For those of you who sell on a lease option, how do you handle the situation when interest rates rise and the tenant-buyer can not afford to exercise because of the rate increase over the 2-year period, for example? I mean do you just say, “tough luck”, that was the risk you took? Or do you structure the contract somehow to accomodate them? I don’t want to get in a position where my tenant-buyer has made all the payments, done everything right, and just can’t possibly exercise because of a 2% rise in rates. I’m not suggesting rates will rise that high over the next couple years but I would love to hear from those who’ve done lease-options in the past where this might have been an issue.
thanks,
Matt
Their will always be a way to work it out.They could go with an ARM
product, Interest only or you could extend more time and renogiate
the term.
You may want to be careful using lease options when interest rates rise for one reason: the DOSC.
Sellers often seek to combine the advantages of leases with sale transactions by structuring their sales as lease options. However, the purchase/lease/option hybrid financing does not exist. A transaction is either a lease or a sale: not both.
In a genuine lease with an option to purchase, neither any portion of the rent nor any option money paid applies toward the purchase price upon exercise of the option.
If money paid by the tenant for rents or option consideration is applied toward the price, the transaction is not a genuine lease with a purchase, but is a disguised carry-back sale - a land sale contract.
The courts can easily re-characterize purported lease options as disguised sales, exposing sellers to all the consequences of mortgage law.
If the lease option is found to be a disguised sale, the tenant is re-characterized as a buyer who builds an equity and has an ownership interest in the property.
The seller may not simply evict a defaulting buyer as he could a tenant. The buyer’s interest can only be terminated by judicial foreclosure, since the lease option seller has no trust deed power of sale provision.
Also, if a lease option is re-characterized as a sale, the transaction will have been improperly reported for federal and state income tax purposes, and the property will be reassessed based upon a change of ownership.
Regardless of what the form of a transaction may be; if its economic substance indicates it is a sale, it will be treated as such for all purposes.
Don’t forget: all lease options, irrespective of their form or duration, do trigger due-on-sale clauses. Banks have not chosen to invoke the DOSC because interest rates were low. As they rise and it makes economic sense for them to do so. . . be prepared.
Da Wiz
The best thing you can do is ignore anything the wiz says about the DOS. It is a non issue 99.9% of the time. And he only posts this for one reason, so people will ask him how to get around it and then he can hustle his trust. The DOS fear is only one of his tactics. We have seen this song and dance for months now and it is getting old. If you live in fear of the DOS, you will never do anything. The only way it makes sense for a lender to call a loan due is if rates skyrocket, which they arent, or if the property has a lot of equity. Do your due dilligence, and make some money.
Funny that I never mentioned a trust – you did. Also that I don’t sell them. Bobo, please stop advertising my services. I’m here to educate and give advice where needed. So, I asked my land trust mentor how he would respond to that post in my stead so I can continue to post politely. Here was his response to Bobo:
"As far as the Due-on-Sale issue is concerned, the DOSC is definitely a threat and I couldn’t care less about what anyone says to the contrary… they are wrong. It is indeed a thing to be reckoned with, and avoided when possible. Sure, most lenders will look away when the market is hot and interest rates are low; and if one can sell or refi if the note is called, then the DOSC is not of much concern.
However, like many of my students, in my first several years in this business I had no credit or money and would have been in very deep piggy-poo had I received any more foreclosures than I did (I lost two properties to due-on-sale calls in the early years).
Furthermore, I have RECENT foreclosure demands on file from Countrywide and Washington Mutual that were thwarted by our explanatory letter indicating that the subject properties had not be sold, but were merely vested in inter vivos trusts and being leased to one of the beneficiaries."
Play ostrich if you like, but don’t say you weren’t given advance notice. You choose to ignore Federal Law (the Garn-St. Germain Act of 1982) that gives banks the right to invoke the DOSC any time you use a subject to and take title, or a lease option. As interest rates rise and banks have a bunch of 5-6% loans they could call in and place back on the market at 8-9%, it’s reckless to assume they won’t invoke the DOSC. They fought consumer groups and paid millions of dollars 25 years ago just to get the right to do so. They won. I wish you the very best.
Da Wiz and the Wizard
Foreclosure demands and actually following through on them are not the same thing. Lenders will try to scare you to death so you refinance or pay the loan off, but they are just huffing and pufing hot air. Unless rates rise significantly, they will not be rushing to call loans due. Rates skyrocketed back then, they arent in any danger of going up enough to be a factor. Now if they went up 4-5-6%, maybe it might be different, but right now, lenders have so many foreclosures they are not about to make a good loan a bad one.
The DOS is a non issue 99.9% of the time. And I could care less what you or your mentor have to say about it.
“Foreclosure demands and actually following through on them are not the same thing.”
I agree. The lenders tried to follow through on two of them whose properties were in land trusts, and they were prevented from doing so by Federal Law which exempts land trusts from the DOSC, ironically the same federal law that makes using a "subject to’ without a land trust a DOSC violation and gives the banks their right to invoke the DOSC.
As to their never occurring, I have heard of several RECENT cases of the DOSC being invoked in Illinois, Texas, California and Colorado. I wish you the best but again, be careful as interest rates rise and have a Plan B when they do.
Da Wiz
DOSC is an issue that must be considered! Be Aware of it…Very Aware… If the loan gets called - your done! Stay away from sub to’s & L/O’s or the DOS will get ya.
I kinda like it when people are afraid of the DOSC, - it leaves more sub to’s & L/O’s for me. Be very very afraid ;D
Ya don’t want to end up in the DOSC jail now do ya…then run…run far away from em as fast as ya can (just let me know where they are before ya leave ;D - I’ll take care of em for ya).
Seriously, it is something to take into consideration (like any risk), but I agree that it is a non-issue for a majority of seasoned investors, JMHO
The 10.5 percent drop in new home sales in February followed a 5.3 percent decline in January and was the biggest drop since a similar 10.5 percent fall in April 1997. Sales of new homes have fallen in four of the past five months with the sales rate of 1.08 million units the slowest pace since May 2003.
While sales of both new and existing homes climbed to new all-time highs in 2005, the fifth consecutive annual records, analysts believe sales will decline this year as the housing boom slows under the impact of RISING MORTGAGE RATES.
By sector of the country, sales fell by the largest amount last month in the West, a drop of 29.4 percent. Sales were also down in the South, dropping 6.4 percent. Sales rose in the Northeast by 12.7 percent while sales in the Midwest were up by 5.2 percent.
Just giving you the heads up.
Da Wiz