Lease Optioning A "Subject To" Property
I’m considering lease optioning a home in which I’ll purchase the home “subject to” . I want to use the T/B option money to make up the back payments. I’ll have the deed to this property. Although DOS is rare, I’m somewhat concerned that if it does occur how will this affect my T/B? Will I have to try to assume the current loan or incur a new loan in my name until my T/B closes in about 12 months? Thanks a million![ Edited by GR8RealEstate on Date 11/19/2004 ]
You can use the t/b option money to make up the back payments. You have to realize that you are going to need to get that option money pretty quickly if you want it to cover the back payments.
Depending on how much your back payments are and how much equity you have in the the property, it could be a really bad idea... If the property has little to no equity - I wouldn't take your only "cusion money" (namely the t/b option payment) to take the property out of the foreclosure. It would take money out of your pocket if that property went un-rented for a couple months...
If the property does have a lot of equity, think about selling it outright to a final buyer - a retail buyer...
Think about it - It still could be a good deal...
Good Luck!
[addsig]
Thanks Matty. I would have substantial equity and I'd probably sell to a retail buyer. However, I just wanted to know what my options would be if I made the choice to lease option to a T/B and the original seller's bank exercised a DOS.
Gr8:
Not an expert on L/O contracts, but what happens to the T/B may depend somewhat on what's in your contract with them.
In the contract for deed that I use (although not a L/O, I know), I spell out that they are purchasing a house with an underlying mortgage on it that could be called due. The clause states that if it is called due, they (the buyers) would be responsible for either assuming the old loan (with any costs of doing so--interest rate hikes, fees, etc.) or refinancing immediately. The consequence of not doing this is that the house will be lost to foreclosure--basically the buyer would be out, both of the home and any downpayment they gave me.
Of course, while I may be legally covered here, ethically I wouldn't be. I'd be screwing both my buyer and my original seller, to whom I promised to make timely payments on their mortage.
What I did was line up some contingent financing in advance: I found a broker who could refinance a house into my name should the orig. lender call the note due. How that refinancing would be done would be based on how much equity there was: if a lot, I'd do a HELOC on it and use it to pay off the original loan; if not a lot, then I might be putting some money down and just getting a purchase mortgage and paying off the orig. loan. Of course, I'd be using my buyer's downpayment to help me do this, potentially sacrificing that profit center, but that may be the cost of doing business, as long as I structured the deal properly to still make money at the end of the unlikely possibility of a DOS call.
This is a good question though, for here or over in the Subject To forum (as L/O is as valid a selling option once you have the deed as any other, depending on your strategy): what do you experienced L/O'ers have in your contracts regarding this if you took the property sub2?
Andy
There are a lot of things being thrown around here, some good, some bad. The absolute best place that you can go for advice on this is your legal counsel, as it will be them that will be representing you should it come down to that. While our advice, good or bad, may be helpful, no one here is going to stand firmly behind that advice should it prove "not as good as it seemed at the time."
I agree with Andy here on most of what was said, "Of course, while I may be legally covered here, ethically I wouldn't be. I'd be screwing both my buyer and my original seller, to whom I promised to make timely payments on their mortage. "
Again, most. The ethically not being covered part in particular. In short, as long as you can and do have a backup financing plan, should in the remote chance the DOS is called, then your t/b's would never know it. However, I don't believe that you would even be legally covered with the terms/conditions as laid out by katz in the contract. In essense, what this clause says is that "if I, as the investor, should screw this deal up by not making payments, etc, etc., and the the bank tries to collect (ie foreclose, DOS), then you, as the tenant/buyer, will bear the costs/effects of that failure, or you will be out of your money and home." Sorry, I can''t remember the legal terms for this, but pretty much any judge that knows anything about contracts will rule that clause(s) as invalid.
Again, the best response here is to never get into a situation where the tenant/buyer would be affected, and the simpliest way to do that is to a) make the payments and b) have a workable backup plan.
As far as the land trust thing goes, I wouldn't recommend it, at least not as you described. This land trust gimmick is exactly what is getting investors here in NC in trouble, because it is, in essense, being viewed as operating as a real estate agent without a license.
Basically, this idea of putting the prop in a land trust was dreamed up by some guru writer that put it in as a way to make his "method" different from someone else's. Unfortunately, it seems to have become popular.
Trusts, when used properly, are a great tool to your investing career. But using them to try to hide the sale of a property is not recommended. If you want to set up your properties in trusts, then do it at the closing table, or after you have purchased the property. The problems occur when the investor has the homeowner/seller set them up BEFORE the investor will buy the property.
Roger
Thanks Roger. I got the land trust idea from Peter Conti and David Finkel's book, "Making Big Money Investing in Foreclosures without Cash or Credit". They've stated it's their preferred way of handling subject to deals. Since it has been working for them, I figured it would work for me. Nevertheless, I will seek legal counsel.
Well, you've hit the nail on the head there.
Since it has been working for them, I figured it would work for me.
And that's the sell. nullSince it has been working for them How do you know that it's been working for them, because they told you in their book? I don't mean to sound rude here, but this is exactly what I was talking about. They probably made the whole investing idea seem very simple and easy to accomplish. That's their usual spill anyway. Of course to get the more "up to date, detailed methods," you'll have to spend some more $$$ for the "better" course or instructions. This is the classic upsale approach.
As you can see, I don't think much of Conti/Finkel. They are with the class of guru writers that have given real estate course writers a bad name because they sell the "gimmick." And regardless of the quality of the material that you read (as you can learn something from anything, even if it's what NOT to do), you still need to keep in mind that the writer is usually going to only give you the best possible outcome because selling books is how they make their money, not in buying real estate.. In other words, always put in a dose or two of reality.
Roger