and void.”), but not the lease. Remember, the option FEE (notice that it is a fee AND not a deposit OR a downpayment) is NOT the security deposit, so when filling out the lease, either take a security deposit separate from the option fee or put ZERO (0) in the security deposit received.
By having two separate contracts, it is much easier to prove that the two agreements are NOT a land contract/owner financing in disguise.
And a third suggestion, if you are giving rent credits, list them with the option agreement only, or better on an additional “summary sheet” (an informal, NON-enforceable sheet of paper). Of course, the best solution is to keep the rent credit a verbal agreement only, but most tenants will want it written down somewhere. Limiting the the application of rent credits is important as well. Examples: applied only IF the option is exercised, applied only if the rent is paid on time, etc. It is up to the landlord to inforce, or not, those limits. However, it does show that these rent credits are NOT equity paydowns.
Hope it helps,
Roger J
Raj,
Great to see you here at the REI Club.
The members here are in store for a very knowledgable investor posting advice to help them now that Roger has joined us.
John $Cash$ Locke
Thanks Roger for that information. I pretty much have all my leases just as you stated expect one. The T/B was on a 35 month lease, but she is moving out this month so that takes care of that issue.
I appreciate you taking time out of your schedule to answer my question.
Thanks again
Troy