From what I have been reading/hearing, it is no longer legal to lease out a lease option? Is this true? I want to purchase a home using a lease option (until I can refinance) and want to lease it out on a weekly basis (it is a beach condo in a strong weekly-rental market - as long as I can get in now with enough time to market and get it rented, instead of 30 days or longer). Is this something that can be done legally? If so, what percentage of my lease payments should apply towards the down payment? The purchase price would be around $40,000. Also, any advice on convincing somebody not advertising a lease option to do a lease option? There is one listed that says they are motivated so I’ll probably start there. I will be able to acquire financing in a matter of a few months, so hopefully it wouldn’t be a hard sale.
Yeah, it’s illegal. That’s why there’s a special section here on that topic. :evil
Illegal? Not at all! What have you been reading? Who has been telling you this nonsense?
Usually, it’s put out by those with the most to lose - sleazy gurus and uncreative Realtors…
Keith
Not that a lease option is illegal, but that you cannot turn around and lease/owner finance a property you have under a lease option. Sounds like even that is ok?
Then when I make an offer to do a lease option, how do I figure the lease amount, and what percentage of that will apply towards a down payment?
Before you start making offers I think some reading up on lease options would be a good thing to help avoid making mistakes.
Not that a lease option is illegal, but that you cannot turn around and lease/owner finance a property you have under a lease option. Sounds like even that is ok?
All options are legal. All leases are legal. Any exceptions will be beyond the scope of whatever you’ll be doing with houses.
Then when I make an offer to do a lease option, how do I figure the lease amount, and what percentage of that will apply towards a down payment?
There are countless variables that can be negotiated concerning a lease/option.
Generally speaking your rent/option starts with the retail rent, and then you negotiate “credits” toward the purchase price that accrue over the term of the lease/option period. However, some Optionees will pay “extra” money as “option consideration,” over and above the retail rent, amount is credited toward the purchase price (it’s not an automatic credit, you have to negotiate that point).
In other instances, an Optionor will credit the Optionee with 50% (or any percentage) of the rent toward the purchase price.
Typical lease/option terms are for two years. However, you can negotiate a term that goes until Moses comes back, if you can figure out a reason (or you just need 10 years to get your act together, or to "get enough “credits;” or perhaps achieve enough appreciation to make the deal profitable.
Options are often used to facilitate a gamble. The Optionee gambles that the property will be worth more at a later date, or that he can get his act together by ‘x’ date, or whatever the ‘thing’ he’s hoping will occur so that he can not only salvage his option consideration, but accomplish his goal.
On the other hand the Optionor is gambling that he’s not going to get the property back at the end of the option period and have to start all over again. However, if so, he’s had a tenant maintaining his property, gave him above retail rents, and can collect another Option fee. So, it’s not all a downside.
Some cheaters set up Optionees for a fall by setting the price at something the Optionee could never qualify to finance. And then the Optionor has kept all the rents, the credits, and the option consideration. Not good.
Unless the lease/option is just a disguised sale with an overly long escrow period, they usually don’t close.
Generically speaking, a two-year option period is the tenant/buyer’s window of opportunity to get his financial act together in order to qualify for a new financing.
E.V.E.R.Y.T.H.I.N.G. is negotiable.
Like any real estate transaction, you need to find out what the Seller wants to accomplish. You do this by asking a lot of questions. Good deals are negotiated.
The answer to “what percentage of that will apply towards a down payment?” depends on what you negotiate. You start with 100% credit, and then work to something less. Easy!
Before you start making offers I think some reading up on lease options would be a good thing to help avoid making mistakes.
Totally agree with that.
Whoops! I misread what you posted. Yes, we actually can seller finance a property that we don’t actually own. This is one of Barney Zick’s most famous strategies.
In a nutshell, we get the option to buy for “x” months at “x” rent. Then we sell our position to a new buyer on a Contract For Deed (Bond for Deed, Agreement for Deed, etc.).
In this case, our buyer’s payments on the Contract for Deed are higher than our payments to the seller.
Now, to go further in protecting our position, we want the original Seller/Optionor to escrow a Grant Deed in our favor; to be recorded once we exercise our option. If done correctly, the original seller can walk away without ever having to come to the closing table again. He’s already signed over the Grant Deed and related closing documents and it’s being held in escrow. If escrow never happens, the Deed never transfers, and is returned to the original seller.
Now, we don’t have title yet (except in some states the completed Grant Deed is effectively transferred, but that’s for another post), but we have the right and the ability to deliver the title to our buyer when he pays us off.
The bottom line, we have the right to close on the property, and we’re selling that right via a Contract For Deed to another buyer. Again, neither we, nor our buyer gets the deed, until everyone performs.
This is really a juicy situation if we’re able to negotiate a low rent on an upscale home AND negotiate a discount on the price. Then we’ll have a “big” spread on the payment …and a big spread on the equity. And we make money on a house we’ve never owned…! Yay!
It gets more juicy when we recognize that rents on expensive homes only go so high …but the end/user loan payments remains in line with the balance of the purchase price and market interest. That is, the loan payments stay in line with the price, but the rents only go so high, regardless of the price. Let’s look at a real example.
Pardon me for going on here, but it’s such fun talking about this stuff…
Example:
- We find a house worth $750,000.
- We secure a sandwich/lease/option.
- Our option price is a 9% discount off current retail (because we’re offering the seller what he would get in a conventional sale using an agent), or $700,000.
- The retail rent is $2,500/mo, but since we’re accepting all responsibilities for maintenance, management, repairs and replacements for the duration of the option, the rent will be only $1,800/mo.
- The seller escrows our deed.
- We sell the right to the deed to a new buyer for retail, or $750,000.
- We ask for 5% down, or $37,500.
- Our buyer owes us $712,500.
- We charge 4.8% interest over 30-years, or $3,738/mo (P.I.)
Summary:
We pay the seller $1,800/mo in rent
Our buyer pays us $3,738/mo as principal and interest
Our cash flow is $1,938/mo
The next question is, "Who’s paying the taxes and insurance and HOA’s?
The original seller is. After all, we’re “renters.” Renters don’t pay taxes and insurance…!
Meantime, even though we’re not paying the taxes and insurance, we’re charging taxes and insurance to the buyer (on top of his monthly payment). Why? Because he’s a buyer, and buyer’s pay taxes and insurance.
Never mind that the seller is still paying these. That’s none of the buyer’s business.
The taxes and insurance on this house are $9,000/yr.
So, let’s recap what you make the first year:
$50,000 in equity at the get-go
$23,256 in cash flow
$ 9,000 in tax and insurance payments
$82,856 in total first-year profits (with 32,256 paid the first year)
Then at the of the 2nd year we’ve capture a total cash amount of $64,512 (without the remaining equity being paid off). Meantime the buyer is making any and all repairs, doing all the maintenance, and we’re just collecting our spread. Yay.
If this sounds too ideal? Calculate paying the full retail rent of $2,500, plus the taxes, insurance, and HOA and see if it’s still a juicy deal, or not.
IE: $3,738 payment from buyer, less $2,500 rent we pay, equals $1,238/mo cash flow.
The buyer is STILL paying the taxes, insurance, and HOA’s himself. So it’s a wash.
Meantime, we make $50,000 in equity, plus $14,856/yr for selling a house we don’t own.
It’s completely doable at any price point, but it’s so much more dramatic in the $750,000 range
:beer :beer :beer
javipa my friend let me step in here for just a minute. Lets say after the first 5 months the new buyer decide to walk away do you bail on the original seller you got the deal from or you still make the payments to the original seller out of your pocket?
It would be true and easy for me to say that this doesn’t happen, but let’s say it did happen.
Anywhere, but in California it’s a matter of an eviction, since the title has not changed hands.
However, getting a defaulted buyer out of a house includes several options including “cash for keys,” a credit toward a cheaper house I might have for sale; or tearing the tenant/buyer’s credit up six ways from Sunday.
If the tenant/buyer thought he only had a slight, even solvable, credit problem before, he’ll have a bankruptcy on his records after I’m done with him (unless he moves out on time).
My Land Contracts are promissory notes that create personal liability in the buyer, and are NOT secured against the property. So, if the buyer were to stop paying me, I offer him several significant options that include cancelling the note, if he moves out by ‘x’ date; and/or offering him moving money if he’s out by ‘x’ date; or jacking with his credit until he can’t rent a refrigerator box under a freeway; and/or forcing him into bankruptcy; and/or executing an eviction and a possible unlawful detainer.
If things don’t go my way, I’m going to collection on the $712,000 note, since it’s an unsecured promissory note.
And…(drum roll, please) I can resell the house in the meantime regardless of what the deadbeat decides to do. This means the defaulted buyer cannot satisfy the debt to me, simply by selling the house, OR even just giving it back to me… (Think about that for a second). Meantime, the buyer’s got no house to sell to satisfy the debt.
It sucks owing me money. :banghead :banghead :banghead
Now, the more elegant approach is simply to offer “cash for keys” after explaining…to the buyer…just exactly what the downsides are by not cooperating. :beer
I found the more money a buyer puts up, the less likely I’ll have any problems, regardless of the hiccups the buyer might experience. That’s one reason why I feel good about marketing “No Credit Check” as my “u.s.p.” This protection keeps me from becoming as nervous as a pregnant nun in regards to my buyer’s motivation to pay me. :anon
javipa my friend you have a way with words. I will only give one option “cash for keys”. California is a tough state but we love doing business there.
Thanks for the example. Some questions:
“6. We sell the right to the deed to a new buyer for retail, or $750,000.”
I take it the option along with the lease is assignable. So, are you stating that you receiving 50k for your rights? Because you do not have legal title until you exercise your option in order to sell it at 750k. At this point, you only have equitable title. With equitable title, you are not in position to sell property secured by deed. That’s why you have an unsecured promissory note as you state later on.
I will have to see the details of the investment strategy, but it looks like the end buyer can raise a case of fraud.
It’s perfectly legal to assign your lease and/or your option to someone else.
Regarding the terms, it will all depend on what is in your best interests and the specifics of the transaction. I suggest you read some books at your local bookstore on real estate investing with lease options.
On Advice, I would approach vacant properties and use title or the post office to track down where the mail is sent. Some would like to sell and some need to sell. Those who have vacant properties and would like to sell because they don’t like to be landlords, then your solution is perfect for them.
Also, by tracking down vacant homes, you might get some great foreclosure or short sale leads as well. You can make money off of those too. Finally, you realize the only difference between a real estate investor and an agent is liability. As an agent, you can make money off rentals and property management. Even help owners in a lease purchase option.
Yes, the option and lease are assignable, because that’s what I’ve negotiated.
All I need to make this transaction work is the exclusive rights to the title, regardless if I have constructive delivery of the deed.
Land Contracts by definition are not secured by real estate, except they do refer to the delivery of title to a particular piece of property, once the borrower has performed. However, California treats them like trust deeds. So, I have to take a couple extra steps to make sure that the Land Contracts don’t morph into those by default.
I use a special note that is illegal in at least two states (hahaha evil laugh) that creates personal liability in the buyer, and gives me the right to file a judgment against a defaulted buyer without recourse; tap his bank account; garnish his wages; and mess up his credit report like a two-year-old with his fingers in a pudding cup. You know just like a bank can.
There is zero fraud involved here. Fraud would have to include that I didn’t actually have the exclusive right to deliver the title. That’s a little hard to argue, when I’ve got a deed with my name on it, sitting in escrow.
Meantime, this isn’t a new assignment strategy, it’s just not well-known (evidently).
:beer
javipa my friend there are plenty tricks of the trades in this business. Sorry folks I have lost my memory.
“Yes, the option and lease are assignable, because that’s what I’ve negotiated.”
That’s fine.
“All I need to make this transaction work is the exclusive rights to the title, whether, or not, I have constructive delivery, makes no difference.”
and
“There is zero fraud involved here. Fraud would have to include that I didn’t actually have the exclusive right to deliver the title. That’s a little hard to argue, when I’ve got a deed with my name on it, sitting in escrow.”
This is where I question your logic. You do have legal rights to title if you perform by exercising your option or having the assignee exercise their rights on the option. Until you or the assignee exercises the option, you or the assignee have equitable title, not legal title. Without legal title, you cannot enter into a land contract with your buyer tenant as the vendor in a land contract must have legal title. So the issue of possible fraud is the unsecured promissory note for 750k you have with the buyer tenant which, I suspect, deals with the land contract and morphing it to remove the security device.
“Meantime, this isn’t a new assignment strategy, it’s just not well-known (evidently).”
Well, by your logic, I can just place options on properties then create unsecured promissory notes for full retail value of the property. The only money I would put upfront is my option money and pay for any hold over costs until I can find a renter buyer. If it was legal as you say, this investment strategy will take off as it is virtually risk free and you can maximize your returns by creating full retail value on unsecured promissory notes on properties in which you only have equitable title on. 
[quote author=satarnag link=topic=52319.msg256944#msg256944 date=1336369973]
“Yes, the option and lease are assignable, because that’s what I’ve negotiated.”
That’s fine.
“All I need to make this transaction work is the exclusive rights to the title, whether, or not, I have constructive delivery, makes no difference.”
and
“There is zero fraud involved here. Fraud would have to include that I didn’t actually have the exclusive right to deliver the title. That’s a little hard to argue, when I’ve got a deed with my name on it, sitting in escrow.”
This is where I question your logic. You do have legal rights to title if you perform…
No. I have an equitable interest in the property, until I abandon my option, or someone buys out my position.
…by exercising your option or having the assignee exercise their rights on the option. Until you or the assignee exercises the option, you or the assignee have equitable title, not legal title.
No. Equitable interest, yes, but not the title.
Without legal title, you cannot enter into a land contract with your buyer tenant as the vendor in a land contract must have legal title.
No. We just need control, coupled with an equitable interest, and an ability to provide a marketable title.
So the issue of possible fraud is the unsecured promissory note for 750k you have with the buyer tenant which, I suspect, deals with the land contract and morphing it to remove the security device.
There is no security device in a Land Contract, other than the seller’s responsibility to provide a marketable title. Except in CA. As I said, a Land Contract there is considered an effective Trust Deed. That’s the the primary motivating factor for modifying the Land Contract, so that the note is NOT secured against the property, but against the person.
“Meantime, this isn’t a new assignment strategy, it’s just not well-known (evidently).”
Well, by your logic, I can just place options on properties then create unsecured promissory notes for full retail value of the property.
Yes, but not exactly. We would still need the seller to escrow title in our favor, for the reason(s) you were stating.
The only money I would put upfront is my option money and pay for any hold over costs until I can find a renter buyer. If it was legal as you say, this investment strategy will take off as it is virtually risk free and you can maximize your returns by creating full retail value on unsecured promissory notes on properties in which you only have equitable title on.
Yes. The task then is getting in with as little money as possible. How little will greatly depend on our negotiating skills; whom we pitch our solution, and what pain relief we’re prepared to offer. However, the actual pain relief we offer, always revolves around not giving the seller any money. I’m sort of kidding.
But I do mean even if it takes $10,000 to secure our position and get the deed escrowed for our lease/option/sale contract, we’re still collecting $37,000 in down payment money from an end/user/buyer, and then collecting the spread on the payments at $23,000/yr.
So the risk then is limited to our $10,000 investment, right? But how long is that money really at risk, in reality? Two weeks? A month? After that, it’s all gravy. [Why does “gravy” sound so cheesy?]
Meantime, we’ve found a seller who has a problem he can’t seem to solve quickly. or easily, that we represent a solution for. However, most importantly, we’ve got a successful track record of flipping expensive houses using lease/options and installment contracts.
In fact, we show the prospects examples of where we’ve been successful at this. We also meet and overcome the seller’s objections and questions, mostly before they even bring them up. Why? Because we use a tailored, scripted presentation. We don’t just roll in and shoot from the hip and hope the seller doesn’t stump us.
That ALL SAID, we could do all that, and just give the seller $10,000 in return for the deed; take over the payments; treat this as a standard Sub2 deal; and resell the house exactly as we’ve discussed.
However, not all sellers will give us their deeds. So to those we offer another solution that they are “fine” with; giving us control of their property, including the exclusive right to the title; and a right to sublet and/or resell. Go figure.
:beer
“No. I have an equitable interest in the property, until I abandon my option, or someone buys out my position.”
I think we are arguing semantics here. However, I am glad you concede my point.
"No. We just need control, coupled with an equitable interest, and an ability to provide a marketable title. "
Here’s a hint, you cannot have marketable title without legal title. What happens if the legal owner dies before you or the assignee exercise their option?
“There is no security device in a Land Contract, other than the seller’s responsibility to provide a marketable title. Except in CA. As I said, a Land Contract there is considered an effective Trust Deed. That’s the the primary motivating factor for modifying the Land Contract, so that the note is NOT secured against the property, but against the person.”
I am a California real estate broker. I am talking about California here as I am not familiar how land contracts might work for other states unless you specify a state and I can look up their laws. That said, the title to the property is the security device. Therefore, you are only validating my argument that by modifying the land contract to make it an unsecured promissory note, you are removing the security device.
So, the claim of fraud by the end tenant buyer can be easily made as to the motivation or reasoning why one private individual would agree to an unsecured promissory note in the amount of $750k. I am sure if you put the tenant buyer on the witness stand, he will say something along the lines of he was promised or thought he agreed to making payments on the note in order to lay legal title to the property. Why else would one person agree to pay another person $750k over a period of time.
"Yes, but not exactly. We would still need the seller to escrow title in our favor, for the reason(s) you were stating. "
Escrow is a mutual 3rd party that is designed to facilitate the terms of the contract. It is not necessary and the fact that you do have or don’t have an escrow is irrelevant with any investing strategy.
"That ALL SAID, we could do all that, and just give the seller $10,000 in return for the deed; take over the payments; treat this as a standard Sub2 deal; and resell the house exactly as we’ve discussed.
However, not all sellers will give us their deeds. So to those we offer another solution that they are “fine” with; giving us control of their property, including the exclusive right to the title; and a right to sublet and/or resell. Go figure.
:beer
"
Sub2 or just an easy assignment of contract seems less intrusive. Hell, even getting licensed and giving yourself a 50k listing agreement is easier. I am not questioning your motive, just your method.
"Meantime, you’re not acknowledging the fact that the seller is depositing a Deed in my favor into escrow, and completing all the documents necessary to transfer ownership to me; short of actually recording anything.
If the seller dies, he dies. He’s already closed on me for all practical and legal purposes. If I don’t perform, the property reverts to the seller’s estate. Simple.
In fact, the seller’s possible death supports my primary negotiating argument for insisting the seller sign all the closing documents in the first place. Otherwise, if the seller died, and hadn’t already closed, on paper, I would then have to enforce my agreement with the administrator of the seller’s estate. That’s not necessarily the worst thing, but it will create delays."
whether he deposits it into escrow or keeps it in his filing cabnit makes no difference. In either case, title has not been conveyed. If he dies, even with his instruments in escrow, you will still have to go through probate. This mere fact only proves my point.
"[b][color=black]javipa: This may be true for someone who doesn’t know what he’s doing. I never suggest doing anything like this without vetting it through an attorney (which I’ve done). "
Yeah, I agree. That’s why I said I would have to see this investment strategy in it’s entirety because of my concerns I have.
“You’re arguing from the perspective of a real estate agent that is subject to all sorts of regulations, fines, reporting and limitations, if not CYA actions. I’m not subject to all that crap. After 20+ years of creative financing I’ve still not been sued by a borrower for fraud. Why? Because nothing I’m doing is fraudulent. One-sided and biased? Yes. Fraudulent, No.”
Although being licensed has it’s drawbacks, we are all subject to the same real estate laws.
"satarnag: Escrow is a mutual 3rd party [agreement] that is designed to facilitate the terms of the contract. It is not necessary and the fact that you do have or don’t have an escrow is irrelevant with any investing strategy.
javipa: According to you. :biggrin"
According by it’s very own definition. Look it up! Just because money or contracts are in an escrow account, doesn’t mean that title or terms have been conveyed. It also doesn’t mean that the terms of the contracts have been executed and all parties have performed.
“BTW, the last thing I want to do is get my license. Having a license hamstrings me 14 ways from Sunday along with my creative negotiations.”
It has it’s drawbacks and it has it’s advantages as well. While you guys are jumping through hoops to convey property and make a profit, I just walk up and do the same thing with less work and less hurdles.
“Not to mention attempting to negotiate anything creative through an agent is like threading a rope through the eye of a needle. That’s why I stay away from agents on these deals.”
No Kidding! Even on simple stuff, they are like ignorant sheep.