I am new at this thing. About 2 months ago I really started to get interested in Investing in Real Estate. Since then I have been reading any Real Estate Investing book I could get my hands on. Lately I have come across Lease with option to purchase books and the sandwhich idea.
My question is: Do these deals actually occur? They seem like a very simple concept, however the books I have read never seem to go into detail about the problems with this type of deal. For example:
Due on Clause - the books mention this but kind of briefly and then move on. If this type of deal is possible then there must be information on how to avoid "due on " and also worst case scenerios.
How to close. In the books they mention double closing and I think a Performance Morgatge but go into little detail about how it works step by step and what happens at the closing table. it would be nice to have some information that informs you of this process so that you can be prepared.
what to do if the seller backs out and you are now obligated to the buyer/tenant to give them an otpion to purchase a house that has already been sold.
I guess I would like to know if this is a good idea and do investers actually use it, as I have read articles that seem to shout the dangers in this type of deal. I would like to start investing and am in no hurry to become a millionare and would like to get started with somethign that is real. I would appreciate any advise and also any books that may help me with the problems listed above. Thanks much…E
I started to write a book on the pitfalls and what not to do in real estate investing. I was shot down by fellow members that said only positive stuff sells. I got disenchanted to say the least. Anything can happen and the bad usually shows its ugly head too often at least for me.
You mentiond two big problems with lease option and sandwich deals. The due on sale problem is avoided by keeping the payments current. Banks mostly care less when the payments are not late or missed entirely. They may start investigating ownership when they do not get their money. Several deals are done where the owners transfer the property into a trust and then the rights to the trust are sold to you. John Cash’s book “Sub2 that is what i do” book is the Bible in the field. It is available on this website.
The other problem you mentioned is what if your buyer does not buy. This happens often and you need to be prepaired to make payments when the house is vacant and fix it up and resell or rent the property. You can quickly be in the red here if you have no equity when you buy the house in the first place. If you pay market price for the house and try to add to the payments for the lease opton added value you create you may be in trouble down the road. Recently here values have declined and so has the rent and I am sure tenant buyers are deciding to walk away and rent somewhere else for less instead of being stuck with an overpriced house inflated at the time they bought and now not even worth what they owe. These deals work better when you find a good deal and give them a market deal and there is some appreciation where they benefit while they are leasing andthey too have some equity when they buy or refinance.
Closing is the easy part. All you mostly do is bring the money and sign the documents. The closing offer will go over the deed, deed of trust, note to seller or mortgage company and alll the other documents and the closing statements. It may seem hard because of all the last minute things that need to be done just before hand. Actually very little gets done untill the title has been checked. You do not order appraisals until the loan if approved nor the survey or termite inspections or the legal documents. It is all kind of a hurry up and wait game at the end where everything must fall in place all at once. Some go smoothe and some rough. If you think about it it makes sense. No need to spend money on stuff if the seller can not convey clear title or order deeds etc if the property appraises for less than the sales price or there are termites everywhere and no money for repairs. Realtors and title agents can help you smoothe over the humps and do stuff in the right order and timing to help make it easier.
Sellers do not back out often but it does happen or even more often they can not convey clear title. You need to make your deals with the buyer subject to your buying the property and be willing to give them back their money or have another house they can buy. They will be fustrated for sure and best to hand them some green stuff if you have to give them bad news like that.
My best advice is to stay away from deals that have no equity and keep a cushion just in case you have to make payments on a vacant house.
Hope this helps some and is not too confusing and rambling
John Locke is not a proponent of lease options nor does he advocate the use of land trusts. John’s Subject To method employs a direct deed to the buyer (or buyer’s business entity) and his exit strategy is a contract for deed installment sale.
I meant he did sub2 deals I believe 500 plus. I have not read his book and I surely need to. I was not aware of his exit strategy. Contract for deed in Texas is no longer a good option. Either the lease option or straight deed to buyer with owner financing is prefered.
Better check with your attorney. I don’t believe a memorandum of option will prevent a sale. It may cloud title, but the title insurer could just note that as an exception without interfering with the sale.
Dave is right. The seller can sell the property with a lease recorded or even a contract for deed or any other instrument or lien. Title companies will write exceptions all day long. The catch is that the buyer will not pay retail ( unless they are mental) for something that has a clouded title. The new buyer with the deed in hand would just step into the sellers shoes and would be obligated to sell under the option agreement or contract and to pay the liens. These actually happen often where the seller wants cash and sells the agreement at a discount to just make a profit quickly and leave money on the table for the buyer. I was too greedy when I had 40 of them.