Spendthrift Seller
What can the buyer do if, let's say after two years of paying, it's time to execise the option and it turns out the seller owes more on the property than what he has agreed to sell it to the buyer for? 
What can the buyer do if, let's say after two years of paying, it's time to execise the option and it turns out the seller owes more on the property than what he has agreed to sell it to the buyer for?
I would think that you would go with the agreed upon price. If I'm understanding correctly the seller had a house for sale that they owed (I'm just throwing in numbers here) 100K on, found a buyer and agreed to sell for 120K on a LO. The buyer makes his payments for 2 years and then wants to excercise his option for the balance on the 120K - lets say 118K but in the mean time the seller has somehow raised his amount owed from 100K to 125K??? So now with the agreed sales price of 118K there is a 7 K shortage.
The seller created the problem and he has to fix it (i.e. swallows that 7K pill). The buyer has a contract. Not sure how to proceed if the seller took out a 2nd on the home for 25 K since it's tied to the property. Maybe the buyer could take over that mortgage and the seller pays him 7K (either by cashing in equity on another property or by credit card, or by taking back a note).
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On 2004-03-02 10:46, steeler19 wrote:
I would think that you would go with the agreed upon price. If I'm understanding correctly the seller had a house for sale that they owed (I'm just throwing in numbers here) 100K on, found a buyer and agreed to sell for 120K on a LO. The buyer makes his payments for 2 years and then wants to excercise his option for the balance on the 120K - lets say 118K but in the mean time the seller has somehow raised his amount owed from 100K to 125K??? So now with the agreed sales price of 118K there is a 7 K shortage.
The seller created the problem and he has to fix it (i.e. swallows that 7K pill). The buyer has a contract. Not sure how to proceed if the seller took out a 2nd on the home for 25 K since it's tied to the property. Maybe the buyer could take over that mortgage and the seller pays him 7K (either by cashing in equity on another property or by credit card, or by taking back a note).
Yes, and notice no one else has replied. Looks like if the seller takes out a second the buyer is up the creek.
[addsig]
I have had a question in that same line. HOw do you protect the buyer and yourself in a similar lease option assignable? I am thinking that a "memorandem" filed at the courthouse would suffice, or maybe a 2nd? something to cloud the title and prevent the unscrupulous from preying on the weak.
If what was signed by the property owner and tenant was a lease with an option to buy, there is no "buyer"--just a tenant who has first right to buy the property for X$ by Y date. By Y date, there must be a purchase contract signed by owner and tenant/optionee.
If the property owner now owes more than the sale price in the lease option agreement, and unless the lease option agreement did not contain any "what if" and default provisions, my feeling is that if the owner can't convey clear title, there's a dead deal. Just one of several hazards with lease option.
So I guess the leasee needs to make sure he's protected - at least in so far as that he get's his option money back since the option is non-executable due to failure of the seller to convey clear title.
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On 2004-03-03 20:52, steeler19 wrote:
So I guess the leasee needs to make sure he's protected - at least in so far as that he get's his option money back since the option is non-executable due to failure of the seller to convey clear title.
If the seller had to take out a 2nd he probably is going broke and doesn't have the option money. The only way to prevent this IMO is to have the seller voluntarily cloud his title. Or make sure that whoever you're buying from is financially sound.
[addsig]
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On 2004-03-03 20:30, NancyChadwick wrote:
If what was signed by the property owner and tenant was a lease with an option to buy, there is no "buyer"--just a tenant who has first right to buy the property for X$ by Y date. By Y date, there must be a purchase contract signed by owner and tenant/optionee.
If the property owner now owes more than the sale price in the lease option agreement, and unless the lease option agreement did not contain any "what if" and default provisions, my feeling is that if the owner can't convey clear title, there's a dead deal. Just one of several hazards with lease option.
You mentioned there are "several hazards." What are the others?
[addsig]
iammagi,
Where a deal is structured only as a lease with an option to purchase (and not as a purchase contract with a lease), the tenant/optionee has no control over the property or liens and liabilities incurred by the property owner. The result can be what has arisen here -- the "option price" is less than the total amount of money owed by the owner.
If the deal were structured as a purchase for X$ by Y date with a right to lease the property prior to Y date, the buyer/occupant has an equitable ownership interest in the property and the purchase contract typically contains protection provisions relating to prohibiting owner from permitting encumbrances to be attached to the property, requiring conveyance of clear title, and what happens in the event of default (both seller and buyer). In addition, what happens if the value of the property by the expiration of the option period is actually less than the option price? Presumably, the optionee would choose not to exercise the option. But if the option fee was sizable, the optionee may have been reluctant to risk forfeiting the fee and may have passed up buying other properties--properties that might have been better than the one he optioned.
From the owner's perspective, lease/option can be "hazardous" because the owner has to sit and wait out the option period. He cannot sell the property to a "real" buyer until either the tenant exercises the option or the option period expires. During this time, the property value can peak (be worth more than the option price) and he'll have to sell the property to the optionee, if the option is exercised, for less than it is worth. Alternatively, the property value can peak and then decline during the option period. The owner missed the opportunity to sell to someone else for a higher value and when the value declines by the end of the option period, he may have to sell the property at a loss, either to the optionee or someone else.
Can it be stipulated in the lease option that the total of present and future encumberences must be less than or euqal to the agreed upon purchase price therefore protection the one with the option?
If that leasee has a written option at a specific price and the seller does not comply upon a valid execution by leasee, then the leasee may have grounds to pursue the seller and enforce specific performance...seller had better get ready.
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On 2004-03-10 19:06, ram wrote:
If that leasee has a written option at a specific price and the seller does not comply upon a valid execution by leasee, then the leasee may have grounds to pursue the seller and enforce specific performance...seller had better get ready.
Doesn't mean squat if the seller is broke. Which probably why he took out a 2nd.
There's at least two ways to approach this. You should at least place a clause in your option agreement with the seller that they cannot incur addtional indebtedness on the prop. Then, you could file that if you want to.
But, what we do (and is recommended by various gurus) to file a notice of option to purchase real estate; basically a memorandum of option. This way, all you're recording is just a memo with no details about your deal. In other words, the rest of the terms of your deal are not being shown to the public (as they would be if you filed the option agreement).
Also, would it make sense to have the seller put a signed deed in escrow with an escrow agreement that says the deed will be recorded (to you) when you fulfill the requirements to exercise your option? Seller may not agree to this but it may be worth trying.