what is eqiutable interest?

I see this mentioned alot in these forums, and im not to sure what it means, can anyone explain?

When you lease option a property to a tenant and he goes into default, he can often claim an equitable interest in the property if his option deposit is credited toward the down payment or rent credit is given. An equitable interest means you must foreclose on him (expensive and time consuming) rather than just a simple eviction. Lease options are a great deal for buyer/tenants – a minefield for sellers.

Da Wiz

Notwithstanding the ‘wiz’ that gets sprayed all over this forum. Here’s the actual definition:

Equitable Interest
“An ownership interest in a property that is demonstrated by actions such as the payment of the current mortgage, property taxes or property insurance rather than by legal ownership.”


Notwithstanding the brilliant response you received that was the glossary definition of equitable interest (I figured you were capable of finding that yourself), I gave you an answer that applies to this forum and the way the term equitable interest could apply to you, specifically if you use lease options. Equitable interest is the biggest hurdle you face when you lease option as the seller. That is because most lease options are actually disguised sales contracts, hence the equitable interest for your tenant/buyer necessitating foreclosure rather than eviction. All lease options violate the DOSC. Good luck to you.

Da Wiz

ok that makes some sense then! but that onyl aplies to when you put the option consideration towards the purchase price and a portion of the rent to the purchase of the property!? thanks again guys!

SO HOW do you just evict them?
Make sure there is some specific language on that in their lease agreement, or just make sure to tell them their down money DOESN’T go toward the purchase of the house and their rent DOESN’T either?
newbie in tampa florida

If you do that then you’re just a regular old landlord.

Personally, I worry about equitable interest about as much as I worry about the sun burning out. While it’s true that a buyer could stop making payments, and could ask for their money back, and could get really pissed off when you say no, and could take you to court, and could win…are you beginning to see how low the odds are?

People like’wiz’ just get a thrill out of scaring newbies, hoping that they might buy into whatever they’re selling.

The reality is that the the dire consequences he’s trying to convince you is virtually guaranteed if you are stupid enough to ever sign another lease option, are so unlikely they’re not worth worrying about.

It’s all just part of his sales pitch. If you really believe his sky-is-falling mantra then you shouldn’t be investing in real estate in the first place, because there is no technique that is 100% foolproof.


Here is a list of five things that may violate the law and cause the judge to classify the transaction as a “disguised sale”. This is not my list, but a list quoted in court during his decision by a Judge in Arizona, a former Senator who actually co-authored Arizona’s landlord/tenant laws (this is direct from the court transcript):

  1. Collection of more than 1.5 times the monthly rent as Option Deposit is illegal in Arizona by statute, and seen by the court as a “possible down payment”.

  2. Collection of an Option Deposit or Rent Credit to be credited to a Purchase, or to discount the Purchase as in a Down Payment.

  3. Predetermining a Purchase Price, as in delaying or disguising a sale.

  4. The Lessee also holding an option on the same property they are leasing regardless if it is one document or two separate documents. (This means no sandwich leases.

  5. The Lessee being responsible for maintaining the property.

If the lease is not recognized by the court as a lease, it doesn’t get the benefits that go along with a legally recognized lease. If the judge feels a sale has taken place instead of a lease, the rules governing foreclosures will apply. For this reason, possession of the property will be decided by a judge in position to decide matters of title and the process can be extremely expensive. Costs can run $10,000+, not including having to pay the back mortgage payments during the life of the suit.

I am not trying to scare anyone and don’t sell anything. I just think it’s important that you have as much information as possible so you can make informed decisions.

Da Wiz

Unless the above is in the lawbooks, it is NOT a law and for you to quote it and make it sound like a law is irresponsible. Not to mention…I don’t recall anyone saying they were in Arizona. Quit using the scare tactics on new investors, and unless you can show something that says this is a LAW, you should not be attributing it to a judge and making it sound like it is a law.


I quoted this judge because lease options are among the investment tools being targeted by state legislatures as new laws keep popping up limiting the alternatives for small investors. Lease options have been virtually banned in Texas with minor exceptions. Item #1 above IS THE LAW in Arizona (ARS Article 2, 33-1321a) and perhaps in other states.

It is always best to know as much as possible about the method of investing you use and how it is being interpreted by the courts. Here is a link to the article about this judge’s startling findings in court re a lease option. It is very important because this is the way judges in Arizona and many other states are interpreting lease option transactions.

Note to moderators: this link is not to any website that sells anything. It is simply to an article written by a Salt Lake City realtor/investor that is pertinent to this topic.


Good luck to you.

Da Wiz

So with all that being said (and thats some pretty scary stuff in that article), what are some ways to avoid allowing an equitable interest in the property?

or what can you do to make sure your lease is a court-recognizable lease?