Ok, the way an option works (as you probably know) is you pay a fee (or consideration) and gain an “interest” in the asset for the specified time.
So let us say you do a 2 year LO on a property for with a $3000 option fee. The TB now has a solidifying interest in the property at the terms specified for 2 years.
Let us say that 6 months in, your TB stops paying rent. What now? They still have 1.5 years left on the option, which is theirs regardless of their payment status on a lease. Even if you evict them, they still own the option on the property until it comes full term.
My option specifically states that if the tenant/buyer breaks the lease (either by eviction, leaving, getting put in jail, etc.) then the option immediately becomes null and void. The buyer forfeits all monies paid and any rights to the property back to the seller (me).
I do not fill out a P&S contract at the time of the lease and option agreement for one main reason; at least in NC, a P&S contract gives you equitable interest in the property. If you try to evict a tenant that has a P&S contract, you’ll likely lose and be forced to foreclose. Things may be different in your state, though.
Thats a pretty good deal if the tenant bails eh?
Not to me. My end goal is to sell the property, so anytime the T/B doesn’t, I consider it a failure. Besides, unless you’re collecting an extremely large option fee (unlikely), you’ll be lucky if you retain enough funds to fixup the place and pay the bills until re-leased.
The last house I sold on a L/O was for $82k, and I took a $5000 option fee and I’m making $272 a month cashflow. If they don’t buy and I have to do that several more times I won’t complain!
Additionally, I guess I worded my reply wrong about the P&S agreement when I sell by L/O. When I BUY a property by L/O I always use a P&S agreement, when I SELL I use an “offer to purchase” in addition to the lease form and the option form.
I’m wanting to start using P&S’s in a Lease Option assignment program I’m starting.
Basically I’m finding tired landlords and offering to put my tenant buyers in their homes. No risk to them, I’m taking the option fee from the T/B as an assignment fee.
I then step out of the deal and hand over the monthly income and future equity to the seller. Works great with landlords who’re wanting to eliminate their headaches with tenants who have “owner” mentality.
A bit harder to do out here in Los Angeles, but I’ve made a couple work and it provides quick cash…
To stay out of trouble, and gain an equitable interest, I want to use a P&S with my one page Lease/option agreement.
Are you just creating a standard P&S: All cash sale, closing in 12-24 mos. (LO term), and referencing the l/o agreement in “additional Provisions” ?
How would I deal with the earnest money issue in my program?
Any comments, suggestions, tweaks from anyone would be appreciated… 8)
Are you sure you actually “want” an equitable interest, if you’re just moving them in then steeping away? It really depends on whose interest you’re trying to protect/serve. If you work for the buyer, you’d want them to have an equitable interest, if you’re working for the seller/landlord, you’d want to try to be sure he doesn’t give up an equitable interest… if I understand what you’re doing correctly.
My option agreement states within that if they default on the rental agreement signed the same day, it voids the option… it’s part of the contract, not an addendum.
If you’re collecting an “option fee”, it can’t be called earnest money, because it would have to credited to the buyer when he cashes out.
This is a project for a good contract attorney moreso than us though. The $200 you spend to do it right can save you down the road…
On second thought… I have a better idea. If you don’t want to, I will L/O them from your sellers, and also L/O them to your buyers. You can keep the option fee. 8)
If you don’t want to, I will L/O them from your sellers, and also L/O them to your buyers. You can keep the option fee.
Ha!! I’d have to think about that deal…
No, the idea behind the equitable interest is that I’m not working for either but myself, and getting in the middle of the transaction to facilitate the meeting of the two.
But to protect myself against Realtors who may think I need a license to do this type of transaction, I want a little more protection. My seller LO agreement states that I’m working in my own interests as investor, but I thought a P & S with the seller might do as well.
When the seller and buyer sign the final contracts, they are separated, Lease agreement and option agreement, according to the terms I’m assigning, which protects the seller. And my assigment has a full release for me that’s signed off by both seller and buyer. I even allow the seller to double qualify the buyers I bring to him.
This along with the fact that my option with the seller in NON-EXCLUSIVE make it a pretty good deal for them.
If you’re collecting an “option fee”, it can’t be called earnest money, because it would have to credited to the buyer when he cashes out.
Yeah, I guess I could just offer a $5-20 consideration if I used a P&S. I thought about the fact that I draw up contracts and qualify the buyers as consideration, but seems a little weak…
I try to keep everybody aware of what I’m doing, always as I like the idea of being honest.
If you don't want to, I will L/O them from your sellers, and also L/O them to your buyers. You can keep the option fee.
Ha!! I’d have to think about that deal…
I was being a little sarcastic. If the seller is willing to L/O his property to the end buyer, I don’t understand why you don’t have him L/O them to you, and you keep the cashflow and equity? You’re doing all of the work, but giving the seller the payday.
Really, the whole program is set up to get some cash flow going. I was in need of some cash and had a hard time getting some of my junker flip offers accepted out here in LA.
I figured I could get this started faily easily if I gave away most if not the whole pooch…I also wanted to make it VERY easy for landlord’s to accept the offers as I knew I would get paid from the buyers I had on my lists…
So, it’s worked on a couple of deals. They haven’t cashed out yet, but I’ve placed a couple of buyers in condos…$3700 on one and about $6200 in another. I save about 40% for emergencies, and another 20% I’m putting toward advertising for more buyers…
Out here in LA I’ve had about 1 in 10 landlord’s that I contact who are interested. A good little side gig, though just another tool in my box.
ZNICK, I think I see what’s causing your confusion. homeowner911 is describing a Cooperative Assignment (CA) as taught by Michael Carbonare.
In such a deal the terms setup for the seller are equal to what you would get from the buyer in a sandwich LO. The extra profit is the reason for the seller agreeing to the deal.
CA’s are used in situations where the seller is not motivated enough to give you terms that make it worth your while to stay in the middle.
