Purchase Option Problem Addressed.
Awhile ago I posted concerning "purchase option" investing as touted by Daved Finkel & Peter Conti.
I heard back from one investor that said the problems he had were " the owner on title pulling a second mortgage on the house and when his lessee wanted to exercise the option the house was mortgaged to the hilt>"
HOw would you address this other than taking the property SubTo?[ Edited by Stockpro99 on Date 03/11/2004 ]
They have 3 recommendations for protecting yourself.
1. Record the option.
2. Record a Memorandum of Agreement.
3. Hold a signed and notarized Grant/Warranty Deed in Escrow.
Recording the option will show publicly how much your option price is, so a tenant-buyer could in theory figure out how much you are making on the spread. They say a the better way is to record the Memorandum of Agreement which would cloud the title should the seller try to refinance or get a second mortgage.
By holding a signed and notarized deed in escrow, you are protecting yourself from the seller trying to back out of the deal years down the road.
Hope this helps.
Excellent reply! very thorough!
I must have missed that in the book>
THanks again Randall
I just finished 2 of Conti's and Finkel's books. I loved them except for the fact that they did not go into detail about the contracts, paperwork, legal issues...ect.
I have noticed a dearth of forms and formats in a lot of these programs and books. I spend a couple K a year learning the ins and outs of CRE and still come up short
Nixon,
Conti/Finkel saves the detail for their advanced courses (Protege Program for example).
Go figure. :-D
A couple of problems with their "solutions." Recording a Memorandum of Agreement or even the option itself does not guarantee you that the owner/seller will not be able to get a loan. Depending on the lender, they may or may not view that as an actual cloud to title.
Having a signed and notarized warranty deed in escrow does no good IF the owner/seller refinances BEFORE you record that deed.
Lease optioning is a good method for "selling" real estate because the owner/seller has the control. That is also why it is not a good method for "buying." There is no one method of real estate that works equally well when buying or selling. That is why most investors buy one way and sell another.
Conti and Finkels "introductory" materials are lackluster at best. Most of their stuff is painted all rosy and is outdated. As mentioned, to get better stuff, you are supposed to buy the higher $$$ materials. Classic upsell gurus and nothing more. The final letdown for me was I signed up for their newsletter after being off of it for a year. What did I get? The same newsletters from a year ago. Nothing new. Sad, sad, sad.
Roger
Roger,I agree with you most guru's you wind up paying big bucks for useful information. What amazes me is on one guru's infomercial he claims since he started investing in 1970 he has bought over $30,000,000.00 in real estate. The funny thing is this is less than $1,000,000.00 per year. I have heard he sells nearly $1,000,000,000.00 in products and services. But what is funny people will listen to these gurus who are nothing but salesmen,but will not listen to active real estate investors.
Most second, third, or no equity mortgages do not require a property search for liens. All they require are the taxes paid and the property being in the mortgager's name. That is why the rate is anywhere between 15% and 24%
Lori
[addsig]
Tinman1755 writes "Most second, third, or no equity mortgages do not require a property search for liens."
---
Second and third + no equity mortgages put liens on the property correct?
If so, will this be a factor when you exercise the option if you had a signed and notarized Grant or Warranty Deed in Escrow?
This is all great input ladies and gentlemen, but what's the bottom line here? I have several LO properties with rent to own tennants. Haven't had that problem yet (knock, knock) so what's the BEST way to protect against it? Thanks.
dmbaker,
Glad to meet you.
As you progress in your creative real estate investing career you will find that it is just as easy to "Get The Deed In Your Name", this stops the problems.
John $Cash$ Locke
Mr. Locke is absolutely correct.
By "buying" on L/O and then "selling" on L/O, you are creating a number of problems down the road, besides the fact that the original owner still has most of the control.
By subleting the property, especially on an option to purchase agreement, you likely have opened yourself up to legal liability UNLESS you have specificly stated within the contract that you DO NOT own the property and the you CANNOT guarantee clear title to the property should your tenants choose to exercise their option. This does two things. First, it greatly weakens your offer. Not many people will put down $$$ on a deal they aren't sure they get, and less than they would normally. Seocnd, it forces you to retain ALL money from the deal in an account because if the deal goes bad, all that money must be returned to your tenant/buyer.
By not owning the property, you're forcing yourself into a double closing situation. These are difficult to do when you know what you're doing, and next to impossible when you don't. Also, with most lenders current guidelines, you will be severely limiting your tenant/buyer's access to financing, since most lenders now require some title seasoning. If your tenant/buyer doesn't exercise their option and you don't exercise yours, then the original seller is usually in a worse situation than he was before you came in to "help" them. The reason is that the seller has now moved on, with another home or apartment and now you are giving him back an added. and expensive bill for him to pay.
How do you think that'll affect your reputation when people ask them what they thought about doing business with you?
Roger
I tend to agree with John on this however; it would appear that this is a major mainstay of the COnti/Finkel team. They appear to have been using this system and making money doing it. I have been contacted by others that have used it successfully. The problems with it are the reason I posted this subject
Randall
They appear to have been using this system and making money doing it.
Drug dealers appear to make good money with their system too, yet it doesn't make it any less illegal.
Just because it appears that they have been successful with it doesn't really mean they have. I'd wager that they have been more successful selling the concept than actually implementing it personally.
Roger
[quote]
On 2004-04-17 19:56, bluecat13 wrote:
Tinman1755 writes "Most second, third, or no equity mortgages do not require a property search for liens."
---
Second and third + no equity mortgages put liens on the property correct?
If so, will this be a factor when you exercise the option if you had a signed and notarized Grant or Warranty Deed in Escrow?
[/quote
When a person gets a no equity loan all that is required its proof that the owner is on title. If someone tells me they own the property, I do a website search, show the bank, close the loan. So if someone else has a signed notarized deed somewhere I would have no way of knowing that.. So yes it can cause a problem.
Lori
[addsig]
Lori,
So you're saying that if I were LOing from the landlord and was in turn LOing to a TB, I would only be able find out about the new No Equity loan AFTER it has already recorded?
Can you tell me why some loan companies give No Equity loans to people?
Mako
John said "its better to just get the deed in your name". Can you do that if you are buying on a purchase option? Is sub2 the only creative way to get the deed in your name?