I am relatively new to investing and am pursuing full-time. This is my first post to the REI forum. I joined several weeks ago and have gained quite a bit of knowledge and insight reading many of the posts. The information provided is truly invaluable. After having spent thousands and thousands of dollars on Real Estate “Guru” seminars, there are still some “missing links”. Thank you all for your contributions.
I hope to place a contract on a SFR in Virginia. I plan to live in this property. As an exit strategy, I am not sure if I should do a Lease Option Purchase or Land Contract? Here’s the scenario:
Owner is military and has orders to leave country in 1 month.
He wants to unload the house. Wants to sell for $240,000
Owner purchased home in January 2007 for $233,000. Comparable
home in development recently sold for $237,000. The high end is
$245,000. There is virtually no equity in this property.
2 Story, 4BR/2.5 Bath, LR, DR, Great Room, Eat-in kitchen
Approx. 1680 sq. ft, One car garage
Located on dead end street
Great neighborhood and in mint condition
I submitted an offer yesterday for a lease purchase option, containing the following:
Sales Price: $235,500
Promissory Note for $4,500 (negotiated payable within 6 months.
Funds needed to payoff carpet financing)
3-year lease option with the ability to sublease
Monthly payments are equal to PITI (approx. $1630, interest rate
is 5.5%)
Option fee will probably be $50
I will pay first $100 of repair costs
Move-in date is November 1.
This property will be my primary residence. However, rather than purchase within 2-3 years, I would prefer to refinance. Consequently, I thought a land contract would be better. The contract could simply state that at a specified time, (within 2 years) title would be transferred to me. I am not sure if I can do this with a lease option purchase.
Finally, it is also possible that I will sublease the property. But this probably wouldn’t be for about a year.
With all due respect, why would you ever want a Lease Option as a tenant? Lease options are slanted towards the landlord – almost always. Don’t you want the benefits of home ownership?
Do you get to share appreciation? NO. Your lease gives you an option to purchase at some future date at full price. You get no share of appreciation until AFTER you purchase.
Do you get to write off mortgage interest or property taxes? NO.
Do you benefit from mortgage reduction? NO. Only the owner does that.
Do you have pride of ownership? NO, you are a glorified renter.
Do you get to refinance at the end of the option period? NO. The only way you can is if the Landlord admits you have an equitable interest. Fat chance of that.
The only benefits of a lease option are for the Landlord. Period. There are much better ways to do this. By the way, both the lease option and the land contract are Due on Sale Clause violations.
Regarding “shared appreciation”, the sales price will be locked in at $235,500. When I refinance within 2-3 yrs, I will benefit from appreciation.
This is an opportunity for me to obtain a property, as a rental, in a wonderful community. Again, I plan to live here for about 2 yrs. How can I structure this deal, so that within 2 yrs. I can refinance? It’s a great opportunity for me to get into a property with nothing down.
If I decided that I wanted to be placed on title within 6 months - 1 year, before I refinance, what’s the best way to not have the due-on-sale cause triggered. My understanding was that I could place the property in a Land Trust. What is the price range attorneys charge set up the Land Trust?
Actually the lease option locks-in your price ($235,500) for the option period. If the property appreciates during that period and you exercise your option then you receive all of the benefits of property appreciation because you buy at the lower option price.
An option fee of $50 does not sound realistic. As for refinancing the property in 2-3 years how can you refinance something you do not yet own? Under this deal you are simply a renter with an option to purchase. If the property value increases above your option price then you get the additional benefit of instant equity if you exercise your option.
Thank you for your response. I am aware of all you have stated.
Let me try paraphrasing my question.
How would I go about obtaining a property, getting my name on title, without accelerating the due on sale and clause?
My short-term strategy is to live in this house. The long-term strategy is to refinance, pay off the existing loan – not secure a new “purchase” mortgage. I guess one might say that I am looking to do a “subject-to” with-in two years. What is the best strategy for me to use NOW to get in the property, considering my short and long term goals? Essentially, do I want a Lease Purchase Option, a Land Contract, or is there another alternative?
I would set up a land trust for the seller in his name and select the non-profit professional Trustee that I use and trust. The seller deeds the property to his Trustee who now owns it. The Seller owns the beneficiary interest in the trust that controls the property. He makes you a 90% beneficiary, retaining 10% for himself. This exempts the transaction from the Due on Sale Clause.
You take full responsibility for payments, maintenance and repairs on a triple net lease. It must be for less than 3 years (mine are 2 yrs, 11 mos, and 29 days). This is in compliance with the DOSC.
You do NOT have an option to buy at a predetermined price (that would be a DOSC violation). You have the first right of refusal to buy at FMV at or before the end of the lease.
Now, because you have payment and maintenance responsibility, the IRS considers you an owner even though you are only leasing and allows you to write off the property taxes and mortgage insurance. This unique strategy greatly enhances your after-tax situation.
You agree on a Mutually Agreed Value of $240K. The property is sold in 3 years (either to you or someone else) for $275K. 90% of the future appreciation between $240-$275K is yours.
Because the IRS has given you the tax write-offs and you are considered an Owner, even though only leasing, you are able to refinance the property without ever having shown a down payment.
Both you and the seller are protected from each other’s judgments, liens, divorce actions, bankruptcies, etc. It is the safest way for the seller and the most lucrative for you. Lease options don’t allow you these kinds of benefits. Good luck.
Many sellers are desperate. They may be over-encumbered. They may be upside down in a rental property. They may be facing a foreclosure or a short sale. They may be tired of waiting for a buyer. They may be drowning in expenses on a ‘don’t wanter’. They may be facing payments on two houses. They may be tired of income property management and negligent tenants. They may be fed up with negative cash flow on their rentals. They may be hoping to avoid assessment of probate and gift taxes upon their heirs. They may be in need of a legal shield against liens, judgment creditors, bankruptcy, divorce actions (even IRS tax liens).
Here are more scenarios. The seller’s job has been transferred and he has to sell NOW. He bought another home and is making two mortgage payments. He can’t qualify for financing until he sells his current home. He can’t afford to sell his house because he has No equity to pay commissions. He may be suffering from an Illness or have Medical issues. His house may need repairs he can’t afford. He may just want out.
Why would he do it? The seller is getting his full current asking price. His credit continues to improve as the payments are made on his loan. He can depreciate the property. His property is safe and he will only relinquish title when he receives his full equity and the mortgages are paid in full. He benefits from mortgage reduction. He is protected from liens, encumbrances, bankruptcies, etc. By utilizing this asset management strategy, he is using THE SAFEST and MOST SECURE means of transfer of ownership interest. He has no worries about the Due on Sale Clause.
As to the 90/10%, it can be 50/50, 75/25, whatever you may want to negotiate. This is the best way for a seller to get out from under a burden and for a buyer to obtain home ownership without bank or credit qualifying or having to come up with a traditional down payment.
I was thinking about lease optioning SFHs. So I guess I can be as creative as I can with trusts. I saw a post you made earlier which I have copied below.
“When I first discovered how the land trust can be used some 10 years ago, I was stunned. You can use the land trust as the engine for a LONG TERM LEASE, AITD (Wrap-Around), LAND CONTRACT (Contract for Deed), LEASE OPTION, LEASE PURCHASE, EQUITY SHARE, BRIDGE-LOAN DEVICE (e.g., when a buyer can’t finance, or afford a down payment for several more months or years and the seller may be willing to wait awhile): AS A VEHICLE FOR HIGHER RENTS AND FREEDOM FROM ACTIVE LANDLORD RESPONSIBILITIES AND COSTS.”
So in terms of doing a lease option or lease purchase. First of all what is the difference between a lease option and lease purchase?
Second, can I still get the benefits of a lease option i.e. option fee, cash flow, tax benefits?
BTW, I live in Texas. And in this market, buying and holding is probably not the best strategy. I understand that I can do a LO for no longer than 6 months w/o taking a big risk. So, I’m trying to find other alternatives so I can tell my BOSS to take this JOB and Shove IT!!!
Just curious how many DOS clauses have you seen that have actually been called? I have yet to see one personally or hear of one through other investors. Personally, I just think that it’s a bs scare tactic that lenders use to try to get you to refinance. With the economy how it is today, I’m sure that they are happy just receiving the payment and not foreclosing on ANOTHER house.
Let me know your experiences. Thanks :banana :banana
In the 1980’s they called them all the time as interest rates rose. They occasionally do so now but rarely on non-performing loans.
However, anyone who says banks don’t want foreclosures isn’t aware of the new scheme companies like First American Trustee Services and First American REO Services are using. If a pre-foreclosure house has a second mortgage, FA Trustee Services will prevent the homeowner from refinancing the existing loan and deny a delay in the foreclosure sale, forcing a foreclosure and the cancellation of secondary financing. FA REO Services then takes the house and immediately list it for sale at retail pricing, making a nice profit. I’ve seen this happen to two different people in the last month and understand it is a growing problem for anyone with equity or secondary financing.