L/O Pitfalls
Can some L/O guru or experts share some experience in these areas?
- T/B buyer trash the place. What to do?
- Seller files BK, or foreclosure
- Any tax benefit buying l/o and selling l/o?
Other pitfalls?
Thanks
I'm no guru, but I'll give it a shot.
Since I started in 1995, I've never had a T/B trash the place. Aside from the fact that they pay a reasonably large Option payment, we have to help create a psychological relationship with the T/B that gives me pride of ownersdhip without granting equity--a balancing act that is both science (Contracts and legalities) and art and that can be learned. But it could happen. We need to have reserve cash from each deal set aside just in case.
If we do our job properly, there won't be a foreclosure. As for bankruptcy, something (I prefer a Memorandum) should be legally recorded, the Contract should state that you are a Buyer and the Owner a Seller, and the Contract should clearly grant an equitable interest to you as the Buyer. My Contract cleverly does that by stating that the Seller understands that I have every right by law and equity to enforce the Agreement. No one notices that when they sign, but you don't have equity if you are a renter; you only have equity if you are a Buyer. The reality is that the Seller could go bankrupt, and if so, we would have to be notified and should appear before the trustee to show our Contracts and present our case, which should be a strong one. Ideally, we should have a Performance Mortgage recorded, but in the real world (outside of seminar la la land), that isn't easy to obtain.
If you are the Owner, yes, you have the same tax benefits you would with any rental property. You would report all gross rental income on Schedule E, and if you offered rental credit and it closes, it would be deducted as a sales expense. No tax benefits to the Buyer; nor are there any for you if you are in a Sandwich Lease. The rent you collect from your T/B is regular Schedule C (unless you are a different entity) business income, and the rent you pay the Seller is a business expense.
It's all about risk versus reward. Properly structured, the risks are quite minimal (but still there). If there were absolutely no risks, there would likely be no reward, because the Seller would have no problem that we could solve (problems create both risks and opportunities).
[addsig]
leaseoptionking,
Thanks for your response.
As a seller, what do you do with option money and rents, put them in your pocket or use some of it toward purchase if a t/b decides to exercise?
I read Conti book and I think l/o is the lowest risk, and maybe sub2 also, an investor can start looking into.
How much cash reserve do you think on need, or can we use option money toward fixing things up if t/b damages the place?
What are typical credit amount or percentage can one structure in a deal for purchase price if you are a seller?
Sorry for many questions.
Even though it's not actually taxable income until the T/B exercises the Option or defaults, I usually report Option consideration in the year received. I set aside $1,000 from each deal as an emergency fund in case I need it. Lease Purchase lenders (who treat it as a refi) will loan someone with bad credit around 90 percent.
[addsig]
Great question! I have also been thinking about this! I think the same question is also valid with respect to simple owner financing... For example, if I buy a house for $30k and sell the property with owner financing for $50k (something like $4000 down, $555 a month for 84 months...). I then sell the note for 90% of face value and net $15k (50-5-30)...
My question is: Can anyone claim I am taking advantage of the buyer or is it basically all about supply and demand, as in "if they're willing to agree to these terms, nothing else matters" ???
Mark.
Like most things, there are good apples and bad ones. It can be very ethical and moral when done with the aim of actually getting the T/B qualified. I try to only deal with serious Buyers and do what I can to help them.
John Reed has some good info and some bad info. He has a good thing going; he puts down others' programs to set people up to buy his stuff. I'm not saying his stuff is bad (I have not perused any of it), but his marketing tactic seems a bit too extreme for my tastes.
[addsig]
Mr. Reed is a character, both arrogant and iconoclastic. He seems to favour patience over creativity, and that isn't all bad. His good/bad gurus list seems quite biased, but has some value. If you look at his site you'll see he doesn't offer much in the way of "freebies," but I did follow a few links and found some interesting insights; I recommend it.