Help With Financing After Lease Option.
This may not be the right forum for this question but any help will be appreciated.
I am living in a house with a lease/option with 6 months left to go and want to get it financed. However, I have a foreclosure recorded 14 months ago after a bankruptcy and have a middle credit score of 586.
Can anyone point me to a sub-prime lendor that can get me financed with about 8% down?
Thanks in advance...
Go see a mortgage broker. If you paid with checks, you can have it treated as a refinance when you buy.
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Thank you mtnwizard for addressing my post directly.
Tahoemaniac attacked a judge he doesn’t know and attacked contracts when there is no evidence that they are faulty. Tahoemaniac is displaying a naiveté common to new investors. They believe the “gurus” or teachers without using their own intelligence or their own attorneys. Having signed the documents in an attorney’s office is meaningless in court. They need to approve your contracts, they don’t need to help you sign them. The only thing that could help in court is if the T/B’s attorney approved your contracts before their client signed them. To think that contracts always protect you is a complete misunderstanding of contract law.
LeaseOptionKing is also jumping to conclusion that we are speaking of “poorly-written contracts”. That was not the point of my post. I am looking at interpretation of the law that governs tenant / landlord relationships in Massachusetts. My post actually takes it for granted that the contracts are good since I had no need to post about bad contracts. LeaseOptinKing’s tag line is “A deal is only as good as the quality of your Contracts” makes his comments about bad contracts to be self-serving. Mtnwizard’s application of AZ law may be appropriate to MA since MA is one of the worst places in the country to be a landlord. Tenant rights are tremendous here.
There are no extenuating circumstances in this case. In housing court, MA uses Rules of Fairness that frequently override contracts. Security deposits in MA are limited to ONE month’s rent and must be kept in a separate MA bank account, the bank info must be sent to the tenant by a certain date after tenancy begins. Failure of the landlord to follow this and other security deposit laws will reward the tenant triple damages.
A judge may look at a pair of contracts, like a Lease and Option to Purchase, and decide under the Rules of Fairness that there was no way that the T/B was going to be able to purchase the property and the investor took advantage of the T/B. It is no stretch of the imagination that he will consider that the Option Consideration was an illegal security deposit and award triple damages to the T/B. It is also reasonable to believe that the public attorney from the free law clinic will investigate all of that investor’s deals and start a campaign against the L/O business in MA.
I know an investor in MA who has been doing L/O deals for 20+ years. Every time he has been taken to court, he ends up giving the Option Consideration back to the T/B. This threat of triple damages being applied is certainly a new twist. My friend, who is a lawyer and investor, only had one simple comment: “this is scary”.
I am a risk taker. I have made good profit on L/O deals (as well as other methods of creative investing). I do not believe that we should stick our heads in the sand and believe gurus without logical discussion. Blaming contracts and bad judges is counterproductive when that is not the issue at all.
Since L/O’s are becoming more viable in MA (huge amount of inventory), it may be that consumer driven lawyers will address the issue of taking advantage of T/B’s in the near future. The attorneys here in MA are already successfully using the 93A Consumer Protection Laws against investors who chase foreclosures. It will only take one case, one judge to apply triple damages to an Option Consideration to ruin the L/O business in MA.
I ask LeaseOptionKing, if you are so good with contracts and deals, please explain in detail how this potential pitfall could be avoided in MA. How do we change current contract wording or change the whole process of L/O. Be creative.
I thank all of you for your comments.
There is an excellent article that is written by Donald J. Valachi, CCIM, Ph.D., CPA, clinical professor of real estate at California State University in Fullerton, and a well-known expert in the field.
To paraphrase some of his article: "The important income tax question in lease-option transactions is whether the tenant is leasing the property or, as an economic reality, an installment sale has occurred prior to the tenant exercising the purchase option."
"Although the lease option is a valuable strategy in many situations, it should be used with great care. There is always a threat that the IRS may view the lease-option transaction as a sale and the lease as merely a financing device. Rents that are significantly above fair market rents, when combined with a "bargain" option price, indicate that the transaction is likely to be characterized as a sale and that the rental payments are, in fact, installment payments on the purchase price. Thus, both the rental payments and the option price should be set by the parties with reference to going market values and rents for similar properties. And the parties should be prepared to justify their estimates of rent and purchase price if the transaction is later challenged by the IRS. Rental value and property value are best established through independent appraisal by experts."
Here is a link to the full article:
http://www.ciremagazine.com/article.php?article_id=691
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Thank you for the replies.
I have been accused of sounding like an attorney before, thankfully I am not.
I agree with the idea of helping the T/B achieve the actual purchase. What I worry about is the occasional bad tenant who does not keep up with the rent payments and they must be evicted. If they seek a public clinic attorney, all hell can break loose. I have never taken a security deposit for the very reasons mentioned. I state very clearly that the Option Consideration (OC) is not refundable, it is notarized and they initial the line that says not refundable. My fear stands that a judge will re-characterize the OC as a Security Deposit. If that happens (MA will be first), then the OC could be subject to the triple damages.
I believe that LO’s are a great way to make money. I am working on a modified LO where I am only sandwiched in the Option but not the Lease. If I am not the landlord, I cannot end up in housing court. The Option could state that the Optionee can send $200 a month toward the Option to Purchase and $400 to $600 will be applied as a Purchase Credit (not rent credit) if the Option is exercised. The owner would get paid the rent directly. I do not have to maintain the property, collect rent or evict bad tenants. I will only work with owners that have huge equity (50 to 100%). The idea still needs work, but it is viable. I did one LO where I was not sandwiched in the Lease because the owner was paying $2,500 and it could only rent for $2,000. The owner is in the hole for the $500 month. I am still making good money on the Option.
LO considered sale by IRS: this is not a concern of mine. I read the reference article and the conditions do not apply.