Owner Financing.... if you are selling you can either do a rent to own which is effectively a lease with option to purchase. Otherwise you could sell the property on a land contract.
If you are the seller of the property you need to take a mortagage or deed of trust AND a promissory note secured by that mortgage or deed of trust from the seller.
If you are a buyer you do the reverse and give the seller a mortgage deed or deed of trust.
All terms are of course negotiable between you and the other party.
The mortgage instrument itself *should* contain:
A clause giving you title and interest to all building, structures and improvements of every nature whatsoever situated on the property, example: fixtures, machinery, appliances, equipment, furniture, and personal property of every nature that are now owned or Will be owned.
If it is a Second mortgage, you want a clause stipulating that any delinquency or defaul under the first mortgage is a default on your mortgage. You may also want to include that any increase or advance is also a breach. (But you may not want that if you are the mortgagee (the borrower).
If you are the seller, you may also want to include
a clause on 1) Warranty of Title, Insurance, Condemnation, environment use, and info..for late pmts...You may also want to talk about what constitute default and how to cure it. You may also want to include a paragraph on future advances (if you are planing on making any). Lastly if you want to be paid when the person sells include a due on sale clause. This will protect you if you want your money in case the buyer ever sales the property.
Hope you got the gist of it but I strongly suggest you have the instrument drafted by an attorney your first time. Hope that helps. [ Edited by roboxking on Date 03/28/2005 ]
Your attorney would be the best source. If you have turned off the electricity to "persuade" the tenant to move, you may be liable for some huge award when the tenant sues you.
Option consideration is not rent credit. It is consideration for the right to purchase under the terms of the option contract. I have heard that there are some communities that are trying to enact laws and ordinances that curtail lease options. The do-gooders feel that the option consideration takes advantage of a tenant who will, in reality, never be able to make the purchase.
Hopefully, others will respond. LeaseOptionKing is in Georgia which is close to you. He likely knows what goes on in TN.
What smells is that if this is so, how does TN view option consideration if there is no lease? If TN has no problem with this, then what happens if the lease and the option are separate documents (most seminars I have taken say that they should be)?
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"Money put down for lease option is illegal in TN because it is considered rent credits? So the 4K they put down would be 4K that needs to be applied as rent credits." It this accurate?
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This is a response that was posted back by a member of our group:
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The problem I see is in your terminology. "Down Payment" indicates money applied toward principal. When you put money down on a new loan, the loan is immediately reduced by the exact amount that you put down.
It’s also a term that’s indicitave of owner financing, which may cloud the water when it comes to selling on lease option.
If you sell on some form of actual owner financing (contract for deed / land contract), you are retaining legal title to your property, but you are giving your buyer equitible title. And when you give equitible title away, it’s not a matter of simply evicting a non-paying tenant - you must foreclose on them. So a down payment is appropriate here, to "tie" the buyer to the property (through equity they stand to lose) and to give you a little more of a safety net (down payment funds should typically start at no less than 3% and 5% to 10% would be quite fair).
When you "sell" on a lease option, you retain both legal and equitible title. Instead you are passing along an equitible interest to your tenant/buyer. You have two seperate agreements: a lease, for which the tenant can/should be evicted for violating, and an option agreement, which gives them an option to buy at a specific price withing a specific time frame (similar to a purchase agreement but without the obligation).
In this case, if you have the tenant/buyer put money "down", then your lease-option could be recharacterized as a form of owner financing, which would effect everything from your tenant’s equitible title to when you pay income tax on the as-yet unrealized, future profit. This is bad.
Instead, your tenant buyers should give you NON-REFUNDABLE OPTION CONSIDERATION. This is simply a fee you charge them in exchange for the privilege of "tying up" your property with the purchase option. You cannot put your house onthe open market now - someone has an option on it. Your reasonable compensation is the option consideration fee.
Owner Financing.... if you are selling you can either do a rent to own which is effectively a lease with option to purchase. Otherwise you could sell the property on a land contract.
If you are the seller of the property you need to take a mortagage or deed of trust AND a promissory note secured by that mortgage or deed of trust from the seller.
If you are a buyer you do the reverse and give the seller a mortgage deed or deed of trust.
All terms are of course negotiable between you and the other party.
The mortgage instrument itself *should* contain:
A clause giving you title and interest to all building, structures and improvements of every nature whatsoever situated on the property, example: fixtures, machinery, appliances, equipment, furniture, and personal property of every nature that are now owned or Will be owned.
If it is a Second mortgage, you want a clause stipulating that any delinquency or defaul under the first mortgage is a default on your mortgage. You may also want to include that any increase or advance is also a breach. (But you may not want that if you are the mortgagee (the borrower).
If you are the seller, you may also want to include
a clause on 1) Warranty of Title, Insurance, Condemnation, environment use, and info..for late pmts...You may also want to talk about what constitute default and how to cure it. You may also want to include a paragraph on future advances (if you are planing on making any). Lastly if you want to be paid when the person sells include a due on sale clause. This will protect you if you want your money in case the buyer ever sales the property.
Hope you got the gist of it but I strongly suggest you have the instrument drafted by an attorney your first time. Hope that helps. [ Edited by roboxking on Date 03/28/2005 ]
Your attorney would be the best source. If you have turned off the electricity to "persuade" the tenant to move, you may be liable for some huge award when the tenant sues you.
Option consideration is not rent credit. It is consideration for the right to purchase under the terms of the option contract. I have heard that there are some communities that are trying to enact laws and ordinances that curtail lease options. The do-gooders feel that the option consideration takes advantage of a tenant who will, in reality, never be able to make the purchase.
Hopefully, others will respond. LeaseOptionKing is in Georgia which is close to you. He likely knows what goes on in TN.
What smells is that if this is so, how does TN view option consideration if there is no lease? If TN has no problem with this, then what happens if the lease and the option are separate documents (most seminars I have taken say that they should be)?
I have students in TN who are very successfully using Lease Options. If you do sub2 in TN, though, stay away from Land Trusts.
[addsig]
Land Trusts are penetrable in court in TN and LA. Neither state recognizes them.
[addsig]
RROG,
Here is the question I posted to our group:
*********************************************************
"Money put down for lease option is illegal in TN because it is considered rent credits? So the 4K they put down would be 4K that needs to be applied as rent credits." It this accurate?
*********************************************************
This is a response that was posted back by a member of our group:
********************************************************
The problem I see is in your terminology. "Down Payment" indicates money applied toward principal. When you put money down on a new loan, the loan is immediately reduced by the exact amount that you put down.
It’s also a term that’s indicitave of owner financing, which may cloud the water when it comes to selling on lease option.
If you sell on some form of actual owner financing (contract for deed / land contract), you are retaining legal title to your property, but you are giving your buyer equitible title. And when you give equitible title away, it’s not a matter of simply evicting a non-paying tenant - you must foreclose on them. So a down payment is appropriate here, to "tie" the buyer to the property (through equity they stand to lose) and to give you a little more of a safety net (down payment funds should typically start at no less than 3% and 5% to 10% would be quite fair).
When you "sell" on a lease option, you retain both legal and equitible title. Instead you are passing along an equitible interest to your tenant/buyer. You have two seperate agreements: a lease, for which the tenant can/should be evicted for violating, and an option agreement, which gives them an option to buy at a specific price withing a specific time frame (similar to a purchase agreement but without the obligation).
In this case, if you have the tenant/buyer put money "down", then your lease-option could be recharacterized as a form of owner financing, which would effect everything from your tenant’s equitible title to when you pay income tax on the as-yet unrealized, future profit. This is bad.
Instead, your tenant buyers should give you NON-REFUNDABLE OPTION CONSIDERATION. This is simply a fee you charge them in exchange for the privilege of "tying up" your property with the purchase option. You cannot put your house onthe open market now - someone has an option on it. Your reasonable compensation is the option consideration fee.
Terminology is everything here.
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Hope this helps! Best of luck on your LO.
MemphisREI
Yes, this helps. You have confirmed what several other knowledgable and experience people have told me.
Thanks,
Rick