So say I tie up property under lease option contract without getting on title, how does my tenant/buyer(that i set up under a new lease option) get a loan to purchase from me with the restrictive seller seasoning/title rules?
Im a loan broker so I know that lenders require the seller to be on title for 3months and require a hud from when the seller purchased.
If when I tie up the property I have the original seller put me on title I take the chance of triggering the due on sale. If I do a land contract this puts me as the benificiary of the trustee but lenders will not allow my tenant/buyer to purchase from a trustee.
Or maybe im missing something, does my tenant/buyer necessarily have to purchase from me or does he purchase directly from original seller?
If he can purchase from original seller, how is it set up so I can collect the difference between the amount I put it under lease contract for originally and the higher amount I set for my tenant/buyers purchase price?
I don’t do lease options. I have heard that lenders are asking your tenant buyer to rewrite your purchase contract to purchase directly from your seller. You can assign your contract with your tenant buyer back to your seller and collect an assignment fee. This is the essence of the cooperative assignment.
If you have the resources, it seems simple to exercise your option to purchase at least three months before your tenant buyer exercises his option to purchase. With at least three months on title, maybe title seasoning is no longer an issue.
If you rewrite the tenant/buyer’s contract to take yourself out of the middle, have the seller agree to accept a lien on the property equal to the profit you would have made if you were the seller. You end up getting paid at closing when your lien is satisfied.
I am sure that there are other ways to get paid when you close in a sandwich lease option.
Im curious about the two methods you mentioned. The assignment method, how do you assign the contract back to the seller? All assignment agreements ive seen assign the contract to the buyer. Or is that what you meant. In that case the buyer would have to come out of pocket to pay my assignment fee.
Then the other method of having the seller agree to accept a lien, how would you talk a seller into doing that? Sounds like that would be tough to convince a seller to do.
If I understand this correctly.On The contract you have with the owner you can place your name along with the words “and or assignee”.This will allow you the right to sell on.To structure this is possible but too much to write on a post.
Your lease option agreement with your tenant buyer is between “Tommy Tenant (Tenant/Buyer)” and “zachj and or assigns (Landlord/Seller)”. In a cooperative assignment, you assign your lease option agreement back to your seller and keep the Tenant Buyer’s option consideration as your assignment fee.
You and the seller agree to void the original lease option agreement you had and replace it with the agreement you have with your tenant buyer. The seller presumably gets a higher rent and a higher option price than he would have gotten in your original agreement.
Then the other method of having the seller agree to accept a lien, how would you talk a seller into doing that? Sounds like that would be tough to convince a seller to do.
Instead of assigning the lease option agreement, you are going to assign the purchase agreement you have with your tenant buyer so that your seller replaces you in the deal. Presumably you are selling at a higher price than you had originally negotiated with your seller. So, you may have to share some of your profit as an inducement. For example, you had an option to purchase at $150K and gave your tenant buyer an option to purchase at $175K. If you exercise your option and purchase in your own name, you will have a $25K backend profit when your tenant/buyer exercises his option.
If you don’t have the resources to purchase in plenty of time to season title, then you can agree to assign your purchase contract back to the seller and collect your profit from the settlement proceeds. One way you insure that you get paid at settlement is to record a performance mortgage (a lien) for your profit. Whether you need to sweeten the pot and give the seller a portion of your profit depends upon the seller’s urgency to sell and your negotiating skill.
Your real estate attorney is probably well versed in both of these techniques.
So if you don't do lease options what do you do?
Fair question. I buy and hold (indefinitely) for the production of income. I never intend to sell, but will if there is a compelling reason to do so. When I do sell, I use a 1031 exchange to upgrade my rental portfolio and improve my cash flow. Since I never purchase a property with the intent to sell, I never put a tenant in place under a lease option.
Assuming there’s a mortgage, I always pitch the benefits of Sub2 to sellers, and I always try to go on title right away even in an L-O context. I want to control the payments on the loan, too, or they may not get made. A good RE atty should be able to place you solidly in the middle of the transaction via your option. If you’re worried your seller may try to stiff you, you could record an “Affadavit Regarding Real Estate” that references your option to buy. It only requires your signature. That clouds the title, and helps ‘protect’ your deal; you’ll require an ‘adminstrative fee’ to release it. Be sure you have a solid agreement, though, there are penalties for unjustified messing with titles. If your seller tries to squeeze you out, you don’t have to release this encumbrance, and the deal dies.
But if you think your seller is going to mess with you, you should reconsider how you structure the deal, and protect yourself or not got through with it. I avoid sellers who seem untrustworthy.
Thanks for the responses! Im wondering now how do you make payments directly to the lender without triggering due on sale? When you set up the land trust does this somehow avoid this?
I would not trust a homeowner in trouble to make the payments.
Google “due on sale clause” and you’ll find zillions of posts on many fora about DOS, it’s rarely an issue. Some gurus with programs to sell (surprise!) do try to make you nervous about it for their own benefit. I’ve made many payments on mortgages in others’ names. Do you really think they have time to see who’s actually sending the payments? And if they did, for all they know, I’m just a wealthy relative.
Speaking of pitching the benefits of “subject to” to sellers what are those? I had a seller just ask me this question and I couldn’t think of any of the top of my head. He seemed to be open to it though.
Your lease option agreement with your tenant buyer is between "Tommy Tenant (Tenant/Buyer)" and "zachj and or assigns (Landlord/Seller)". In a cooperative assignment, you assign your lease option agreement back to your seller and keep the Tenant Buyer's option consideration as your assignment fee.
You and the seller agree to void the original lease option agreement you had and replace it with the agreement you have with your tenant buyer. The seller presumably gets a higher rent and a higher option price than he would have gotten in your original agreement.
Dave, I like this idea above. Couple questions…
-Is it necessary to fill out an assignment of contract form which gives me the assignment fee(option deposit from my tenant/buyer)? Its not as if original seller is actually giving me any money, im just keeping the deposit. But legally the future lender may want to see this?
-Then when my tenant/buyer goes to actually purchase this property from original seller, the lender will ask of proof of the 3% deposit that was put up. This will be a check made out to me, I would think the lender may question this? I could have check written to original seller and then have the seller pay me but its a bit of a procedure to do that.
-Will lender also question why my name is on the sales contract and im assigning to the actual owner?
Just obviously worrying about any repurcussions here with the future lender.