Lease Option Nightmare...what Now?
I was hit with this question today...and had no idea how to answer....What happens if the person you lease option FROM doesn't make the payment and the house gets forclosed on...and now the people you are lease optioning TO are being evicted and they are hunting you because they made their payment. How do you keep this from happening? All the trusting one person does that the other will follow through on his word.....
Cover your ASSets! Set up payments to be made to a loan servicing company and you have less to worry about. I would never let the original owner be responsible for something I worked so hard to put together. Hope this helps!
Good luck
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On 2003-12-29 15:40, Steena wrote:
I was hit with this question today...and had no idea how to answer....What happens if the person you lease option FROM doesn't make the payment and the house gets forclosed on...and now the people you are lease optioning TO are being evicted and they are hunting you because they made their payment. How do you keep this from happening? All the trusting one person does that the other will follow through on his word.....
There should be a third party collector. That entity receives the monthly rent and makes the mortgage payments. The residual amount is then remitted to the appropriate parties..
But what about the little red flags? Won't the bank receiving the payment from a different place all of a sudden cause a DOS? How do you get around that?
Steena
As I understand it the banks just process the checks, and the person who opens the envelope is not about to raise alarms because the check comes from someone other than the borrower. I don't think they really care.
And even if they did, there has been no sale, only a lease, so the DOS clause would be irrelevant.
True. Thank you very much. This is such a great site!
A loan servicing company. Any idea the average cost you should expect to pay for something like that?
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It's Not What You're Getting.......It's What You're Becoming![ Edited by Steena on Date 12/29/2003 ]
Other posts answered how to prevent this from happening. If it actually does happen I hope you at least know a month or two before the actual sale. If your tenant buyers are getting evicted then you did not find out early enough. You need to help them by finding them another house if they will trust you at all. Let them know that it is your fault that this happened and take all the blame even thought it is the sellers fault. Even as a kid we all say I did not do it no matter what. Tell them it is your fault because you did not check with the mortgage company each month to make sure the seller gave them the money. If you can not find them another home you could be held accountable for their losses even though you can hold the seller accountable. Lawyers look for deep pockets. Your seller will have on his or her underwear only.
Like stated above the best way is to avoid, but if this actually happens try to deal with it as fast as possible and make the tenant/buyer as whole as possible
Good LUCK and HAPPY HOLIDAYS
Hope this helps some
Ted Jr
It's an aspect I had never considered until my friend brought it up. I was stumped. Yes, I fully agree that helping them would be the most important, since it is their life that has been turned upside down. Thank you for all your advice and guidance. I will be WAY more cautious in the future to avoid these circumstances.[ Edited by Steena on Date 12/29/2003 ]
I (my company) collects the lease option payments and I (my company) makes the mortgage payments. If it is a deal breaker then I would have a third party make the payments if the original seller does not agree any other way, but this has not been an issue for me. Just indicate to the seller that they have no more time or financial obligation to the home once you do the paperwork. My typical language: "this means you won't even have to make your mortgage payments, actually we won't let you. We have to make the payments to assure they are made on time each and every month. In the event the tenant buyer does not make a payment, not a problem, we will continue to make the payments."
I'll give you another solution in addition to a contract services company (third party that handles all payments)..
Get the OWNER/SELLER to sign a POA (power of attorney) over the mortgage (I do it on every one of my sub-2 deals)..
This gives you all legal right to handle the loan, and deal with the mortgage company in place of the owner/original borrower, if you ever need to.
And additionally, ALMOST ALL mortgage companies offer online access to view you acct.. (balance, payments due, dates, etc.) Most homeowners don't signup online (online immediate access with socials, loan number and amount usually) for this, which YOU should, and then you can monitor it.. (If the homeowner signedup, get the username and pw from them)..
Realistically, YOU want to make the mortgage payments yourself.. Mind you this is a nice service (you'll do for free) for the seller so they don't have to deal with or worry about it..
You should use POA's left and right in this biz, on lease ops, sub-2s, etc..
Chris,
"jew owe me five dollah for all dee knowledge. Jew make me broke!!"
^ In my most annoying high pitched oriental voice..
I echo what most have said. Make the payments yourself or have a third party do it. Do not let the sellers touch the money.
In regards to the DOS. In most cases the Option agreement does violate the DOS clause. Or, if over three years, the lease will violate it (normally). A review of themortage will tell you. HOWEVER, I have never heard of a LO causing a lender to accelerate the note. It is possible, but I haven't heard of it nor do I worry about it.
With that said, since you do have a T/B with a contract, you do need to make sure that you have the ability to refinance the thing if the sellers lender goes wacko on you.
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On 2003-12-29 17:07, Steena wrote:
A loan servicing company. Any idea the average cost you should expect to pay for something like that?
Escrow Specialists in Ogden, Utah:
$100 to set up the account, $12/month maintenance.
it is possible that the seller/owner will not pay the mortgage if you will let him/her pay it. To avoid this from happening you have to pay them yourself or hire a third party to do the same. here is my question: can the seller/owner make a loan on the house while under L/O? like attaching a lien on the house while on L/O? can you do something to avoid this potential problem?
God bless.
I heard an idea that someone had in regard to this. They buyer obviously does the POA over the mortgage, but the buyer also has the seller change their mortgage mailing address to the buyer's PO box, so the seller never even touches the paperwork any more. Then tell the seller get access to the web so they can monitor to make sure the buyer is paying their mortgage if they are worried. Just saved you the $100 plus $12 per month mentioned above...
Cool idea I thought- changing address to a PO box should not create any red flags with the lender either....
But, if you never let the seller touch the paperwork any more and their taxes go up- I guess that means that you get stuck with the increase and cannot go back to the seller for relief... Any answers to that one??
Anoter question- in regard to L/O - I have heard that locally the sewer and or water bill going to a different address can trigger the county to know the address in question is no longer owner occupied- therefore increasing the taxes darastically... Anyone know how to avoid this?
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Anoter question- in regard to L/O - I have heard that locally the sewer and or water bill going to a different address can trigger the county to know the address in question is no longer owner occupied- therefore increasing the taxes darastically... Anyone know how to avoid this?
Why would you change the water and sewer bills. They should be taken care of by the new owner/lease holder. I wouldnt change anything but the mortgage mailing address in that situation. All the other bills are the responsibility of the new occupant.
so, you are saying that if i sell my property to someone on a L/O, that they can turn around and sell it to someone else as a L/O at the same time, during the duration of our contract??? how is this possible?!!! and how can i make sure that this is prevented if i so choose to?
And what if they want to pay off early? how can you sell something you don't own?
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It's Not What You're Getting.......It's What You're Becoming![ Edited by Steena on Date 01/09/2004 ]
pleasehelpme:
Your contract should include a clause that makes asigning or sublet/sublease not permited.
junior, it is very possible that if i sell my property to an investor on a L/O that this will be their intention, yes? (to sub-lease)
how should i handle this so that they can do so?
Pleasehelpme:
If your contracts with a lessee (in the instance of a lease option the lease and the option agreement) do not prohibit assignment or subleasing this is a possibility. If you are adament that you do not want this to happen, put it in your contract. Being as explicit as possible in writing upfront in any transaction is ideal. All of my contracts with sellers expressly give me permission to assign or sublet the agreement without the seller's permission, while all my contracts with tenant/buyers prohibit any subleasing or assignment without my written consent. As to why a seller would agree to this is determined by their motivation to put a deal together with you in the first place. I work with sellers and am very upfront about the fact that we are signing an agreement between them and my corporation that specializes in lease options, and that I am going to sublease the property to a tenant/buyer. Sellers I work with like the buffer of my experienced and established corporation between them and any tenants--they know they're going to get paid on time every month and I'm going to take care of finding that tenant.
[addsig]
stpaulhomes,
that is fine with me if a corporation wants to buy my property this way... what happens if the sub-leaser (renter) messes the place up? you take care of it for me? what if they don't buy the place from you within the year? do you still purchase the property before the end of the term?
i guess i need to know specifics on what terms to incorporate into the agreement between myself and my buyer before going to an attorney. i've been advised on a couple of occasions to try to sell my property on a L/O - investors seem be very interested in this method.
i have a huge two family with a lot of potential (could be updated to turn second floor into a 3 bedroom vs. a 2 bedroom)....
any more advice from you would be greatly appreciated!
pleasehelpme
Selling your personal home on L/O is a great idea. For one you get above market value for it. You also get a premium rent for it which means positive monthly income for you. You also get that Option consideration for yourself. I will always sell on L/O. You just need a good solid contract and do some reseach on your possible tenant. The same goes for any homes you sandwich L/O and make sure you get a umbrella insurance policy. I hope this helps.
rg200,
what is "umbrella insurance"? will i have to get special homeowners insurance as well to rent out my property if someone is under a L/O contract to purchase it? (i imagine i will) currently i have not rented to anyone - it was myself and my daughter who lived there. is it a lot costlier to have this kind of insurance vs. regular homeowner's? i expect that the rent will just cover the mortgage, taxes & insurance by the time i take out some of the rent towards the down payment...
a umbrella policy is an extra policy beside your homeowners for extra liabilty. When you rent out your house call your insurance company and let them know it is a rental and you should get a discount. Make sure your tenants get renters insurance.
I have read now several times "make sure your tennants get renter's insurance", but I have yet to find more explicit details.
How exactly do I make sure they do this and keep it current? Is it rolled into their payment to me? Do I just make sure they set it up and hope they keep paying? How are people handling this.
Also, I was under the impression that the renters insurance covered stolen / damaged items, etc... is it actually providing me with an additional layer of liability protection as well?
I think that in addition to the POA it could be a good idea to explore setting the house on a Land Trust. It will give you more control and will prevent this issues. However, this will be a different strategy yet very similar to the Sandwich strategy. More than anything it will prevent the DOS issue if a concern.
Hope this will enlight some. Inquire about the PAC Trust by Bill Gatten.
[addsig]
SOme great answers!
I would suggest a loan servicing company however that will notify you if your in default if the seller is making the payments.
That said I can't understand why y ou would have or want the seller to make the payments?
If you did a good deal then it is cash positive every month and your tenant buyer is making the payment and if there is a problem with non payment it would be the tenant buyer holding the option that caused it. YOu should always have enough reserves to make payments for a couple of months if something untoward happens (or your not ready to do SUb-To).
I can't see for the life of me why the situation you described would or should happen.
YOu structure the deal so the tenant buyer is making the payment to a loan servicing company who lets you and the seller know if payments have not been made. You probably record a memorandum of agreement between you and the seller clouding the title so the seller can't borrow against your property and damage the tenant buyer. ANd you make the period to refinance s hort, no more than 3 years and preferably one or two.
I am sure John Locke would tell you exactly how to keep the seller from borrowing against the property (if I haven't covered it) and what you should really be worrying about.
Randall
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"Chance favors the prepared mind..."[ Edited by Stockpro99 on Date 05/22/2004 ]