Option Money
I have recently read that when doing a LO, and applying some of the rent from tenant/buyer toward the option, that in a court of law your tenant/buyer is then a buyer, and if tenant/buyer defaults on payments, then foreclosure rather than eviction is necessary. Is there a way to avoid this, other than placing the property into a Trust?
I would like to hear any and all responses to this question. Thank you.
Hello here are some great tips that should answer you question pretty good. You should have no problem if you use these.
1. Use separate agreements. Give your tenant a lease and a separate option agreement. Make certain the lease does not refer to the option. You don't show any option agreement to the court until the judge asks for it.
2. Keep your term short. Do not give tenants more than one year lease/options at a time. If the tenant insists on three years, give him a one year with two rights to renew. Draw up brand new leases and option agreements each time he renews. If you give a cumulative rent credit, raise the purchase price each time.
3. Take a security deposit. Sellers don't take security deposits, landlords do. Make it look like a landlord/tenant relationship, even if the security deposit is small.
4. Pay the taxes and insurance. Do not let the tenant pay the taxes and insurance. This makes it look like a sale.
5. Don't give large rent credits. The more "equity" the tenant has, the more likely a judge will favor an equitable mortgage
6. Watch your language. Refrain from using the words "credit," "seller," and "buyer" in your agreements. Instead, use the words "non-refundable option," "landlord," and "tenant."
Hope this helps a little.
Allan Dinger
**Please See My Profile**
Thank you Alan for your reply. Your response is right on. I see you are a wholesaler. Do you do lease options, and have you ever had any less than desirable situations with your tenant/buyers that have justified doing LO business this way?
Janis
So the tenant buyer never gets a copy of the option agreement, just the lease? What about if the tb brings up the option agreement in court, then you do have to produce it?
The agreements are contracts (lease and option) which the tenant should receive a copy.
Eric & Rosa
[addsig]
Allan gives good advice.
I never mention the word "downpayment"
(there I just did it) in my ad,conversation,
and/or written agreements.
I don't give a "rent credit". This may just support the premise that the lessee has an equitable interest in the property.
I increase the non refundable option consideration by $x/mo if necessary. Remember rent is taxable. Option money isn't until the transaction is consummated or the option expires.
I would like a copy of what you read...
The contract makes all the difference in the world....
I disagree totally....if your contracts are "right" then you have a tenant... until they decide to exercise the option or default on their right to.... You cannot foreclose on someone who does not have title....
Quote:
On 2003-10-13 19:22, janis wrote:
I have recently read that when doing a LO, and applying some of the rent from tenant/buyer toward the option, that in a court of law your tenant/buyer is then a buyer, and if tenant/buyer defaults on payments, then foreclosure rather than eviction is necessary. Is there a way to avoid this, other than placing the property into a Trust?
I would like to hear any and all responses to this question. Thank you.
Dave,
Thank you for your pointers. I have read the information (if your tenant/buyer defaults, and the court sees that it has been option monies going toward a purchase, then they could rule that the tenant/buyer has equitable interest, making foreclosure the only way to remove tenant/buyer) on a website that sells Trust setups. At this site they believe the Trust is the only way to protect yourself from this happening.
So, do you give option monies to your tenant/buyer, and if not, do you keep your options short, and what makes this deal attractive without option monies from rental payments?
Janis